How do YOU define Commercial Real Estate?
Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
How do YOU define Commercial Real Estate?
Most Popular Reply
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13yCRE 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. :)
47 Replies
- 13ySteven Hamilton IIPro MemberAccountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
CPA firm. A true accounting firm doesn't have someone outside in a costume.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
Seth, Karen and Will, where is your rating of the businesses suggested? Won't you guys play along? :)
- Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes13y
@Bill Gulley I'd probably take the CPA firm for a tenant, but would rather own a Pawn Shop. CPA's by their nature are very conservative, therefore; if they rent the building you know they can afford it and have thought it through. The others aren't exactly high demand growing industries. 1200 sq. ft. for a pawn shop isn't big enough so they'd be moving quickly.
Years ago I had a listing on a Pawn Shop and another on an Auto Dismantling business. The money that came into both of those places!
- Investor · Milford, CT · Member since 2012 · 592 posts · 285 votes13y
Great thread, I think of commercial as any property that makes you money that is not your primary SFH. I have 2 properties with a retail location within them. Not very big one is about 1500sqft liquor store and the other is 600sqft office for a contractor.
I've been thinking long and hard about what other businesses I can incorporate in those locations. I would very much like to bring someone as a partner to run the operations and I would basically be the person offering the space. I would like a piece of the action so I have been thinking more of retail and food end of it.
Some ideas in my head are - Clothing, Jewelry, Stationary, Organic Foods, Global ethnic products to sell locally, Outdoor Sports, Coffee shop, Yogurt or Ice Cream Shop.
I was thinking I could visit some of the local colleges and just market that I have the space for the right person/ biz plan. Like a incubator where I would be like the angel investor where I will offer the space maybe a little seed money then enjoy a percent of the sales.
- Investor · Milford, CT · Member since 2012 · 592 posts · 285 votes13y
Oh I also was thinking like Elder Care or Pet Care & Services!
- 13ySeth WilliamsPro MemberSpecialist · Grand Rapids, MI · Member since 2012 · 582 posts · 353 votes
I would also go with the CPA firm - though I must admit, some of my reasons are biased.
- I'm assuming they will be the most financially literate, and will understand the dollars and cents of what they are getting into.
- They will likely be the "nicest" tenants to the building, and won't leave much damage behind once their lease expires.
- Most CPA firms seem to do pretty well financially (because frankly, they need to in order to afford their highly paid staff). If we're literally talking about a CPA firm, these aren't the stores that have a dancing mascot on the corner.
In my days as a commercial lender, I don't think I've ever seen a CPA firm go under. This obviously doesn't make them immune, but I have seen ALL of the others default on payments at one point or another.
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes13yOk, I'll bite.
Originally posted by Bill Gulley:
Seth, Karen and Will, where is your rating of the businesses suggested? Won't you guys play along? :)
Of the 5 choices provided, hands down it is the CPA firm assuming all credit and past tenant history being equal. Here is why. The CPA firm is the most stable business in my opinion. Food service businesses have very high failure and turnover ratios, the gun pawn shop would not be as stable and the CPA firm would have professional clientele. I am guessing here, but I am thinking insurance could be higher with the gun shop.All in all, the CPA firm would be the most stable tenant who would likely stay there the longest, saving on tenant turnover ratio.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
Okay, you guys, the idea wasn't to pick the best but to list all of them, from the best to the least desirable. The owner is paying the insurance! All other things were equal.
The issue is selecting tenants based on the risks associated with business activities.
Think in terms of;
The types of inventory a business holds, what do they use in the course of thier operations and are there any concerns that may pose any risks, to the property or public, clients or customers.
Does any business pose additional insured risks? Fire, theft, explosion, vandalism are perils covered and insurance, being paid by you, is determined by risks.
Are any businesses more prone to any social stigma that may attach to your property, if any. An example would be a building leased as a strip club for years. When that tenant leaves there will be a period of time where the public still associates that building as a strip club. It's unlikeky due to social aspects that a church group would lease the building quickly after the club closes.
What clientel is expected in each of the businesses? What will the foot and vehicle traffic be like, keeping in mind that the more traffic they have the more maintenance may be required. You have all outside responsibilities, the more the door opens the more often the A/C and heat kick on, the harder it works.
Are there any environmental issues with these business operations? Do any of them use chemicals, any corrosives, are operations expected to be loud or cause noise issues? Any odors neighbors might complain about?
Do any of these businesses cause additional wear and tear on any building system? What about business hours customary for the types of businesses listed, any late night activities that keep the property working for longer periods, perhaps weekends. Again, a consideration for insurance and wear and tear.
