Question 1

What is a 1031 exchange in commercial real estate?

Accepted Answer

A 1031 exchange (named after Section 1031 of the Internal Revenue Code) allows commercial real estate investors to defer capital gains taxes by selling an investment property and reinvesting the proceeds into a like-kind replacement property within strict IRS timelines. The investor must identify potential replacement properties within 45 days of closing the sale and complete the acquisition within 180 days.

Question 2

How long do I have to complete a 1031 exchange?

Accepted Answer

The IRS enforces two strict, non-extendable deadlines. The 45-day identification period begins at the close of escrow on the sale of your relinquished property. The 180-day exchange period is the total time from the sale closing to complete the purchase of your replacement property. These deadlines run concurrently and cannot be extended.

Question 3

What qualifies as like-kind property in a 1031 exchange?

Accepted Answer

Any real property held for investment or business use can be exchanged for any other real property held for investment or business use. You can exchange a retail shopping center for an industrial warehouse, an office building for raw land, or a multifamily apartment complex for a net lease pharmacy.

Question 4

Can I do a 1031 exchange into multiple properties?

Accepted Answer

Yes. The IRS allows three identification rules: the three-property rule (identify up to three properties of any value), the 200% rule (combined value cannot exceed 200% of the sold property), and the 95% rule (identify any number but acquire at least 95% of total identified value).

Question 5

What happens if my 1031 exchange fails?

Accepted Answer

If a 1031 exchange fails, the investor faces immediate capital gains tax liability on the original sale. Federal capital gains tax is currently 20% for high-income earners, plus 3.8% Net Investment Income Tax, plus applicable state taxes. In California, a failed exchange on $1 million in gains could result in $370,000+ in combined taxes.

Question 6

Do I need a Qualified Intermediary for a 1031 exchange?

Accepted Answer

Yes. A Qualified Intermediary (QI) is legally required to facilitate a 1031 exchange. The QI holds the sale proceeds in escrow between the sale and purchase. If the investor directly receives or controls the funds at any point, the exchange is disqualified.

Question 7

Can I live in a property acquired through a 1031 exchange?

Accepted Answer

Not immediately. A property acquired through a 1031 exchange must be held for investment or business use. Tax professionals generally recommend holding the property as a rental investment for at least two years before converting it to personal use.

Question 8

How much money do I need to invest in commercial real estate?

Accepted Answer

Direct commercial real estate investment typically requires a minimum down payment of 25-35% of the purchase price, with most lenders requiring at least 25% equity. For a $2 million property, that translates to $500,000-$700,000 in equity plus closing costs and reserves.

Question 9

What is a cap rate and how is it used to value commercial property?

Accepted Answer

A capitalization rate (cap rate) is the ratio of a property's net operating income (NOI) to its purchase price or current market value, expressed as a percentage. Cap rates serve as a quick comparison tool across properties and markets. As of 2026, cap rates for institutional-quality commercial properties typically range from 4.5-7.5%.

Question 10

What is the difference between a gross lease, net lease, and NNN lease?

Accepted Answer

In a gross lease, the landlord pays all operating expenses built into the rental rate. In a net lease, the tenant pays base rent plus some or all operating expenses. A triple net lease (NNN) requires the tenant to pay taxes, insurance, and maintenance in addition to base rent.

Question 11

What are the biggest mistakes first-time commercial real estate investors make?

Accepted Answer

The most common mistakes include inadequate due diligence, overleveraging, underestimating operating costs, and making decisions based on emotion or time pressure rather than analysis. Many first-time investors also fail to engage experienced professionals who specialize in commercial transactions.

Question 12

How do I evaluate a commercial property before buying?

Accepted Answer

A thorough evaluation begins with financial analysis: review at least three years of operating statements, rent rolls, and tax returns. Calculate the cap rate, cash-on-cash return, and debt service coverage ratio. Conduct physical due diligence including inspection, Phase I ESA, and ADA compliance review.

Question 13

What types of commercial property offer the best investment returns?

Accepted Answer

Returns vary by property type, risk profile, and market conditions. As of 2026, industrial properties deliver strong risk-adjusted returns at 5.0-6.5% cap rates. Net lease retail offers stable passive income at 5.0-6.5%. Medical office buildings provide recession-resistant income at 5.5-7.0% cap rates.

Question 14

What is a triple net (NNN) lease property?

Accepted Answer

A NNN lease property is a commercial real estate investment where the tenant pays all three major operating expenses — property taxes, building insurance, and maintenance — in addition to base rent. This provides landlords with predictable net income and minimal management responsibility.

Question 15

What should I look for in a NNN tenant?

Accepted Answer

Tenant credit quality is the single most important factor. Evaluate financial statements, credit rating (investment-grade BBB- or higher carries lower risk), industry health, and number of operating locations. Also assess store-level performance at your specific location.

Question 16

What are the risks of NNN property investment?

