Law Office of Henry B. LaTorraca Civil Trial Attorney

Learning the basics about commercial real estate

When Californians consider investing in commercial real estate, it's important that they understand a few key terms. After all, the process can be much more complicated than dealing with residential real estate. Contract terms are longer, and the building values are often substantially higher. However, entering the field can provide exciting opportunities for great returns and long-term investment.

For starters, it's important to know the capitalization rate, or CAP rate. This is based on a formula that divides the property's net operating income (NOI) by the property's fair market value. This rate reflects the return that an investor can receive from their commercial real estate investment; this rate is an important figure to consider when determining whether to invest in a given project or property.

In addition, commercial real estate investors will also see references to usable square footage, or USF. While the entire property will be a certain size, there are always large areas in commercial buildings that are unavailable for use, such as bathrooms, stairs and exit halls. Besides the USF of a property, investors may want to look into the RSF, or rentable square footage, as well. This is the complete amount of working and shared space, including hallways, bathrooms and lobbies. It is used when calculating rental prices for the property.

When preparing rental contracts for commercial real estate, there are a number of clauses that can be included, including a right of first refusal that allows a specific tenant the first opportunity to rent any additional space that becomes available in the property. In addition, the contract may permit or forbid subleasing, which is when the tenant rents the space to another party.

Commercial real estate offers exceptional opportunities and a growing market. For investors planning on entering the field, a real estate attorney can play a critical role in developing and reviewing contracts as well as executing transactions.

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