Understanding Commercial Property
Commercial Property or Commercial Real Estate involves properties used solely for business purposes. These include office buildings, medical centres, nursing homes, malls, warehouses, multi-family housing buildings, farm land and garages.
- Office buildings – include downtown skyscrapers, small professional office buildings, and single tenant properties.
- Industrial – these range from smaller to large office service or warehouse, to the very large properties. They are used for manufacturing and production.
- Retail or Restaurant – include single tenant buildings, small neighbourhood shopping centres and large stores.
- Multi-family – consists of apartment complexes.
- Land – could be undeveloped rural land for future development
Understanding and being able to analyse the elements of an investment allows you to provide services to commercial real estate investors.
What are these elements?
These elements are:
Cash Inflows – These include proceeds from sale, rent, tax benefits and credits, depreciation, and operating expense recoveries.
Cash Outflows – These include initial investments, operating expenses and taxes, mortgage payment, costs upon sale, payments for acquisition of property, plant and equipment,purchase and selling long- term assets.
Timing of Cash Inflows and Outflows – It is important to know the timing of cash inflows and outflows so you can project when you’re likely to have a positive or negative cash flow. A firm can have a negative cash flow for a quarter, but this is not necessarily bad news, if the firm can generate a positive result from its normal business operations.
Risks – Risks are always present in any investment. If people were too afraid to take risks, we wouldn’t have big businesses today. It is dependent on current market conditions, and current tenants, whether they are likely to renew their lease contracts or not. Economic conditions affecting future interest rate hikes can complicate loan refinancing and valuations.
Why is it important to analyse these elements?
The cash inflows and outflows are part of a bigger picture – the cash flow.
A cash flow is the flow of money into and out of the business or a project. A cash flow statement shows the sources and uses of a firm’s cash. When analysing the cash flow statement, you have to consider each factor that contributes to the change in cash position. Think of it as your personal bank account.
Basically, the cash flow statement is organised using the following categories:
Cash generated from operating activities, from investing activities, financing activities, and other activities such as amount of income taxes and interest paid.
If the cash from operating activities is consistently higher than the net income, it means the company’s income is high quality, if it is otherwise, questions would be raised as to why the income is not turning into cash.
If the company is generating more cash than it is spending, this means the company has a higher chance of paying off or reducing its debt, buy back its stock, and increase its dividend, or it can acquire another company.
The statement of cash flow will show how efficiently a company is managing and using its shareholders’ capital to run its operations. It reveals the company’s liquidity and shows the rate of return of its projects. It can be used to evaluate the sources of income of the company and investment risks a company undertakes.
Investing in commercial real estate or property comes with a larger amount of start-up capital and a wide-range knowledge of the legal, financial aspects as well as the regulations and standards of owning this kind of property. Commercial estate leases, for example, require different levels of responsibility from the landlord to the tenant. In addition to rent, transactions also involve paying property taxes, insurance and maintenance. Investors, who do not want to deal with paperwork, can do it through real estate investment trusts.