CRE 101: Commercial Real Estate Investing

Define usable and rentable square feet, explain their calculation and the load factor for multistory office buildings, and show how common areas are allocated pro rata to determine rent.

Usable square feet are the area leased and used exclusively by the tenant, measured length by width from the entrance to the exterior wall.

Determine rentable square footage by combining usable space with a pro rata share of common areas, such as lobbies, restrooms, and hallways on the first floor.

Calculate usable and rentable square footage; apply the load factor to the rent rule; and note cubic volume does not count toward leasable square feet.

Perform a financial modeling exercise centered on commercial real estate investing to understand how models support decision making.

Define and compare gross, triple net, modified gross, and ground leases, and explain how operating expenses relate to base rent across different commercial real estate leases.

Learn how gross leases, or full service leases, quote a single rate covering base rent and all operating expenses per square foot, with annual escalations.

Explain how a triple net lease separates base rent from operating expenses, including real estate taxes, building insurance, debt service, and passthroughs, with annual escalations and pro rata shares.

Examine how percentage leases add a percentage rent to base rent in retail properties. Analyze statements of sales, audits, and the impact on net operating income and property value.

A modified gross lease blends gross and net, with expenses in base rent and rest added; expenses outside base rent are reconciled annually to actual costs for any property type.

Understand the ground lease: landlord owns the land (out parcel), tenant builds and maintains improvements, and pays taxes and insurance; rent is land-based, with 20–50 year terms and redevelopment potential.

Explore how rent structures affect net operating income, including percent and ground leases, modified gross terms with limited pass-throughs, and how expense caps, reconciliations, and annual escalation rate shape outcomes.

Engage in a lease negotiation exercise within the realm of commercial real estate investing, applying core negotiation concepts to optimize terms and outcomes.

Explore revenues and operating expenses in gross and triple net leases, including pass-throughs, capital versus operating costs, and how reconciliations affect rent.

Explore gross potential rent as the total property rent, adjusted for vacancies to reveal the actual amount collected, and its treatment in a triple net lease with expense reimbursements.

Define operating expenses as maintenance costs, including insurance, taxes, management fees, and repairs, as above the line for net operating income, with debt service and reserves below the line.

Identify controllable expenses like landscaping, parking, and janitorial, and non controllable costs such as real estate taxes, utilities, and snow removal, and learn how contracts and leases affect budgeting.

Negotiate expense caps in a triple net lease to cap increases, using pass-through rates and 3 to 5 percent, and shift to modified gross lease to prevent 100% tenant reimbursement.

Explain capital expenses as improvements extending a building’s life, including common areas or the interior of a tenant space; show broker commissions capitalized on straight-line over the lease term.

Understand gross potential rent as adjusted, the lease controls reimbursements, pro rata shares, expense caps, and tenant audit rights, while distinguishing capital from operating expenses and noting depreciable capital improvements.

Engage with a property management exercise within commercial real estate investing to build practical skills in managing properties.

Explore financing mechanisms for commercial real estate projects, covering equity and debt options, including traditional and bridge loans, tax credits, grants, SBA loans, and affordable housing funding.

Explore equity financing in commercial real estate: owners and investors contribute cash or land; equity is first in, last out, with returns around 10% from cash flow after debt service.

Explore traditional funding through bank financing and federally insured sources like credit unions and savings and loan associations, with 65% loan-to-value, 10–15 year terms, and loans securitized in secondary markets.

Bridge loans fund value-add projects by financing renovations and potential rent increases, with private equity backing on the debt side and short-term, higher rates.

Explore grants and tax credits for affordable housing, including 9% and 4% low-income housing tax credits, funding 70% and 30% of the capital stack, with HOME, CBD, and SBA loans.

Explore the capital stack components, grants and tax incentives, and calculate NOI and cash flow. Assess debt service relative to cash distributions and equity shortfalls, and outline SBA loan basics.

Engage in a development project exercise within CRE 101 to explore key concepts in commercial real estate investing.

Learn the cap rate, loan to value ratio, and debt service coverage ratio formulas used by investors and lenders. Understand where these numbers come from and how to recognize them.

Apply numbers to the illustrations to anchor where figures sit in the process of determining the NOI and the capital stack.

Calculate net operating income by subtracting operating expenses from gross rents, yielding a net income of 335,000.

Explore how the cap rate measures a property's performance by comparing NOI to value, using the formula NOI divided by value equals cap rate, and assess market pricing.

Apply a 75% loan-to-value ratio to a 6.1 million property to determine the maximum loan amount of 4,575,000. Subtract the loan from value to reveal equity of 1,525,000.

Apply the debt coverage ratio to compare net operating income with debt service. A 75% loan is supported when noi is 335,000 and debt service is 294,715, yielding 1.14 dcr.

Apply the capital stack formulas and identify variables in the capital stack and the performer to underwrite a project, evaluating operations and value against market, lender requirements, and feasibility.

Explore how property types, lease structures, and operations determine value and meet lender requirements, while understanding negotiable lease terms, rents, reimbursable expenses, and expense caps.