Le Knapp: Commercial Property

Commercial real estate (CRE) is property used exclusively for business purposes or to provide a workspace rather than a living space. Most often, commercial real estate is leased to tenants to conduct business. This category of real estate ranges from a single gas station to a huge shopping center. Commercial real estate includes retailers of all kinds, office space, hotels, strip malls, restaurants, and convenience stores.

The Basics of Commercial Real Estate

Commercial real estate along with residential real estate comprises the two primary categories of property. Residential includes structures reserved for human habitation and not for commercial or industrial use. As its name implies, commercial real estate is used in commerce.

Some zoning and licensing authorities further break out industrial properties—sites used for the manufacture and production of goods, especially heavy goods—but most consider it a subset of commercial real estate.

Commercial real estate is categorized into four classes, depending on function: office, industrial, multifamily, and retail. Individual spaces are also categorized. Office space, for example, is characterized as class A, class B or class C.

• Class A represents the best buildings in terms of aesthetics, age, quality of infrastructure, and location.
• Class B buildings are usually older and not as competitive—price-wise—as Class A buildings. Investors often target these buildings for restoration.
• Class C buildings are the oldest, usually over 20 years of age, located in less attractive areas, and need for maintenance.

Commercial property refers to real estate property that is used for business activities. Commercial property usually refers to buildings that house businesses, but it can also refer to land that is intended to generate a profit, as well as larger residential rental properties. The designation of a property as a commercial property has implications on the financing of the building, the tax treatment, and the laws that apply to it.

Breaking Down Commercial Property

Commercial property includes malls, grocery stores, office buildings, manufacturing shops, and much more. The performance of commercial property, including sales prices, new building rates, and occupancy rates, is often used as a measure for business activity in a given region or economy. For the United States as a whole, Moody’s provides the Moody’s/RCA Commercial Property Price Indices (CPPI), which measures the price changes in commercial real estate across the country.

Investing in Commercial Property vs. Residential Property

From an investment perspective, commercial property has traditionally been seen as a sound investment. The initial investment costs of the building and the costs associated with customization for tenants are much higher than residential real estate, but the overall returns are also higher, and some of the common headaches that come with tenants aren’t present when dealing with a company and clear leases. Commercial property investors can also utilize the triple net lease, where the risks are passed on to the leasing business to the extent that is not available to residential real estate investors. In addition to more control over lease terms, commercial property tends to have more straightforward pricing considerations. A residential property investor has to look at a number of factors, including the emotional appeal of a property to prospective tenants. In contrast, an investor in commercial properties will have an income statement that shows the value of the current leases, which then can easily be compared to the capitalization rate for other commercial property opportunities in the area.

Investing in Commercial Property through REITS

If you want to invest in commercial properties but don’t have the capital or the desire to purchase a whole building, real estate investment trusts (REITs) can achieve the same end in more manageable portions. REITs operate like mutual funds in that they pool investment dollars to purchase assets, and the shares of the REITs themselves become the trading instruments representing the underlying assets. REITs that specialize in commercial properties offer shares to investors to raise the capital to purchase a portfolio of income-producing properties. Investors can buy and sell those shares on exchanges. Buying shares in a commercial property REIT gives you exposure to commercial property without requiring you to buy a building on your own.

How real estate zoning works

If a live/work property is really your goal, it helps to understand what could be standing in your way. Most of the time, that means understanding your local zoning laws.

Zoning in some form or other has been around for hundreds of years. In most towns, zoning simply means dividing up land into sections and earmarking it for a certain kind of development. This helps communities maintain property values, ensure safety, and keep traffic in check.

The most common zoning types include:
• Residential
• Commercial
• Industrial
• Agricultural
• Rural
• Historic
• Combination
But even then, these designations can be broken down further. There are several different kinds of residential zoning, covering single-family homes, apartments, trailer parks, and so on, and they can’t always be intermingled. Each type has limits on what the property can be used for—you probably won’t be allowed to start a dairy farm in your backyard, for example.

Buying commercial property…and then living in it

It’s tough to give specific advice on what you need to do to live in a property not zoned for residential use, given that the rules vary so greatly from state to state, and even from town to town. Some areas do have plenty of mixed-use zones where you’ll have no problem finding what you’re looking for. In others, though, you will have to apply for a mixed-use permit, first.

One important thing for buyers to keep in mind? Just because you see a commercial listing that advertises an included apartment or living space doesn’t mean that space is legal. Before you buy, check with the local planning office to make sure all permits are in place.

Real Estate Zoning Laws

Real estate zoning laws are often difficult to understand, but you should know that they are set up to keep people safe, to set construction standards, and to maximize profit capabilities for a town or city. There is a big difference in definition between residential and commercial property:

• Residential property is meant for building houses, apartments, and other homes,
• Commercial property is meant for building businesses that generate income.
• Industrial property is separate from these two properties as well.

