Commercial Real Estate Terms - Northern Colorado Commercial Real Estate

How to Maximize Your Building’s Cap Rate

April 26, 2023

Maximizing Your Building’s Cap Rate

Maximizing your commercial real estate building’s capitalization rate, or cap rate, tends to bring the best return.

A cap rate considers a building’s current market value and net operating income and produces a percentage that shows the investment potential. Additionally, a higher cap rate typically leads to higher risk, so each investor needs to determine their comfort level based on their situation.

What Affects Cap Rates?

There are various ways that cap rates can be affected. The following are factors to pay attention to when evaluating the investment potential of a property:

Market Trends: Market trends substantially impact a building’s value. When there is strong demand, a building will be worth more. When there is a large influx of supply, a building’s value may drop. Any change in a property’s value will ultimately alter the cap rate for better or worse.
Leases: Cap rates are dramatically affected by the amount of income the building produces. The types of leases in place and the rental rates are crucial in maximizing returns.
Location: The location of any piece of real estate is essential. If you are looking to draw a specific tenant or demographic to increase rental income, you need to be in the correct location.
Condition: The condition of the building can have a major impact on cap rates. A property that needs little to no updating will likely draw higher-paying tenants but will have a heftier price tag.

Finding a building that doesn’t just excel in one of these categories is crucial. To maximize your property’s cap rate, you must ensure it has the best combination of the abovementioned factors.

For example, just because a building may be in perfect condition, a bad location may result in a lower cap rate. Or, if the real estate market is strong, but the leases in place don’t have great terms, you may be leaving money on the table.

Your commercial real estate agent will work with you to understand your investment goals and strategy, and help you find the right property to fit your needs. Please contact Steve Longenecker at WeBrokerCORealEstate or 720-600-9513 regarding any commercial real estate needs in Longmont, CO, and our neighboring communities.

We give out $250 gift cards for referrals that become our real estate clients.

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What is Cost Segregation in Commercial Real Estate?

April 12, 2023

What is Cost Segregation?

Cost segregation is a tax strategy used by investors in commercial real estate that involves depreciating their properties at an accelerated pace. Then, the depreciation may be deducted from a person’s overall income, meaning they will owe less in taxes and end up with more cash in hand.

Depreciation is something that any real estate investor can claim to help offset the cost of owning, maintaining, and operating a property. There are specific rules regarding the rate at which you can claim depreciation depending on the type of investment property. Cost segregation simply speeds up the process and allows you to write off the depreciation more quickly, keeping more money in your pocket up front.

How Does It Work?

Cost segregation is not necessarily a simple process. It requires hiring a financial expert to conduct a cost segregation study, which takes about a month and costs anywhere from $5,000 to $15,000.

The study includes an analysis of the various components of your investment property (exterior elements, plumbing, electrical, permanent fixtures, and other building components). The firm you hire will also want to collect a recent appraisal (or other documentation showing the building’s value) and will analyze the operating expenses associated with the investment.

Once all necessary documentation is gathered and thoroughly examined, the financial firm will provide a report detailing the options and strategies available using cost segregation based on your specific property.

Is Cost Segregation Right for You?

To determine whether cost segregation is right for you, consider discussing with an experienced commercial real estate broker, other property owners, and a financial firm to help you walk through the process. Be sure not to dismiss the idea, as the best tax strategies can save you thousands and keep your assets liquid so you can continue investing elsewhere.

Please contact Steve Longenecker at WeBrokerCORealEstate or 720-600-9513 regarding any commercial real estate needs in Longmont, CO, and our neighboring communities.

We give out $250 gift cards for referrals that become our real estate clients.

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Pros and Cons of a Triple Net Lease

March 30, 2023

What is a Triple Net Lease?

A triple net lease is one of several lease structures in commercial real estate. In general, net leases require the tenant to pay other expenses in addition to their base rent. There are single, double, and triple net leases, which refer to the number of additional costs the tenant must pay.

A single net lease involves the tenant paying base rent and property taxes. A double net lease is structured so that the tenant pays property taxes and insurance in addition to their rent. Finally, with a triple net lease, the tenant pays the base rent plus property taxes, insurance, and maintenance.

Pros of a Triple Net Lease

There are several pros of a triple net lease. As a landlord, a triple net lease leaves little room for risk. The tenant is paying all of the building’s expenses, so the property owner can be sure they will not incur unexpected costs.

