Commercial, industrial, and income properties and business opportunities

Identify the property and the transaction

Commercial uses include retail and offices; industrial uses include manufacturing, storage, and distribution. Income property describes a revenue-producing investment, not a single statutory property class. California's Real Estate Law excludes single-family residential real property, covered residential dwelling units, vacant land, and certain other categories from its definition of commercial real property. An apartment investment is not commercial merely because it earns rent.

Separate the real estate interest from the operating business. California's definition of a business opportunity includes the sale or lease of the business and goodwill of an existing business enterprise or opportunity. Goodwill reflects reputation, customer loyalty, and similar business advantages. A restaurant buyer may acquire equipment, inventory, and goodwill while leasing the premises. Review assignment provisions and required landlord consent.

Investigate use and income

Retail analysis emphasizes customer access, visibility, and relevant tenant sales. Office analysis emphasizes tenant demand and lease expirations. Industrial analysis emphasizes permitted uses, loading, truck access, power, and environmental conditions. Business analysis verifies financial records, included assets, assumed liabilities, and transfer requirements. Obtain qualified legal, tax, environmental, or accessibility advice where needed.

Potential gross income minus vacancy and collection losses plus other income equals effective gross income. Subtract operating expenses to obtain net operating income (NOI). Debt service and income taxes are excluded from operating expenses in this calculation. Direct capitalization estimates value as annual NOI divided by the capitalization rate. Cash flow after debt service is different. Gross and net leases allocate expenses differently; examine the actual lease terms.

Federal rules that apply in California

At existing public accommodations, the Americans with Disabilities Act requires removal of architectural barriers when readily achievable. If removal is not readily achievable, readily achievable alternative methods of providing goods and services must be considered. Age alone does not exempt a building.

Section 1031 addresses qualifying exchanges of real property held for investment or productive business use. Property held primarily for sale is excluded; goodwill and movable business equipment do not qualify as real property. Identify replacement property within 45 days after transfer of relinquished property and receive it by the earlier of 180 days or the tax return due date, including extensions.