Is there any issue concerning equipment used by tenants, anything heavy that may damage floors over a long period (damages of normal use over long periods are not necessiarly on the tenant as they are usual and customary, for the operations accepted by the owner)?
Will parking be an issue? Again a traffic matter with the public and tenants/employees. Any peak hour concerns?
Legal requirements, are any of these tenants subject to supervision, any inspections of operations required? Is one business subject to more code requirements than another and could non-compliance effect thier ability to operate or stay in business? Even if an employee made an honest mistake, could operations be shut down, any license pulled?
IMO, by far, the best risk and my first selection would be the CPA!
But rank the other businesses, do you see any of these issues being associated with these businesses? :)
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes13y
I am jumping in late to this party...... : )
I just hired a local secretary full time to help with all of the database and back office stuff. It was a long process to find the right fit.
When working with developers and owners you start at the highest and best use for cash flow and then risk and also the fit for the tenant mix already existing in the development and the saturation levels for around that area.
So if one type of retail rented for 18 sq ft, 15, 12, 10, 8 then you rank them in that order for income.
Then do another ranking for from worst to best for liability, saturation level in the area for competition, corporate credit versus mom and pop.
As the landlord you then decide what level of risk and or security you want to take on for the gain. For instance research might show something with a high liability gives off the best cash flow but you do not want that risk so you look at the next cash flow model down. TI is important in what the lease tenant wants and also what kind of increases there are in the rents.
I like corporate tenants because although they are not fool proof often you get big backing with a guarantee on a lease and their books are better kept and more transparent then mom and pops in many cases. Leases are generally kept at 10% of sales and optimally 8%. Anything above that the tenant can start to get into trouble on paying the rent.
As far as a non-recourse loan that has almost become an oxymoron in todays world. The non-recourse I see wants 50% down. If you are getting 50% down and then after say 5 years in you are really at a low LTV anyways. Most owners are not going to walk away from that kind of equity down payment so the non-recourse means nothing in the deal. If recourse means you can get 70 to 80% ltv and just 50 or 100 basis points higher and get the seller to hold a second you are getting great leverage. Of course you have to buy right and not into marginal deals where one wrong thing happening can sink you.
- Altus, OK · Member since 2008 · 2k+ posts · 690 votes13y
My defs:
Residential-SFH,2Plex,3Plex,4Plex
Residential/Commercial-multifamily,condos
Commercial-MHP,office,industrial,hotel/motel,shopping centers,restaurants - Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
Wow, you guys are missing the whole exersise suggested. I think folks are chiming in without reading the challenge at all..... ::)))
- Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes13y
Bill Gulley for all the detail you requested we'd need to write a book!
1. A CPA firm (Cleanest and probably most sound)
2. A sandwich/hamburger joint (if it's a independent, if it's franchise
moves up to #1)
3. A flower shop (how well established are they?, chemicals?)
4. A hobby shop, model cars/planes and toys (not enough business)
5. A gun pawn shop (drug addicts hawking their stuff and vandalism, though they take in a lot of money and can pay the rent, not sure I'd want to deal with the issues)So... did I pass the test?
Joel Owens, I like your strategy.
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes13y
It is just that your posts are so long Bill, I cant read that fast! :)
1. A CPA firm (Cleanest, most sound, most professional, most stable, lowest insurance, lowest risk of clientele, lowest risk for insurance)
2. A flower shop
3. A hobby shop, model cars/planes and toys
4. A sandwich/hamburger joint (The reason I have this at 4 rather than 2 like Karen is the fact that insurance would be higher (fire in kitchen, etc) higher turnover ratio due to business failure and potential pest control issues
5. A gun pawn shop (drug addicts hawking their stuff and vandalism, though they take in a lot of money and can pay the rent, not sure I'd want to deal with the issues) - I copied Karen's response here as i agree 100% - Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
Karen Margrave, hmmm, not really.
Seems everyone wants to analize the ability or the profitability of the tenant, not the question at all. Several times I mentioned ALL THINGS ARE EQUAL as to ability to pay, there is no questiona about how one might pay, that is a totally differnt issue. XOXOXO
I went through the questions and possible risks associated with BUSINESS TYPES, that means a burger joint vs a CPA, or a flower shop VS a pawn dealer.
I think I'm going to give up.
Does no one see the aspects of selling amunition with guns and having a store full of amunition, which is a customary part of a gun shop and having the risk of break ins, security issues, that if some employee sold guns illegally the place could be shut down. Does anyone see the risks associated with fire and amunition? This is a very high risk tenant for all issues you are insuring against and paying premiums on. A pawn shop takes all kinds of TVs, electronics and small appliances that, if damaged and left to sit can pose contamination issues. How do they dispose of such items that don't sell or that may have been pawned that have issues?