For a tenant, a triple net lease gives more control. They don’t have to manage the building’s upkeep and appearance. Additionally, the tenant often has control over their utility usage and the associated costs.

Cons of a Triple Net Lease

There are a handful of cons to keep in mind when considering a triple net lease as a landlord or tenant. For landlords, finding a solid tenant willing to take on a triple net lease can be challenging and, therefore, may result in vacancies. In addition, the tenant is given lots of automomy, and the landlord must trust that they have the financial ability to maintain their leases space properly.

As a tenant, the biggest con is the risk. With complete control of the building comes elevated risk exposure. If the building starts experiencing maintenance problems, the cost falls on the tenant. Additionally, property taxes and insurance increases will directly impact the tenant’s overhead.

Figuring out the right lease structure for your property or business can be difficult. Please contact Steve Longenecker at WeBrokerCORealEstate or 720-600-9513 regarding any commercial real estate needs in Longmont, CO, and our neighboring communities.

We give out $250 gift cards for referrals that become our real estate clients.

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Understanding Cap Rates

March 22, 2023

The term “cap rate” is commonly thrown around in commercial real estate. But what does it actually mean? Cap rates, or capitalization rates, are a way to measure the return on investment of a specific property. It takes into consideration operating expenses, income, and the building’s value and is commonly represented as a percentage.

Cap rates are an excellent way for investors to determine how quickly they will recoup their investment and how much risk is associated with a given property. Typically, lower cap rates correspond to less risk and smaller returns. Inversely, higher cap rates correspond to more risk and higher returns.

Calculating Cap Rates

To calculate a cap rate, divide the net operating income of a building by its value. Net operating income is the property’s total income minus any operating expenses. Dividing this number by the building’s asset value gives the capitalization rate.

For example, a building worth $5 million with a net operating income of $200,000 has a 4% cap rate. Generally, different categories of commercial real estate tend to fall into specific ranges of cap rates.

What Affects a Cap Rate?

Cap rates are affected by several different factors. Some of these factors include location, type of building, property class (A, B, or C), and types of leases. Understanding each factor’s impact on a building’s cap rate is crucial in finding a suitable investment for your portfolio.

Please contact Steve Longenecker at WeBrokerCORealEstate or 720-600-9513 regarding any commercial real estate needs in Longmont, CO, and our neighboring communities.

We give out $250 gift cards for referrals that become our real estate clients.

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Common Commercial Lease Terms to Know

March 2, 2023

Does Commercial Real Estate Have Its Own Language?

Depending on your level of experience, commercial real estate may seem like it has its own language. There is no shortage of acronyms and unique vocabulary. Educating yourself on standard terms in commercial real estate is crucial to excelling as an investor or real estate professional.

More specifically, when looking at a commercial real estate lease, you need to understand the terms used. A commercial lease can have severe financial and legal implications if you don’t correctly understand its terms.

Common Commercial Lease Terms to Know

Let’s take a look at a few common commercial lease terms to know:

Lease Term: This is simply the lease length from start to finish. After the lease term, there may be specific rules about renewing your lease.
Purchase Option: Depending on the verbiage, a purchase option can require or allow you to purchase the commercial real estate space at the end of the lease.
Subletting: This determines whether or not you can rent out a small portion of your rented space to another tenant.
Go Dark Provision: A go dark provision allows the tenant to stop operating their business when they are no longer making a profit without defaulting on the lease terms. These are common in retail centers.
Landlord’s Solvency: This aspect of a lease details the tenant’s rights if the landlord goes into foreclosure.
Zoning: The building’s zoning determines what type of business may operate in that location.
Escalation Clause: An escalation clause increases rent over a given period. The increases may be due to higher maintenance costs or stronger sales/business activity.

Understanding commercial lease terms and partnering with a professional to help you through the leasing process is critical. Please contact Steve Longenecker at WeBrokerCORealEstate or 720-600-9513 regarding any commercial real estate needs in Longmont, CO, and our neighboring communities.

We give out $250 gift cards for referrals that become our real estate clients.

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Four Benefits of Real Estate Investing

February 14, 2023

Some investors want to own a large portfolio of cash-flowing properties. Others only own their primary residence and don’t consider themselves investors at all. In reality, if you own any piece of real estate, no matter the type, you are an investor.

