Property Types
Commercial vs. Residential Real Estate: Key Differences for the Exam
The real estate exam tests your understanding of both residential and commercial property concepts. The key differences in valuation, financing, lease types, and legal standards are all fair game.
Key Differences at a Glance
Valuation
Residential: primarily sales comparison. Commercial: primarily income approach (cap rate). Both use cost approach.
Financing
Residential: Fannie/Freddie conforming, FHA, VA. Commercial: portfolio loans, CMBS, SBA loans, no conforming secondary market for most deals.
Leases
Residential: gross leases (landlord pays expenses). Commercial: net leases (tenant pays some/all expenses).
Disclosures
Residential: extensive required disclosures (lead paint, property condition, etc.). Commercial: caveat emptor more common; sophisticated buyer standard reduces disclosures.
Commercial Lease Types
Gross Lease
Landlord pays all operating expenses (taxes, insurance, maintenance). Tenant pays a fixed rent. Common in residential and some smaller commercial leases.
Net Lease
Tenant pays base rent plus some or all operating expenses. Variations: single net (tenant pays taxes), double net (taxes + insurance), triple net (taxes + insurance + maintenance).
Triple Net Lease (NNN)
Tenant pays base rent plus property taxes, insurance, and maintenance costs. Common for freestanding commercial properties (fast food, drug stores). Landlord has minimal management responsibility.
Percentage Lease
Tenant pays base rent plus a percentage of their gross sales above a breakpoint. Common in retail malls. Aligns landlord and tenant incentives.
Ground Lease
Long-term lease of land only. Tenant constructs and owns improvements on the leased land. At lease expiration, improvements typically revert to the land owner.
Commercial vs. Residential FAQ
Does Fair Housing law apply to commercial transactions?
No. The Fair Housing Act applies to residential housing. Commercial real estate transactions are not covered. However, the ADA (Americans with Disabilities Act) does apply to commercial properties open to the public.
What is the 'five and below' rule for financing?
Properties with 1–4 residential units qualify for residential mortgage financing (FHA, conventional). Properties with 5+ units are classified as commercial and require commercial financing, regardless of their residential use.
Can a residential agent handle commercial deals?
Legally yes — a real estate license typically covers all property types. But commercial deals require specialized knowledge of income analysis, lease structures, zoning, and environmental issues. Most agents specialize in one or the other.
What is a CAM charge?
CAM (Common Area Maintenance) charges are fees commercial tenants pay toward the maintenance of shared areas — parking lots, lobbies, landscaping. They're part of the 'operating expenses' that may be passed to tenants in a net lease.