Does anyone see the liability of a burger joint, the extended hours of operation, the health codes involved, the maintenance involved in plumbing outside the building, grease traps are outside! The equipment involved with overhead vents and ventilation systems? Does spilled grease cause any problem under heavy equipment? Does a 1,200 pound cooler setting on legs make impregnations in flooring over time? Hopefully there is high traffic for sales, that also means more maintenance. Heavy use of HVAC systems fighting heat from kitchens. Peak lunch, dinner periods could mean parking issues, late night operations of lottering, teens at a burger joint could mean vandalism issues as well. Would a health code violation shut down operations, reduce income and threaten the ability to pay rents? Great eating establishments carry business interuption coverage, mom and pops in 1200 sq ft probably don't, so your risk of being paid is directly related to thier ability to run a clean store.
Does a hobby shop that sells model airplanes and cars with engines have and sell fuel? It'some of the most volitile fuels on the planet, like jet fuel, stored and sold in small cans. The place is full of glues and adhesives used to build models. Batteries and battery acids are also common, dry cells and lead acid for larger models. Kids are common running through hobby stores. A hobby shop that has airplanes usually has rockets, some are large, a variety of rocket engines are common inventory, talk about freakin fireworks on the shelves! The place is a roman candle waiting to blow!
A flower shop uses tons of fertilizer, prservatives, plant foods and vegitable matter, they can be horrid on plumbing, induce mold and mildew and with coolers can cause mildew on walls behind the coolers if not properly vented and cleaned. Generally, they are clean operations but the humidity and tempature controled environments can cause troubles in a building. One that sells garden supplies is even worse!
If I were to rate these I'd say;
1. CPA office
2. Flower shop
3. Cafe/burger joint
4. Hobby shop
5. Pawn-gun shopClearly the first two are fairly easy to assess and address issues of, the rest depend, but the landlord needs to understand what kinds of operations go on in his/her building, what they have as inventory, the type of clientel that walks through, what equipment they may have and how that equipment may play on building conditions and the risks posed by such operations.
If you don't have a clue as to business operations, you should not get involved in commercial properties. You don't just lease a building but a social, environmental, economic and physical environment inwhich to conduct business. Nothing in the world like residential properties. :)
- Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes13y
Bill Gulley Well geez Bill... didn't we both end up in the same place? LOL.... and my brain didn't have to work near as hard. Bet you have a headache!
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
Like your math teacher told you, show your work....LOL
The methods of making the decission, the considerations of the business risks was the assignment, not a right or wrong ranking of best to least desirable...... :)
- Phoenix, AZ · Member since 2013 · 76 posts · 35 votes13y
@BillGulley:
Maybe I'm missing your point; but, after reading your post on the "risks" at 8:07 PM, I'm wondering if I should ever go into any retail establishment, let alone the outside world. Mold, health risks, explosions, teens, grease traps, settling, mildew, volitile fuels......wow.
With all due respect, good retail and office leases, governmental and zoning regulations, regular inspections, specific use provisions/restrictions, and good tenant screening would allay most fears. I'm surprised you didn't mention sequestration.I've managed many properties with every tenant you proposed as a potential tenant for over 25 years. Oddly enough, a quiet office/service center tenant was raided by the DEA for shipping and receiving marijuana. The DEA was not gentle in it's search, breaking doors, damaging ceilings and drywall. The tenant didn't have insurance....DEA didn't want to pay; and the quiet office tenant is now a guest in the State Penetentiary. The tenant didn't respond to default and demand letters.
Currently, we have three hamburger joints, a McDonalds, 3 or 4 chinese restaurants, CPAs, Law Firms, Attorneys, and one Hobby Shop. We've managed projects with Pawn Shops and Flower Shops. No break-ins, no mold, no trouble. Flower shop went out of business due to internet sales.
We've had trucks drive through store fronts of Rent-to-Own retailers, break-ins at mobile phone stores, naked people in our fountains, armed robberies and a murder inside of video store. Oh, and a couple of shootings outside of a respectable bar a few years back.
I just happen to like hamburger joints. My favorite has been in the same strip center for over 25 years. Bikers and business men go there because the hamburgers are good, quick service and beer. Next time I go in, I'll talk to him about the grease trap. I'm pretty sure he cleans it regularly. ;-)
Paul
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes13y
Wow, sound so defensive, LOL, you are also in AZ, now that area is known for poor weather, LOL
Didn't mean to paint doom and gloom, but more of a realization of what goes on in business ops. Yes most restaurant operators clean the grease trap, it's why I put it outside with the owners maintenance responsibilities, just for fun...the DEA, great guys but they don't mess around, police actions, civil unrest are not a covered peril under insurance, happened here as well.
