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Commercial Real Estate

Commercial vs. residential real estate- what are the differences?

Commercial versus residential

The opinions and ideas are quite interesting regarding what each other’s chosen segment of real estate is really like.  What are the general things that the different practitioners deal with, worry about, or think of on a daily basis?

Below, I’ll define five terms/phrases from each sector and then give you the nitty gritty about what the true differences are. I have experience in both and trust me, they’re very different practices.

Five commercial terms:

CAM Charges – Common Area Maintenance charges. Those charges levied on or the expenses incurred in maintaining the common areas of a building.

Tenant Improvements (TI’s) – Improvements to land or buildings to meet the needs of tenants. They may be new improvements or remodeling, and may be paid for by the landlord, tenant or part by each.

Letter of Intent (LOI) – There are potentially multiple uses of this term. Generally, a written statement that two parties to a prospective transaction (buyer/seller or lessor/lessee) intend to proceed to a final agreement in good faith on stated principal business terms of the deal to be entered into.

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Triple Net – A lease requiring the tenant to pay in addition to a fixed rental, the expenses of the property leases, such as taxes, insurance, maintenance, utilities, cleaning etc. The terms “net, net, net “or “triple net,” and other such repetitions are used.

Load Factor – In a lease, the load factor is the multiplier to a tenant’s useable space that accounts for the tenant’s proportionate share of the common area (restrooms, elevator lobby, mechanical rooms, etc.). The load factor is usually expressed as a percentage and ranges from a low of 5% for a full tenant to as high as 15% for a multi-tenant floor.

What residential probably doesn’t know about commercial RE

This is the real stuff, the hidden side of the practice of commercial real estate:

  1. Most are completely ignorant asshole landlords who still think its 1995, know everything about real estate and have teal carpet and faux wood trim in their office to prove it.
  2. You as a Broker are treated like a complete ass because it’s “just business.”
  3. Owners sometimes change parts of the contract after it’s been signed. This happened to me last week!!
  4. Square footage numbers that are always “generally” 10-20 % less than number stated on contract.  Hey, what’s 200, 400, 600 square feet amongst friends?
  5. Zoning and or allowable use?  Not in my back yard.
  6. Getting paid when the other broker decides to “process” it.

Five residential terms:

Assessed value -The valuation placed on property by a public tax assessor for purposes of taxation.

HUD-1 settlement statement – A document that provides an itemized listing of the funds paid at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow (impound) amounts. Each type of expense goes on a specific numbered line on the sheet. The totals at the bottom of the HUD-1 statement define the seller’s net proceeds and the buyer’s net payment at closing. The HUD1 statement is also known as the “closing statement” or “settlement sheet.”

PITI– This stands for principal, interest, taxes and insurance. If you have an “impounded” loan, then your monthly payment to the lender includes all of these and probably includes mortgage insurance as well.

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Real Estate Settlement Procedures Act (RESPA) – A consumer protection law that requires lenders to give borrowers advance notice of closing costs.

What commercial probably doesn’t know about residential RE

This is the real stuff, the hidden side of the practice of residential real estate:

  1. Home owners associations and covenants.  Ignorance is not bliss.
  2. Buyers who really have no clue what’s really needed to purchase a house.  The amount of money needed and real values in the real market.
  3. Low ball and I mean way low ball investors.  Who then of course after they purchase the property think it has magically increased 50% in value.
  4. Short sales and the time it takes for the banks to respond.  As in whenever the hell they want to.
  5. Where are the clients?  The ones with a job, credit score and money to actually qualify?

What little tidbits of your workday thoughts, considerations or insights could be of use or help to your fellow real estate friends?  Please, feel free to let it flow!

CC Licensed image courtesy of kayveeinc via Flickr.com.

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Written By

Broker/Owner in Lafayette, IN, whose passion is Commercial Real Estate with focus on Technology, Social Media, and Networking.

21 Comments

21 Comments

  1. ShortWoman

    May 2, 2010 at 3:41 pm

    Ha! You are so right about many “investors.” I once had one cold-call me and ask if I was willing to submit low-ball offers. I replied “Sure, as long as you understand that it won’t be accepted.”

  2. Scott Harris

    May 2, 2010 at 6:09 pm

    Funny – I started in the business doing residential and still do some – generally commercial clients of mine buying a house.

    I’ve got another one regarding commercial — NNN means read the lease — really really read the lease. NNN absolute = same as the above, and generally you’ll find that that a NNN absolute lease isn’t quite as absolutely absolute as it was claimed to be.

  3. Chris

    May 3, 2010 at 11:10 am

    Sad to say, I laughed out loud reading some of this. We had a #4/what’s a few hunderd SF among friends that took over a year to iron out (and get paid…).

    A term to add:

    Commission Agreement! If you don’t have an exclusive contract to list/represent, then you want something from the party IN WRITING that says they’ll pay up.

    Another thing residential brokers don’t know about commercial:

    Lawyers like to add themselves to the commission splits.

    And regarding NNN – if it’s not Gross, as in the landlord pays for everything, then you have to explain it with something other than some CRE shorthand like NNN, Net, +J, ++, etc… or my personal “favorite”, Modified Gross…

  4. Duke Long

    May 3, 2010 at 11:15 am

    Chris,
    Thanks….when you think about it…it’s always about money!!!!

  5. Ryan Martin

    May 3, 2010 at 5:41 pm

    That’s pretty funny Duke. I think my favorite one is the amount of time that it takes the other broker to “process” your commission. Receiving the leasing commission often takes longer than getting the LOI negotiated and the lease signing combined.

    • Duke Long

      May 3, 2010 at 5:50 pm

      Waiting on two to be “processed” as we speak!!!!
      Excuses:
      1. The owner has not paid us yet.
      2. We do that through corporate.
      3.That comes from our regional office.
      4.We only sign checks once a month.(obliviously not this month)
      5.I’ll call down to..Mandy/Allison/Stephanie/Sue/ to check for you and will call you back.
      6.Or the one I love…hey if you don’t call we just figured it was our’s to keep!!!
      I would continue but I am trying to keep this a G-rated response!!!

      • Ryan Martin

        May 4, 2010 at 9:41 am

        Ironically, we have 2 that are also being “processed” right now.

        Technically, commissions are due upon execution of the lease, but as Doug points out (and we all have experienced), commissions are actually received whenever the listing broker and seller get around to it.

  6. Candice A Donofrio

    May 4, 2010 at 12:30 am

    7. “You’re a buyer’s[tenant’s] agent so you can get your own client to pay you.”
    8. (really happened) “His deposit check bounced and he is giving us one of his JetSkis as collateral–when we get the pink slip we will cut you a check.”
    This is probably my favorite post of yours ever!
    PS. Stop making sense. 🙂

    • Duke Long

      May 4, 2010 at 11:17 am

      Candice, thanks and keep’em coming.:):)

  7. Wayne

    May 5, 2010 at 12:44 am

    Who pays for the new compressor in the antique HVAC system when it fails? Read your lease!

  8. Macky

    May 5, 2010 at 11:00 pm

    thanks for sharing this…very very informative…my wife will love this..thanks again!

  9. John molloy

    January 30, 2011 at 3:01 pm

    All posting’s have been great & informative;-)
    Has anyone ever come across a LOI were commissions are due upon execution of buying/selling contract???

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