Commercial Real Estate 101

Commercial real estate is designed to serve the needs of industrial, commercial and investment buyers and sellers. There are significant differences between commercial real estate and residential real estate. Residential real estate has a quicker turn around time in order to successfully close a transaction - typically five business days to satisfy written terms and conditions. Commercial real estate can sometimes take months to satisfy written terms and conditions in order to complete a successful transaction.

There are four main components to commercial real estate:

1. Retail and Office Leasing also known as Commercial Leasing
2. Sale of a Business
3. Industrial Real Estate
4. Investment Real Estate

Commercial Leasing:

Commercial leasing focuses on commercial-retail and commercial-office leasing. It is a commercial Realtor's obligation to be knowledgeable in understanding the Landlord and Tenant Act. As well, a commercial agent will be able to understand and negotiate terms and conditions of written leases.

When reviewing and discussing commercial lease options, there are different types of tenancies. A lease may allow a tenant the right to assign or sublet to a new tenant; however, the original tenant on the lease will be liable for the lease and any damages incurred through the tenancy. Leases are governed by legislation which is subject to The Landlord and Tenant Act.

Understanding rent calculations is very important. Net lease is the minimum amount of rent payable; typically on an annual per square foot basis. Occupancy rent is the tenant's proportionate share of common area maintenance charges which includes operating costs, realty taxes and hydro.

Retail leasing is different from office leasing. Retail leasing includes net rent and occupancy costs, which may include proportional operating costs, realty taxes, local improvement and business taxes, repairs and maintenance, insurance, utilities and other charges such as management fees and/or advertising costs; or can be based on a percentage rent with occupancy costs. Percentage rent is typically calculated at a specific percentage point of gross sales.

Sale of Business

In successfully selling a business, a commercial real estate agent must be discreet as valuable and confidential information is at hand. A variety of items are discussed and reviewed before and during the sale. Be prepared to decide if its shares or assets of a business that are being sold. Valuation of the business will need to be considered. Is the business valued via capitalization, discounted cash flow or by adjusted book value/asset valuation? Value of a business is derived from net profits, book value of assets including inventory, fixtures, chattels, equipment and/or leaseholds and by tangible and intangible items including licenses, franchise rights, patents, leasehold interests and goodwill.

Industrial Real Estate:

Industrial real estate is a large and highly specialized segment of real estate. Not only does industrial real estate include all land and buildings utilized for industrial activity such as manufacturing and distribution of tangible economic goods, but also supports other segments of industries such as storage, trans-shipment, fabrication, assembly and air terminals.

Industrial buildings are typically built for a specific purpose. These buildings are designed and built to meet demands for products and services. Since industrial buildings are very specific it can make the resale process long, especially if it's in a slow-moving market. Potential buyers must calculate the costs associated to modifying the existing building to meet and accommodate their specialized business with special attention given to ceiling heights, clear spans and floor loads. As well, industrial building users must consider site requirements such as zoning restrictions, availability of services, transportation facilities and physical topography.

Investment Real Estate:

The purpose of investment real estate is to accumulate wealth and/or to gain profit. A prudent investor assesses their needs, risk and return before seriously pursuing the investment opportunity. Investment real estate appears in various forms: buying, holding, renting multifamily dwellings and/or a series of individual rentable properties; buying, holding and developing land for residential or commercial purposes or just holding land with intentions of selling in the future.

Please note: It's very important to include your accountant and lawyer in all aspects of commercial real estate whether it's leasing, buying or selling.

If you have any questions or are interested in commercial real estate in Saskatoon, feel free to contact us any time.

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