This distinction can be difficult to understand, though, since real estate zoning laws are different throughout different towns, counties, and states. You might realize that some jurisdictions have different positions on the differences between what can be considered commercial and what can be considered residential. One example is as follows: in some cases, a residential home is not commercial property even if part of it is rented to others for profit. Apartment buildings can also be considered commercial property, even though they are residential in nature since many people live there.

The Dangers of Living on Commercial Property

You can find stories of individuals that have successfully lived on commercial property for months for free, since in some cases, it is illegal for landlords to collect rent from those living on this property. These stories are told by individuals who lived in metropolitan areas with high residential property rent, so they squatted on commercial property to save money. However, consider the consequences: you will live in spaces that are not inspected to be safe and fitting for humans to live in.
You might find yourself in rooms that do not have a quick escape in an emergency, or in a loft that is not inspected and has leaks, rodents, and pests that can cause your health problems.

Renting commercial property…and then living in it

For those of you playing with the idea of living in rented commercial space, expect to run into different hurdles. Even if you live in an area that has fairly relaxed zoning laws, odds are pretty good that your landlord will have their own rules, which you will agree to in signing the lease. All in all, that makes sneakily living in your rented office or studio space not a great idea.

There are plenty of tales on the internet of people who have worked around the law and made it work, though. In some instances, their neighbors were happy to keep quiet in exchange for the free after-hours security.

What happens if you get caught?

Alright, so you ignored all our advice and went about this the less-than legal way. What happens if the wrong people find out?

Well, again, this depends a lot on where you live and what your specific situation is. Your best bet will be to talk to a legal professional or real estate expert, but in general terms, this is what you can expect.
If you’re caught with an illegal apartment in a commercial property you own, you will in all likelihood be fined and either be required to remove the unit or legalize it by getting the correct permits. In the event that there’s a fire, flood, other dangerous situation, though, you can expect your insurance company to refuse coverage, and a death in one of those situations could lead to civil or criminal charges.

If you’re caught living in a rented commercial property, you will either be warned or evicted, depending on your landlord.

How to find live/work properties

Now that you’ve checked out your local zoning laws (right?), it’s time to start looking for the right place.

There isn’t exactly a box you can check on Zillow for commercial properties, and you probably won’t find that option on your local MLS, either. If you know the area you’d like to live in, you can kick the process off by driving around and looking for signs. Vacant commercial property is usually well-advertised, with plenty of signage and prominent contact information. Pay special attention to older areas of town—they’re more likely to be zoned for mixed use.

Ultimately, though, your best bet is going to be getting in touch with a realtor or broker who knows the local market well. Many specialize in either residential or commercial properties, but some do work with both. Happy hunting.

Is it legal to purchase commercial property and use it as your residence?
Other answers are correct with respect to zoning. You may also want to evaluate if you acquire the property using a commercial loan and live in it you may actually have defrauded your lender which is a federal crime. If living in the building is your primary purpose and you obtained a loan for commercial purposes it is fraud. However, if your primary purpose is to use it for commercial purposes and it also happens to double as a residence in compliance with local zoning then I don’t think it would be considered fraud. When in doubt, disclose your intentions. Would you be be charged and end up in jail for it? Very unlikely. However, it would be a really stupid reason to end up with a criminal record. It would change the trajectory of the rest of your life. Get an opinion from a criminal defense attorney who specializes in “white collar” crimes.

Converting commercial buildings into residential

Perhaps one of the most accessible examples of commercial premises that have been converted successfully to residential living spaces has been played out on our television screens.

Channel Nine’s the Block has run with this concept on more than one occasion, producing excellent financial results for both the network and the contestants. In 2014, Dux House in the Melbourne suburb of Albert Park – whose previous incarnations had been as a cinema, a church and office space – was transformed into four glamorous residential apartments through innovative renovations. This ‘commercial to residential’ renovation formula was also applied to an office block in inner-eastern Prahran in the next series.

Finding the right property

Converting commercial buildings into residential developments can be an attractive prospect, but there are a few things to consider before launching into your own project. Firstly, find the right commercial property. As an investor, look for the usual attributes – a great location, access to all the desirable amenities including public transport, cafes, schools and arterial roads. A trusted commercial real estate agent will be able to supplement your own research with advice and provide property options that meet your brief.

Zoning Real Estate

For any commercial premises you have earmarked, the next step is to find out if there are planning or zoning constraints, which will affect whether a building can be re-used, demolished or redeveloped. Contacting the local council will help you understand what is and isn’t permitted regarding change of use.

Commercial properties, including offices, shops and warehouses, all have the potential to be transformed into contemporary living spaces. They may offer character and features that newer buildings can’t, making them attractive commercial investments. The cost of converting and renovating can vary hugely, so it pays to do the research and try to source information from comparable conversions.

Finding, converting and making money from a ‘commercial to residential’ project is not only possible, it’s exciting. It can bring out the character of a building and create something extraordinary. But as with all investments, nothing replaces research and experienced, trusted advice.