Accepted Answer

The primary risk is tenant default or vacancy — if your single tenant stops paying rent, income drops to zero. Other risks include below-market rent escalations, residual value risk for purpose-built buildings, and interest rate risk since NNN values move inversely with rates.

Question 17

How are NNN properties typically priced?

Accepted Answer

NNN properties are priced based on cap rate, typically ranging from 4.5% for the most desirable assets to 7.5%+ for higher-risk properties. Key pricing factors include tenant credit quality, remaining lease term, rent escalation structure, location quality, and building condition.

Question 18

Why is healthcare real estate considered a recession-resistant investment?

Accepted Answer

Healthcare real estate is recession-resistant because demand for medical services remains constant regardless of economic conditions. Medical tenants sign long-term leases (7-15 years) and invest heavily in tenant improvements, creating high switching costs and strong renewal rates.

Question 19

What makes medical office tenants different from other commercial tenants?

Accepted Answer

Medical tenants invest significantly more in improvements ($60-$150+ per square foot vs. $20-50 for standard office), their revenue is driven by patient volume rather than discretionary spending, and practices are inherently location-dependent, producing lower vacancy and longer tenancy.

Question 20

What should I know about investing in medical office buildings?

Accepted Answer

Key considerations include tenant mix analysis, proximity to hospitals and referral networks, building specification compliance (ADA, HVAC, plumbing for medical use), and demographic analysis focused on population density, median age, and insurance coverage in the trade area.

Question 21

How is the aging population affecting healthcare real estate demand?

Accepted Answer

Approximately 10,000 Americans turn 65 every day, and adults over 65 utilize healthcare services at 2-3 times the rate of younger populations. This drives expansion of outpatient facilities, ambulatory surgery centers, and medical office buildings through 2040.

Question 22

What is CAM and how is it calculated?

Accepted Answer

Common Area Maintenance (CAM) charges are fees paid by tenants to cover shared spaces and building systems. CAM is calculated by determining total annual maintenance costs, then allocating each tenant's share based on proportionate square footage (pro-rata share).

Question 23

What should I look for before signing a commercial lease?

Accepted Answer

Evaluate total occupancy cost, lease term and renewal options, rent escalation structure, tenant improvement allowance, permitted use clause, assignment and subletting rights, exclusivity provisions, personal guarantee obligations, and early termination options. Have a real estate attorney review the lease.

Question 24

What is a tenant improvement allowance?

Accepted Answer

A tenant improvement (TI) allowance is a dollar amount per square foot that a landlord contributes toward customizing a space for a new tenant. TI allowances vary based on market conditions, lease term, and property type. Landlords may offer $30-$80+ per square foot for office space.

Question 25

What is the difference between debt and equity financing in commercial real estate?

Accepted Answer

Debt financing involves borrowing money secured by the property that must be repaid with interest. Equity financing involves selling an ownership stake in exchange for capital. Most transactions use both: senior debt covers 60-75% of purchase price, equity provides the remaining 25-40%.

Question 26

What loan-to-value ratio can I get for a commercial property?

Accepted Answer

LTV ratios typically range from 60-75%. Stabilized multifamily can achieve 70-75% LTV. NNN with investment-grade tenants qualifies for 65-70%. Office, retail, and industrial generally fall in 60-70%. Lenders also require minimum 1.20-1.30x debt service coverage ratio.

Question 27

What is mezzanine debt and when is it used?

Accepted Answer

Mezzanine debt fills the gap between senior debt and equity in a capital stack. It carries higher rates (8-15%) because it is subordinate to senior debt. It is commonly used in larger acquisitions and value-add projects where borrowers want to maximize leverage.

Question 28

What should I look for when choosing a commercial real estate broker?

Accepted Answer

Focus on broad transactional experience, years in the business, and licensing credentials. A full broker's license indicates higher qualification than a salesperson license. Ask about transactions completed in the past 12-24 months, average deal size, and specialization. Look for designations like CCIM or SIOR.

Question 29

How is Arbor Realty Capital Advisors different from other commercial real estate firms?

Accepted Answer

ARCA was founded by award-winning brokers from major international firms with 23+ years average tenure and over $5.5 billion in transaction volume across 15+ states. ARCA combines institutional-quality analysis with a client-centered boutique approach, especially in complex 1031 exchanges.

Question 30

What services does Arbor Realty Capital Advisors provide?

Accepted Answer

ARCA provides Investment Sales & Capital Markets, 1031 Exchange Services, Agency Leasing, Tenant Representation, Debt & Equity Finance, Legal & Financial Professional Advisory, and Healthcare Real Estate & Strategic Advisory from its headquarters in Pasadena, California.

HEALTHCARE REAL ESTATE & STRATEGIC ADVISORY

Healthcare Real Estate & Strategic Advisory

How It Works

Decision Drivers

The ARCA Approach

Frequently Asked Questions

Should physicians own or lease their medical office space?

How does real estate strategy fit into medical practice growth?

What makes healthcare real estate different from traditional commercial real estate?