How do YOU define Commercial Real Estate?

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Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes

What is your definition of Commercial Real Estate? I know many on BP consider Multi Family to be commercial R.E. Others believe that it's any real estate used for "business" purposes, still others consider any property that produces income to be Commercial Real Estate. What do YOU consider C.R.E.? And... do you personally own any CRE or will you be buying any in the future? Why and Why not? What type of CRE would you want to purchase if you could?

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Bill Gulley

Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes

13y

CRE can be any property that is not SFD residential property or used only for personal use and not for any business purposes. Yes I do, yes I would because it makes money or creates a postive economic benefit. :)

Use alone does not define the type of property or an intent to profit from it, a contractor builds a SFD, it's still a SFD, not commercial property but his intentions and use is for a commercial venture.
A property limited by legal authority to be used for other purposes other than residential use is under the commercial umbrella as are residential properties having more than 4 living units under one legal discription as platted. :)

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Seth WilliamsPro Member
Specialist · Grand Rapids, MI · Member since 2012 · 583 posts · 353 votes
13y
I think part of it depends on the zoning of the property, and what the local municipality will allow it to be used for.

If you're asking for the purpose of getting financing, in my experience - most banks will move a multi-unit/apartment building into their "commercial" loan department once it has 5+ units in it.
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Uwe S.
Property Manager · Dublin, OH · Member since 2009 · 1k+ posts · 291 votes
13y
Hello Karen,
my definition of CRE is sweeping.
Hotels/Motels, Gas Stations, Office Buildings, Retail Buildings, Mixed Use properties with one store frontcan be CRE, Parking Facilities, Hospitals, MFH's, Industrial properties, land defined as commercial by town, Automotive, Restaurants, Day Care, Self Storage and many more.

As PM I would purchase an Apartment Complex +25 or if possible an Office building.

-Uwe
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Greg Adlington
Banker · Menomonee Falls, WI · Member since 2013 · 3 posts · 0 votes
13y
I agree with Seth. The definition of CE is based on what a lender will finance. Since there are very different rules and regulations for residential and commercial lending, the 5 unit multi-family rule exists. Also, any property from which an income is derived that does not fit the residential guidelines is, by default, treated as CRE.
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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
CRE can be any property that is not SFD residential property or used only for personal use and not for any business purposes. Yes I do, yes I would because it makes money or creates a postive economic benefit. :)

Use alone does not define the type of property or an intent to profit from it, a contractor builds a SFD, it's still a SFD, not commercial property but his intentions and use is for a commercial venture.
A property limited by legal authority to be used for other purposes other than residential use is under the commercial umbrella as are residential properties having more than 4 living units under one legal discription as platted. :)
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Karen MargraveBusiness Member
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Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
13y
Seth Williams and Greg Adlington Sorry I was asking what YOU personally consider Commercial Property, not necessarily what the planning department or bank considers Commercial for zoning or loan purposes. I just wanted to get a conversation going, as I've seen many on BP that think Commercial Property is strictly Multi Family. Others have other definitions. Some think it's Industrial.. so just curious, and getting people to weigh in.

I'm with Bill Gulley and @Uwe S in that I consider Commercial Property to cover a wide swath of properties from multi family to heavy use industrial, and everything in between.

I know there are many that are reaching the limit on the number of SFR homes they can finance, and thinking they might want to begin considering commercial properties. Besides that, it's what we do, develop commercial projects, so trying to get more Commercial conversations going on BP!!

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Greg Adlington
Banker · Menomonee Falls, WI · Member since 2013 · 3 posts · 0 votes
13y
In my business I am seeing a lot of office/retail activity and even industrial/warehouse financing beginning to pick up. Student housing is hot and credit tenant financing is doing very well. Re the bank definition, it is important for clients to realize that the rules are very different than in residential. For a commercial project, the property is the most important component, whereas with residential, the borrower is generally the key. With larger commercial deals you can get into non-recourse financing, where the borrower is insulated from exposure in cas of default. I would be happy to entertain any questions from anyone on this topic, as it is my sole business focus, and education is a big part of what I do.
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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
13y
For me commercial encompasses tons of niches. Specifically I look at multifamily and triple net because that is what I know and focus on.

