What Creates Value in Commercial Real Estate Lending
Commercial private lenders such as HML Investments take measured risks when deciding whether to fund a property. Having the knowledge of what exactly creates value in commercial real estate lending allows investors to decide whether or not the deal is worth making. When it comes to residential real estate, the value predominantly lies in location (location, location, location!). But when dealing with commercial real estate, factors that generate value lie mainly in how the property is used, and the lease.
- Use: How the property is used is probably the most important factor when looking how commercial property creates value. How the real estate is used is determined by the city’s local planning department. That department keeps control of this through zoning, which is a governmental system that determines land use and is typically master planned by the city. For example, say you identified a prospective commercial property that you intend to build into an apartment complex. But upon firther research, you find out that the city has zoned that property for agricultural use only. That means that it can’t be used to build apartments, retail centers, office buildings, or industrial parks.
- Leases: When you buy a commercial property, you are buying its leases (and the property essential comes for free). Simply put, if the lease is weak, your property value is weak. A lease is a written legal agreement between the lessor (the landlord) and the lessee (the tenant) whereby the lessee compensates the lessor (by paying rent) for the use of the property for a specific time period. Some things to consider when looking into a properties lease agreements are rent amount, lease terms, additional costs, sub leasing, improvements, and security deposits.
For more information about commercial real estate lending, contact the specialists at HML Investments today.