Key Takeaways:

  • Commercial buildings are structures with over 50% floor space dedicated to commercial activities.
  • Various types of commercial properties serve distinct functions, such as office spaces, retail, industrial, and more.
  • Classifications within commercial properties include Classes A, B, and C, reflecting building quality and maintenance.
  • Commercial leases often differ from residential leases, usually calculated by square footage.
  • Knowledge of commercial property types and classifications can guide business decisions, investment, and lease negotiations.

Commercial Building Definition

A commercial building definition is one in which at least 50 percent of its floor space is used for commercial activities, such as retail, the providing of services, or food service (restaurants and the like). For example, a building in New York City that is 10 stories high with 6 of floors being dedicated to apartments or residential dwellings, with the remaining 4 floors being dedicated to commerce, would not be considered a commercial building.

Additionally, a commercial building (or, land) may also be defined as a space that has the potential for being one that brings in income.

Additional qualities of commercial real estate include:

  • A space that allows companies to carry out day-to-day operations and serve customers or clients. As such, a commercial property does not strictly need to be a store or restaurant; it can also be a space in which income is being generated by providing services to people, such as a law office or a doctor’s office.
  • Schools do not qualify as being commercial real estate; however, places of worship and lodging entities such as hotels, may be qualified as commercial properties.
  • Unlike residential rental properties, in which a tenant pays a set monthly fee for the entire apartment (and, that is how the lease agreement is spelled out), commercial property leases are generally drawn up in such a way that the occupant is paying a certain amount per square foot of space.

Purpose and Function of Commercial Buildings

Commercial buildings serve as spaces for conducting business operations that generate income. This may include retail stores, office spaces, industrial facilities, and hospitality establishments, each with specific functions. Unlike residential properties, commercial buildings are tailored to support business needs, offering the infrastructure necessary for activities ranging from client interactions to product manufacturing. For example, retail spaces often require visible locations and customer-friendly layouts, while industrial buildings focus on functional storage or production areas.

Types of Commercial Properties

Within the scope of commercial properties, there are generally six different types:

  • Office
  • Retail
  • Industrial
  • Multi-family
  • Land
  • A miscellaneous catch-all category that essentially covers everything else

Commercial properties that are defined as office properties can range from a single-tenant space to a skyscraper, and everything in between. Further classifications then exist as buildings are designated as Class A, B, or C.

  • Class A buildings are considered to be the cream of the crop. They are often newer construction with better amenities and infrastructure. However, a Class A building may be an older building that underwent a great deal of remodeling. Generally, they are professionally managed and located in a prime area with easy access to other points of interest.
  • Class B buildings are usually the ones that are the most sought after by investors because even though they tend to be a bit older, they can still bring about a significant return on investment with some renovations and upgrades. Typically, a Class B building is decently maintained and well-managed.
  • Class C buildings are generally over 20 years old, located in less desirable areas, and not nearly as well managed or maintained. These buildings are typically in greater need of renovations, and in turn, charge less for their leases to make up for the lack of maintenance. Given the poorer quality of the property, these spaces tend to remain vacant longer than either a Class A or Class B commercial property, which makes them prime targets for redevelopment opportunities.

Retail or restaurant commercial real estate properties can either be free-standing buildings or they can typically be found in the lower floors of a larger building, particularly in more urban settings. This is especially true of such entities as banks and coffee shops. In less urban areas, shopping malls or strip malls (sometimes also called strip centers) are often the key sites of commercial real estate properties.

A strip center is generally viewed as being an unenclosed space that houses multiple retailers, covers from 5,000 to over 100,000 square feet, and has a tenant that serves as something of an anchor store, such as a large supermarket or a TJ Maxx, with the remaining stores being smaller retailers, either in name or space.

A shopping mall, on the other hand, is generally 400,000 to 2 million square feet and may have several anchor stores, like a Macy’s, Nordstrom, and Sephora. The remaining stores may run the gamut in terms of size, national name recognition, and price point, as you may find a Payless Shoe Source right across from an Aldo or Ferragamo, depending upon location and average clientele of that particular shopping mall.

Important Considerations in Commercial Building Selection

When selecting a commercial property, consider factors like:

  • Location: Proximity to customers, suppliers, and labor force, as well as access to major roads or public transportation.
  • Zoning and Compliance: Verify that the building is zoned appropriately for your intended use and complies with local regulations.
  • Size and Layout: Ensure the space can accommodate your business activities, from storage needs to customer areas.
  • Lease Terms: Understand the lease type and potential responsibilities for maintenance or property-related expenses.
  • Market Conditions: Be aware of local market trends, which may affect rental costs, property availability, and investment opportunities.

Additional Types of Commercial Properties

Apart from office, retail, and industrial properties, there are other specialized types:

  • Medical Buildings: Dedicated to healthcare services, housing clinics, urgent care centers, and specialty medical practices.
  • Hospitality Properties: Includes hotels, resorts, and motels designed for short-term stays and amenities for travelers.
  • Mixed-Use Buildings: These combine multiple types of commercial activities, like residential units above retail spaces, commonly found in urban areas.
  • Storage and Distribution Centers: Large facilities primarily used for warehousing, distribution, and logistics operations, essential to supply chains​.

Understanding Commercial Leases

Commercial leases are distinct from residential leases in both structure and terms:

  • Net Lease: The tenant pays rent plus additional expenses like property taxes, insurance, and maintenance.
  • Gross Lease: The landlord covers most or all of the expenses associated with the property.
  • Percentage Lease: Common in retail spaces, where rent is a base amount plus a percentage of the tenant's sales.
  • Triple Net Lease (NNN): The tenant takes on the responsibility for property taxes, insurance, and maintenance, in addition to rent. This lease type provides the landlord with minimal management responsibility. These lease structures allow tenants and landlords to negotiate terms that suit their financial and operational needs.

Understanding Commercial Property Classes

Commercial buildings are categorized into three main classes based on quality, amenities, and location:

  • Class A: These are high-quality buildings, often newer and in prime locations, with modern amenities and professional management. They are highly sought after by businesses and command higher rents.
  • Class B: Older buildings that may require some upgrades but offer reliable infrastructure and are typically well-maintained. Investors often favor Class B buildings for their value potential after renovations.
  • Class C: Generally over 20 years old, these buildings may be located in less desirable areas, and while they offer lower rental rates, they often require substantial upkeep or redevelopment​.

FAQ Section:

Frequently Asked Questions

  1. What qualifies as a commercial building?
    A commercial building is one where over 50% of its floor space is dedicated to commercial activities, like retail, services, or hospitality.
  2. What are the main types of commercial properties?
    Common types include office, retail, industrial, multi-family, land, medical buildings, and mixed-use properties.
  3. What is a Triple Net Lease?
    In a Triple Net Lease (NNN), the tenant pays for property taxes, insurance, and maintenance in addition to rent, reducing landlord responsibilities.
  4. How are commercial buildings classified?
    They are categorized as Class A, B, or C, reflecting quality, location, age, and amenities, which influence rental costs and tenant appeal.
  5. Can I find a lawyer to help with commercial leases?
    Yes, you can post your legal needs on UpCounsel’s marketplace to connect with top lawyers experienced in commercial real estate.

If you need help with commercial building definitions, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.