Types of Commercial Properties
Commercial real estate lenders make loans on real estate for one and
only one compelling reason: because there is cash flow from the property
to pay back the loan. However, not all commercial properties generate
cash flow. For example, an unused or unoccupied vacant tract of
land does not generate cash flow though it is still called a commercial
property. Because cash flow is essential with any loan, the collateral
(land and buildings) must first be identified as either a property that
generates cash flow or one that does not. Commercial properties that
generate cash flow are referred to as income producing, and properties
that do not are referred to as non-income producing, or owner-occupied.
Understanding this distinction between income-producing and nonincome-
producing properties is key in establishing the foundation on
which the commercial real estate lending industry is built.
Non-Income-Producing Properties
The term “non-income-producing” specifically refers to the absence
of a lease. In other words, the property is not rented or leased to aperson or business, and the commonly assumed relationship between
landlord and tenant does not exist. A tract of land with or without a
commercial building on it whose owner is not receiving rent or any
other consideration is simply referred to as a “non-income-producing
property.” Another term for “non-income-producing” is “owneroccupied,”
which means that the company or business occupying the
land or commercial building happens to be the owner of the land and
building as well as the owner of the business. In this situation, the
business owner is relying on the income from the business to pay his
or her commercial mortgage payments to the lender and not to a
landlord. A business owner who occupies his or her property for the
sole purpose of owning and operating a business is simply referred
to as an owner-occupant.
Owner-occupied buildings are free-standing single-occupant
buildings that are occupied by the property owner. These buildings
are usually designed and built specifically for the type of business the
owner is running. For example, a muffler shop is built with equipment
intended specifically to lift automobiles up off the ground so
that a mechanic can fix and replace mufflers; an automatic car-wash
facility is specifically designed and built to wash cars. Both buildings
are commercial properties, but they are owner occupied and do not
have any cash flow from rents because there are no tenants. The only
cash flow associated with the property is from the operation of the
business itself, such as income from customers’ payments for parts
and labor for the muffler repair or the income from washing cars.
Owner-occupied properties have neither a landlord nor tenant. There
are small business owners that are owner-occupants, and there are
large companies that are owner-occupants, such as Wal-Mart and
Target. These large retail companies do not pay rent because they typically
own their own buildings. Examples of other non-income-producing
properties that may or may not be owner-occupied include
the following
Churches
Day care centers
Gas stations
Schools
Car dealerships
Marinas
Auto repair shops
Factories
Amusement parks
Hospitals
Nursing homes
Car washes
Zoos
Convenience stores
Airports
Museums
Truck stops
Cemeteries/funeral homes
Auto race tracks
Golf courses
Bowling alleys
Business condos
Casinos
Time shares