Everything you need to understand CRE terminology, deal structures, financial analysis, and strategies to land your first commercial deal.
By Khai Tran | khaitranofficial.com
If you're a residential real estate agent looking to expand your business, increase your income, and differentiate yourself in a competitive market, commercial real estate (CRE) might be your next big opportunity.
The truth is, many residential agents have the skills, connections, and work ethic needed to succeed in CRE. They just need the right knowledge and confidence to make the transition. This comprehensive guide will give you everything you need.
| Aspect | Residential | Commercial |
|---|---|---|
| Property Value | Based on comparable sales | Based on income generation (NOI/Cap Rate) |
| Buyer Motivation | Emotional (home, lifestyle) | Financial (ROI, cash flow) |
| Lease Terms | Typically 1 year | 3-10+ years |
| Due Diligence | Inspections, appraisal | Extensive: financials, leases, environmental, zoning |
| Commission Structure | Typically 5-6% split | Varies widely (4-8%), often negotiable |
What it is: Shopping centers, strip malls, standalone stores, restaurants.
Key factors: Location (foot traffic), tenant mix, parking, visibility from main roads.
Why residential agents excel here: You already understand retail location analysis from residential markets.
What it is: Single-tenant or multi-tenant office spaces, medical buildings, professional suites.
Key factors: Class rating (A, B, C), parking ratios, amenities, accessibility.
Opportunity: Many small business owners need office space. Tap into your existing network.
What it is: Warehouses, distribution centers, manufacturing facilities, flex space.
Key factors: Clear height (ceiling height), loading docks, power capacity, proximity to highways.
Growth sector: E-commerce boom has created massive demand for warehouse space.
What it is: Apartment complexes, student housing, senior living facilities.
Key factors: Occupancy rates, rent roll analysis, unit mix, amenities.
Natural transition: This is the easiest entry point for residential agents since you already understand housing markets.
Commercial real estate follows distinct market cycles:
Understanding where your local market is in the cycle helps you advise clients on timing their purchases and investments.
These are the 10+ terms you must know to have confident CRE conversations.
Definition: The ratio of Net Operating Income (NOI) to property asset value. It's used to estimate the investor's potential return on investment.
A property generates $100,000 in NOI and sells for $1,000,000. Cap rate = 10% ($100,000 / $1,000,000 = 0.10 or 10%).
What it means: Higher cap rates typically indicate higher risk/return properties. Lower cap rates suggest stable, lower-risk investments.
When to use it: Initial property evaluation, comparing investment opportunities, discussing valuations with investors.
Definition: All revenue from the property minus all reasonably necessary operating expenses.
What it means: NOI is the single most important number in commercial real estate. It determines property value and investor returns.
Don't confuse NOI with cash flow. Cash flow accounts for mortgage payments; NOI doesn't.
Definition: A lease agreement where the tenant pays for property taxes, insurance, and maintenance in addition to rent.
A retail tenant in a NNN lease pays $5,000/month base rent plus all property taxes, building insurance, and exterior maintenance costs.
Variations:
Gross Lease: Landlord pays all operating expenses; tenant pays only rent.
Modified Gross: Landlord and tenant share operating expenses based on negotiated terms.
In a modified gross office lease, the landlord might cover base year expenses, while the tenant pays for increases in taxes, insurance, and common area maintenance.
Definition: Fees tenants pay to cover the landlord's costs for maintaining shared spaces in multi-tenant properties.
Includes: Landscaping, snow removal, parking lot maintenance, property management, common area utilities, security.
A tenant leasing 5,000 SF in a 50,000 SF building pays 10% of total CAM charges (5,000 / 50,000 = 0.10).
Definition: Build-out costs for customizing space to tenant needs. Often negotiated as a landlord concession.
A medical office tenant needs exam rooms. Landlord offers $40/sq ft TI allowance on 2,500 sq ft = $100,000 toward buildout.
Definition: Non-binding preliminary agreement outlining key deal terms before a formal Purchase and Sale Agreement.
When to use: Early stages to establish mutual interest before spending money on legal contracts.
Definition: Timeframe (typically 30-90 days) for buyer to investigate property before closing.
Key items: Financial review, lease audits, environmental assessments, physical inspections, zoning verification.
Definition: Document listing all tenants, lease terms, square footage, and rental rates.
What to look for: Lease expiration dates, current vs. market rents, tenant concentration, renewal options.
Definition: Percentage of leased vs. vacant space. Critical metric for valuation and cash flow analysis.
A rent roll is one of the first documents you'll review. Here's what to look for:
Operating expenses directly impact NOI and property value:
Mortgage payments (debt service), capital expenditures (roof replacement, parking lot repaving), tenant improvement costs, leasing commissions.
Your first commercial clients are closer than you think:
Don't try to learn CRE alone. Partner with seasoned commercial brokers on your first few deals.
How to approach experienced brokers:
Review clients who:
"Hey [Name], I know you own [business]. Have you ever considered purchasing the space you're leasing? I've been expanding into commercial real estate and would love to show you what's possible."
Commercial buyers care about numbers, not emotions. Lead with financials, not features.
NNN vs. Gross vs. Modified Gross dramatically impact tenant costs and landlord returns. Know the difference.
Environmental issues, lease problems, and deferred maintenance can kill deals. Always investigate thoroughly.
Partner with experienced CRE brokers on your first deals. The learning is worth more than a full commission.
Understanding where your market is in the cycle helps you advise clients on timing.
Available at: khaitranofficial.com/calculators
This guide is just the beginning. Join our CRE training cohort for 6 weeks of deal structures, underwriting, and partnership strategies with live coaching and accountability.