When most investors I know talk about switching from residential to commercial the multifamily aspect is the one they choose. The reason is they simply understand more from owning little houses to now grouping all those tenants into one large property.

That is easier for them to transition then trying to figure out hotels, self-storage, etc. for their first buy into commercial.
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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
While there is non-recourse financing in commercial, it is not usual in the types of properties normally subject of BP investors and let's not re-introduce non-recourse in seller financing again, that's been hammered here on BP. Non-recourse financing is far more advanced than any other financing mode discussed here, if fairly underwritten and usually not appropriate to small seller financed transactions unless accomplished by sophisticated investors. :)

Back to general commercial property matters.....this is not a financing forum......
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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
Originally posted by Joel Owens:
For me commercial encompasses tons of niches. Specifically I look at multifamily and triple net because that is what I know and focus on.
When most investors I know talk about switching from residential to commercial the multifamily aspect is the one they choose. The reason is they simply understand more from owning little houses to now grouping all those tenants into one large property.

That is easier for them to transition then trying to figure out hotels, self-storage, etc. for their first buy into commercial.

Yes Joel, I agree the natural progression is from SFD to multifam residential.

Without specific training in other business properties and a sound business background, things such as strip centers, hotels or even gas stations requires more the RE knowledge to be successful. You need to understand the business that occupies your property as well as the aspects of property ownership.

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George P.
Property Manager · Livonia, MI · Member since 2011 · 4k+ posts · 1k+ votes
13y
i was just thinking of commercial real estate and not about the multi families units.

i'd love to learn more about it simply because there are far and between any deals left on the SFR's.
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Paul Falbo
Phoenix, AZ · Member since 2013 · 76 posts · 35 votes
13y
Interesting question Karen.

I've always believed that, by definition, "residential" is where people reside, one or many.
Conversely, where commerce occurs is "Commercial."

Residential includes, SFH, duplexs, tri-plexes , etc., Multifamily or apartments, condominiums, or anyplace someone could legally call home.

Commercial includes: Retail, Office, Industrial, Office.

Zoning Classifications seem to follow this logic, with Industrial (I) residential (R), office (O) and retail (R) as main classifications, and many "sub-uses" under each (I, R, O, F). There may be other zoning categories such as institutional and recreational.

Blending the two can lead to a Mixed use title.

I currently do not have any commercial properties, only SFR. I believe retail and Office are undergoing major changes due to international markets, internet sales, consumer confidence, and tele-commuting. Grocery anchored centers with 10,000 sf. of shop space are projected to be the new craze. I've invested in office condos and was able to build, sell, and get out before the fall in 2007-8. Well located light industrial can be a good investment.
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Karen MargraveBusiness Member
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Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
13y
George P. That was the whole intent of my post and why I introduced it in the Commercial thread.. I know that most people on BP invest in, and are interested in learning about SFR homes, fix and flips, REO's, etc., and are just getting into the market.

I also know there are others out there that have been doing the Fix and Flips and inventory in their areas are running low, and they're going to be moving into new arenas.

Then there's a group of us that have Commercial property as our primary interest, and would like to see the conversation on various commercial properties sometimes.

I know Joel Owens and Bill Gulley are both extremely knowledegable on Commercial, and it's nice to have a forum for them and others to go into some detail on types of the commercial properties they like, where they think their local markets are going, etc.

Greg Adlington As for financing, that's a whole other beast! and deserves a discussion all of its own. Also Greg, maybe you can put lender or ? on your profile, so that if anyone is looking for that, they can contact you.

Thanks everyone for the input thus far.

