A Complete Guide To Commercial REITs

Commercial REITs are real estate investment trusts that are specific to business properties. Read on to learn more about this type of real estate investing.

Investing in real estate is commonly known as a stable way to make increasing returns. Real estate has been the investment darling of investors at nearly every income level, from private homeowners buying rental houses to businesses operating investment organizations. Of course, a large investment portfolio is safer than investing in just one or two properties, and sharing the investment burden is more stable than investing alone. That is where Commercial REIT investment comes into play.

What is a REIT? Pronounced “reet,” REIT stands for Real Estate Investment Trust. This organization invests in a large portfolio of properties and then sells shares to shareholders, who receive a divided 90% of the org’s annual income from those investments. This action mitigates risk for investors while maximizing on a stable and growing income from investment.

There are four types of REIT

• Residential
• Mortgage
• Healthcare
• Commercial

Today, we’re focusing on the details and value of commercial REITs.

What Are Commercial REITs?

A commercial REIT is a real estate investment trust that invests entirely in commercial properties, including office buildings, restaurants, parking lots and garages, hotels, conference centers, and so on. Commercial property has the potential to be extremely profitable – often with more than one income-generating business tenant per building – but the threshold for investment is quite high for individual investors.

A commercial REIT allows shareholders to pool resources to purchase profitable, stable commercial properties and then share in their profits. The properties are stored in a trust (the T in your REIT) jointly holds the titles and manages the assets.

How Do Commercial Real Estate REITs Work?

A commercial REIT uses assets from shareholder investment to purchase commercial properties. The properties generate income, and most of that income is paid back to shareholders annually. The process is quite similar to a mutual fund, where multiple stocks are managed on behalf of a group of shareholders who all share the risk and profits. Investors buy shares in the real estate trust, then the trust buys more properties and manages those properties to generate profit for the shareholders. 

What is a REIT requirement? Like other REITs, a commercial REIT requires:

• Distribute 90% of property income to shareholders annually
• Minimum 75% investment of assets in real estate
• Have a board of directors or trustees
• Have fully transferable shares
• Minimum 100 shareholders in the first year
• Maximum 50% shares held by five or fewer shareholders

How Do I Assess the Value of a Commercial REIT?

• FFO
  • Funds From Operation
  • Determines the overall operating performance of the trust’s investments
  • Net profit plus depreciation minus gains and interest income
  • (Net Profit + Depreciation) – (Gains + Interest Income)
• AFFO
  • Adjusted Funds from Operation
  • Adjusts for capital expenditures or large maintenance expenses over time
  • AFFO = (FFO + Annual increases (ex rent increases) – (Annual Maintenance + Capital Expenditure)
• Debt-to-EBITDA Ratio
  • The commercial version of a debt-to-income ratio
  • EBITDA is Earnings Before Interest, Taxes, Depreciation, and Amortization
• Credit Rating
  • For commercial credit ratings, look for AAA to BBB-

Commercial Real Estate Experts in Colorado

Investing in real estate is almost always smart, provided that you choose the real estate you invest in carefully. A commercial REIT that is performing well is a profitable and stable way to invest without worrying about the specific properties that are invested in. The REIT takes care of purchase, maintenance, and ensuring their investments remain profitable on behalf of shareholders like you. The next time someone asks, “What is a REIT?” you will be prepared with a well-informed answer about acronyms and trust investment.

If you’d like to begin investing in commercial real estate in Colorado, it’s time to assemble your team of experts. Unique Properties can become that expert team. From commercial real estate investment property through acquisitions and dispositions, landlord and tenant representation, to property management–we focus on your real estate needs so you can focus on your business.