Let’s take a closer look at the four benefits of real estate investing.

Cash Flow

Cash flow is the big one on which many investors focus. For example, if you own a rental property, you want the rental income to be greater than any associated expenses (mortgage, maintenance costs, insurance, etc.). You aren’t cash-flowing if your costs are higher than your rental income.

Appreciation

Appreciation benefits any and every property owner. It’s likely shocking how much your parents or grandparents bought their first home for versus what the same house is worth now. That is the power of appreciation.

When there is more demand than supply (more people who want to buy property than there are properties available), real estate becomes more expensive as multiple buyers drive prices up.

Tax Incentives

Mortgage interest deductions, insurance deductions, and depreciation are a few of the tax incentives that come with owning real estate. Some only apply to a primary residence, and some are the benefits of owning rental properties.

Your trusted CPA can help guide you on how to maximize your tax savings regarding your real estate investments.

Debt Reduction

Debt reduction only applies to real estate investors who finance their properties. When you use a mortgage, you put a certain amount of money down and then are left with an outstanding loan balance. As you or a tenant continue to pay the mortgage each month, the debt amount shrinks, and the property’s equity grows.

Ready to Become a Real Estate Investor?

Building your team of local real estate professionals is the first step in becoming a real estate investor. Please reach out to Steve Longenecker at WeBrokerCORealEstate or 720-600-9513 regarding any commercial real estate needs in Longmont, CO, and our neighboring communities.

We give out $250 gift cards for referrals that become our real estate clients.

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Opportunity Zones in Commercial Real Estate

February 1, 2023

Opportunity zones encourage private real estate investors to seek new investments in lower-income areas. Tax incentives reward investors who take advantage of the opportunity zone program. Tax deferrals, general reductions, and adjustments of capital gains taxes make opportunity zone investments appealing.

What is an Opportunity Zone?

An opportunity zone is an often up-and-coming area with a distressed economy. The general goal in deeming an area an opportunity zone is to find an influx of funds to kick-start the economy and create new jobs.

The government aims to entice investors with tax benefits and, in return, see new development, land improvement, and property renovations. The establishment of new recreational facilities, restaurants, etc., creates more jobs in the community. Furthermore, even the construction and renovation processes provide job opportunities for community members seeking work.

Who Should Invest in Opportunity Zones?

Typically, long-term investors are the ideal fit for investing in opportunity zones. Investors only realize some tax benefits after a specified period (10+ years). Therefore, if investors hope to liquidate their assets before taking full advantage of the tax incentives, opportunity zone investing may not be the right strategy.

If you are unsure whether or not opportunity zone investment is an option for you, consult your team of local real estate professionals. Please reach out to Steve Longenecker at WeBrokerCORealEstate or 720-600-9513 regarding any commercial real estate needs in Longmont, CO, and our neighboring communities.

We give out $250 gift cards for referrals that become our real estate clients.

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Build-Outs in Commercial Real Estate

January 18, 2023

A commercial build-out comes into play when a space, previously occupied by a tenant, is now leased by a new business that will use the suite differently.

Tenants use commercial real estate spaces for various reasons, and every renter has their own needs. Some spaces may be the perfect fit as is, and some will require minor or extensive renovations to suit a new tenant.

Commercial Real Estate Build-Outs

A commercial real estate build-out refers to anything required to make a space ready for your business. Depending on the existing building, a build-out may include new lighting, removing or adding walls, designing a waiting area, installing a kitchen, or creating new offices or storage areas.

If the current space functions well for your business, a build-out may be unnecessary, and you may simply add a fresh coat of paint to complement your brand.

If your company is looking for new office space, you will likely be able to find a building that works efficiently as is. If, on the other hand, you are looking to open something more unique, like a bar, restaurant, or arcade, you will likely renovate (build-out) to create the right atmosphere.

Who Pays for a Build-Out?

There is no perfect answer as to who pays for a build-out. Everything is negotiable in commercial real estate transactions, and the same applies to a build-out. The landlord may cover the expenses, the tenant may be solely responsible, or they may share renovation costs, depending on the negotiated lease.

Be sure to consult an experienced commercial real estate broker as you choose your new space and decide on a build-out strategy. Please contact Steve Longenecker at WeBrokerCORealEstate or 720-600-9513 regarding any commercial real estate needs in Longmont, CO, and our neighboring communities.