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George P.
Property Manager · Livonia, MI · Member since 2011 · 4k+ posts · 1k+ votes
13y
ok and that's great... so let's get into the details.

i looked online and saw a party store for 160k.

i know nothing about
- how to evaluate the tenant
- types of leases and lenght
- going over their business plan
- can i change the type of business if i want
- at the end of my commercial mortgage, can i get another mortgage of the whole left over mort amount is due?
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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
Seems agricultural hasn't been mention, its a calls of its own under commercial, a step child so to speak, a rural area with no zoning usually defaults to ag and while it can be used for a variety of commercial ventures, location usually restricts options.

One of the most interesting and profitable areas or RE is changing existing properties to a higher use. As an example, a recent project here I looked at and discussed with a few was buying a middle school and converting it to office-retail. Another example, popular in mnay areas is historic retail or industrial properties to luxury apts/condos.

The key to profit is identifying under utilized properties and changing them to thier highest use. Sometimes, it can be as easy as doing a minor-subdivision of land and changing zoning or just obtating exceptions and permits. Many residential properties in good business locations can be modified and converted to insurance, doctor/denist offices, gift shops, rest/tea houses, used car dealerships, hair saloons, lounges/bars, not far from me is an appraisers office. Possibilities for tenants are almsot endless.

Anyway, deals are what you make them! :)
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Jim Flannery
Developer · Baltimore, MD · Member since 2013 · 2 posts · 0 votes
13y
I've had most of my experience in the historic realm and that's a very interesting asset type given the creative ways to structure the financing. I think a lot of deals like that make sense by leveraging incentives to make them feasible.
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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
Yes Jim, historic projects have many financing options especially non-profit activities like a museum, but it's usually the down that can be tough to swing and renovation expenses can be twice, even more than conventional projects.

George P. seems to be hot on the trail of something, hope he got away from MH parks (LOL).

George, while you certainly look at current rents with tenants and the risks with them, never buy based on one tenant, someday they will likely move, die, go out of business or want to buy it.

A short game maybe, might be interesting.....

Say George buys this 1,200 sq ft. retail spot, free standing. He gets several tenant applicants to consider. As I mentioned, you need to know something about businesses, which tenant applicants would be the best selection as to physical risks associated by each type of business wanting to lease?

1. A flower shop
2. A gun pawn shop
3. A sandwich/hamburger joint
4. A hobby shop, model cars/planes and toys
5. A CPA firm

Assume infill is there, tenants pay PIT and carry liability, building insured by LL. Tenants do maitenance on the inside, 5 year lease, all paying the same rents, all having been in business over 3 years elsewhere. HVAC, electrical, sewer and water service maintenace is on the LL, but not utilities.

No right or wrong, just your considerations, how would you select the business type, best to least?
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George P.
Property Manager · Livonia, MI · Member since 2011 · 4k+ posts · 1k+ votes
13y
let's get this example and unfold it so that i and others can learn.

btw, not into mobil homes, just running out of the normal SFR's to invest in.

i'd get the CPA as my number one choice. the rest seems much higher insurance premiums and risk of a down economy would hurt the lessee. the sandwich shops are busy only during lunch hr.
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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
Originally posted by George P.:
let's get this example and unfold it so that i and others can learn.
btw, not into mobil homes, just running out of the normal SFR's to invest in.

i'd get the CPA as my number one choice. the rest seems much higher insurance premiums and risk of a down economy would hurt the lessee. the sandwich shops are busy only during lunch hr.

Okay, but let's list them in order.... Insurance is an issue, who has what risks, reasoning, not just insurance either.....:)

Karen Margrave, Joel Owens come on....

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George P.
Property Manager · Livonia, MI · Member since 2011 · 4k+ posts · 1k+ votes
13y
1. A CPA firm - makes the most money
2. A flower shop - safe environment, but depends on set number of people that do buy flowers
3. A sandwich/hamburger joint - steady, predictable sales, but go out of business often
4. A hobby shop, model cars/planes and toys - when was the last time anyone went into one of those? noone that i know goes into any of them..
5. A gun pawn shop - ??

highly biased in my responses.. :)
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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
Good post George!

Others? Let'sassume the ability to pay rents is the same, that's another topic. :)

Greg Adlington Paul Falbo Uwe S. Seth Williams

How about Will Barnard,another lender type opinion....