These were all businesses that I have had experience with, the hobby shop burned, total loss, but a good thing as then there was a new building now.
If someone were to go commercial from residential, I'd suggest office and office warehouse. A good lease agreement will save you headaches too. Ours lists items that may not be stored or kept upon the property, corrosives, posions, etc. allowing only those cleaning products generally used and sold at retail stores.
The point was being aware of what potential risks there might be in various businesses, not to avoid some so much. And, my opinion stands, that if you don't know anything about them you shouldn't be leasing to them. Being a commercial landlord is close to being partners in many ways (not legally, but relying on them), that's where the bacon comes from.
BTW, I wasn't aware there was such a thing as a respectable bar in AZ, LOL... I enjoyed Phoenix too! :)
Wow, 9,000 posts and still here, LOL
- Phoenix, AZ · Member since 2013 · 76 posts · 35 votes13y
I agree. Knowledge is power. I like most commercial product. I rank retail as being the hardest to manage, followed by office and industrial.
but, you do raise valid points. If new players to commercial don't understand the complexities of commercial, then they are in for a unique learning experience.
Again, thanks to @karen and @bill for great topics of discussion.
I've got a tough day ahead of me. 86 degrees, clear skies, and tanning oil. Hope it doesn't snow or hail! ;-)
Paul
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes13y
When I owned my restaurant grease trap was directly under the washing sink and cleaned out on a regular schedule.
A tip when looking at an existing restaurant or one that went out of business is to inspect the grease trap. If the restaurant has been dormant for awhile the grease can harden up inside the trap and block the lines. In that case you have to rip out the grease trap and possibly replace some of the line. ( very expensive )
Some lazy plumbers will install the grease trap above ground inside of the restaurant and run pipes to it on the floor. Health departments can't stand this for safety and health issues and attracting rodents. They want the pipe under the floor with the trap recessed into the floor flush and tiled around it.
You have to call around for plumbers to get the best deal. The great thing about a restaurant that went out of business is usually most of the equipment is in place and the build out is minimal. Downside is you are building a restaurant brand concept from scratch and consumer base which takes a ton of time and resources.
What I look for in a business is a partner split, owner with health issues, family that lives far away with health issues, owner has multiple businesses and they need to put resources toward that building instead of this one ( example one guy recently I talked to owns a Huddle House that throw off 6,000 a month profit. Guy wants to sell it because his bar in the next county needs his full attention and he has 1 million on the line with it versus 90,000 with the Huddle House, owner is retiring, etc.
I like businesses that have models in place for decades and generate nice cash and multi-generational consumers already. Those places require small lifting with repairs and updating but the people and sales are already in place. I see new businesses that start out great but then 4 years in the owner is burned out and wants to sell cheap. Those places often have high rents they are chained to plus where sales were 10k a week now they are 5k a week with no FFC ( fixed food contracts ). If you can't fix labor and food you will go under as a restaurant. When buying a restaurant you have to analyze and plan for repairs just like a house. If I am looking at someone selling a place and that pizza oven is about to go out and it's a conveyor type I know 7k to 10k used and up to 25k brand new depending on how many pies I want to go through per hour in the peak rush.
Do you think it's important to know after buying a place that in a few months you could get hit for a 10k to 20k replacement?? You be it is and that is just one thing. What about if the restaurant is part of a franchise and a remodel is coming do in the next year as part of the franchise agreement where they have to update stores every 5 to 10 years.
All of these things is where newbie buyers of restaurants do not have the knowledge to protect themselves and overpay. My biggest thing is many restaurant owners in the smaller purchase amounts are owner operators. They say profit is 50,000 but then you find they work their 7 days a week and 40k of that is a salary and the property is only doing 10k profit then. If I pay a manager 35k and food costs go up and I get hit with some repairs I am breaking even on profit unless I drastically increase sales from where they are.
This is why these days whether it is a restaurant, apartment building, etc. I will not buy unless I can put a system in place where I know I won't get sucked into a JOB. The investment has to have the scale and size to stand on it's own infrastructure without my daily involvements or filling in under emergency situations while still meeting my profit goals. If the location is good I would try to buy the strip center or building the restaurant is in. This way rent goes down instead of up over the years and you have a saleable asset down the road if the business goes under.
Not a fan of rent the space and keep paying more and more and if you go out later you have nothing but equipment to sell at 10 cents on the dollar.
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes13yDont lump us all together, I answered your question and rated based on factors like crime, insurance, stigma, etc. I stand by my arrangement of best to worst based on my opinions. Though I could easily place hamburger joint up in the ranks a spot.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.