We give out $250 gift cards for referrals that become our real estate clients.

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How are Buildings Classified in Commercial Real Estate?

January 5, 2023

Classes A, B, and C categorize commercial real estate buildings. With every market around the country being different, the class is determined in relation to other buildings in the area. For example, a Class A building in Northern Colorado could be considered a Class B building in a larger city market.

The classification levels have pros and cons, and each one of the three classes presents a unique opportunity.

Class A Buildings

As you might have guessed, Class A buildings are the top tier. They are generally very aesthetically pleasing and are the newest buildings in their area. Class A structures have premium construction and building materials, prime locations, impressive amenities, and robust building management.

The above-mentioned characteristics mean that Class A buildings can demand the highest rent and retain quality tenants. Class A structures tend to sell quickly and above the average price point of their given market.

Class B Buildings

Class B buildings are average overall. These structures are reasonably attractive, moderately well-located, and slightly older than their Class A counterparts. Class B buildings still function well and have decent management and tenants.

Investors tend to be attracted to Class B options as buildings can often return to Class A status with renovations. Class B buildings command fairly good rental rates and sell at fair prices.

Class C Buildings

Class C buildings are the bottom category. They tend to be outdated (aesthetically and internally), much older, and located in undesirable areas.

Some will approach Class B buildings as an investment opportunity, but typically for redevelopment purposes rather than simple renovations. Class C buildings have the lowest rental rates and are slow to lease and sell.

How is Your Building Classified?

We would love to discuss any questions you have about the classification of your current buildings or any other properties in your market! Please contact Steve Longenecker at WeBrokerCORealEstate or 720-600-9513 regarding any commercial real estate needs in Longmont, CO, and our neighboring communities.

We give out $250 gift cards for referrals that become our real estate clients.

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Sale-Leasebacks in Commercial Real Estate

December 20, 2022

A sale-leaseback is an agreement between a buyer and seller that the buyer will purchase a property and then lease it back to the seller for a specified period. Sale-leasebacks are used for various reasons and have pros and cons for both parties.

Pros of Sale-Leasebacks

As the seller (who becomes the tenant), one of the main pros of a sale-leaseback is an influx of cash. You can still use the property you once owned, but the mortgage is no longer associated with your business. Additionally, any equity you achieved while you owned the property is now liquid.

As the buyer (who becomes the landlord), a sale-leaseback allows you to purchase a property knowing that you already have a tenant with a specified lease agreement. This eliminates any risk of immediate vacancy and negotiating a lease with an unknown tenant.

Cons of Sale-Leasebacks

The most obvious con of a sale-leaseback for the seller is that after the sale occurs, the seller no longer reaps the benefits of the property appreciating. Additionally, while they remain in the building as tenants, there will be certain restrictions on modifying/remodeling based on the lease agreement.

As the buyer-landlord, the main drawback is any issues that may occur with the seller-tenant. The tenant may require extra supervision as they are accustomed to treating the property as if they were the owner.

Rely on Your Broker

When in doubt, rely on your commercial real estate broker to help determine when and if a sale-leaseback is the right fit for you and your business. Please contact Steve Longenecker at WeBrokerCORealEstate or 720-600-9513 regarding any commercial real estate needs in Longmont, CO, and our neighboring communities.

We give out $250 gift cards for referrals that become our real estate clients.

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How to Maximize Your Building’s Cap Rate

Maximizing Your Building’s Cap Rate

What Affects Cap Rates?

What is Cost Segregation?

How Does It Work?

Is Cost Segregation Right for You?

What is a Triple Net Lease?

Pros of a Triple Net Lease

Cons of a Triple Net Lease

Calculating Cap Rates

What Affects a Cap Rate?

Does Commercial Real Estate Have Its Own Language?

Common Commercial Lease Terms to Know

Cash Flow

Appreciation

Tax Incentives

Debt Reduction

Ready to Become a Real Estate Investor?

What is an Opportunity Zone?

Who Should Invest in Opportunity Zones?

Commercial Real Estate Build-Outs

Who Pays for a Build-Out?

Class A Buildings

Class B Buildings

Class C Buildings

How is Your Building Classified?

Pros of Sale-Leasebacks

Cons of Sale-Leasebacks

Rely on Your Broker

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