Hey, not right or wrong, but how do you recongize risks with types of businesses? Rate 'em in order, best to least.... :)
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Seth WilliamsPro Member
Specialist · Grand Rapids, MI · Member since 2012 · 583 posts · 353 votes
13y
Originally posted by Bill Gulley:
Seems agricultural hasn't been mention, its a calls of its own under commercial, a step child so to speak, a rural area with no zoning usually defaults to ag and while it can be used for a variety of commercial ventures, location usually restricts options.

Good point Bill - I'm actually closing on a 9 acre parcel of agricultural land right now, and I was surprised to see that my closing attorney is recommending a commercial title insurance policy. You're right, ag land this does fall under the umbrella of "commercial" in terms of title insurance.
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Karen MargraveBusiness Member
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Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
13y
@Bill Gulley you're right in that you never know which tenant is going to end up being the best tenant. We once built an office building, leased it out to the State of California, whom up to that point had never defaulted on payments, had good credit etc... and of course, low and behold, after they had moved in and were there a few months, that's when it all hit the fan and they decided to start giving out 'vouchers'. Of course we had leased to Cal Trans, and they didn't even give vouchers. What a headache that was!
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Will BarnardPro Member
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Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
13y
Well, the question was, how do you (in this case, me) define commercial RE and MY answer is office, industrial, retail strip, land, multi-use, apartment buildings (5 or more doors), self storage, mobile home parks (not individual units) and even boat slips.

Yes, I have invested in some commercial, but not much to this point. Would I do more? Yes, so long as the numbers make sense. Regardless of the function, the classification, or how it is classified by third parties, including financing, I would only do so if and when that specific commercial investment produced yields to my satisfaction, nothing more glamorous than that.
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Karen MargraveBusiness Member
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Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
13y
Will Barnard I'm with you on that. If it's not a good investment there's no reason to buy it.
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Paul Falbo
Phoenix, AZ · Member since 2013 · 76 posts · 35 votes
13y
Say George buys this 1,200 sq ft. retail spot, free standing. He gets several tenant applicants to consider. As I mentioned, you need to know something about businesses, which tenant applicants would be the best selection as to physical risks associated by each type of business wanting to lease?

1. A flower shop
2. A gun pawn shop
3. A sandwich/hamburger joint
4. A hobby shop, model cars/planes and toys
5. A CPA firm

Okay.

Assuming that the "neighborhood" has the demographics to support all of these potential uses equally:

I would look at their sales history for the last three years to determine whether sales are flat, escalating, or declining. Yes, I would ask for tax returns, k-1's etc.

I would run a credit check and bacground check on each individual.

I would analyze the competition in the sub market.

Assuming all come back with credit scores of 700, historical sales of each are stable, and there is not another similar use within a 1 mile radius, I'd go with:

A true "retail" use, because I might be able to negotiate a percentage rent provision. If the tenant's sales increase over a natural or unnatural breakpoint, I will participate in the success of the tenant.

1. Hamburger joint. People will always have to eat. Just make sure you sample the wares first. Hot, but respectable waitresses help sales. Be sure they offer a "Vegan Burger."
2. Flower shop: husbands have wives, husbands are always screwing up. Husbands need flowers. People die. Flowers say "I love you, sorry for your loss and "let's have a wedding" to name just a few.
3. Hobby shop. Wives don't like husbands who have hobbies, and kids can't be torn away from the TV or latest computer game. Mom and pop hobby shops seem to be rarer and rarer.
4. CPA: office user. Boring, safe....but who wants someone standing on the corner during tax time dressed in a costume to attract customers?
5. Pawn shop: Pawn Stars is a setup. Most pawn shops have more tools than anything else. A good client of mine has been investigating a Pawn shop for three years for a corner pad building. They will pay a premium rent; but, the use has been historically been associated with non-traditional retailing. Business booms when things are bad and very few people like to admit they got their engagement ring from Metro Pawn......

That was fun.

What about churches? Would you, or wouldn't you lease to a church?

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