understanding the varied investment and property classifications available to them, commercial land investors are able to do a way clearer understanding of what to expect both during the lifetime of an investment also as upon a project’s completion.

While every commercial land property has its own unique characteristics that investors should research when considering a possible deal, most private land investments are often classified consistent with certain overarching characteristics. These classifications fall under two umbrellas: one focusing on the investment characteristics and the other relating to the property itself.

Below, we will look at these two classification metrics and explain how these breakdowns are crucial when evaluating potential real estate investments.

Profiling An Investment
Most property investments fall into four broad categories that each characterize an investment’s unique risk and return profile. These profiles include:

Core: a lower risk/return investment that focuses on stable, fully leased, multi-tenant properties within strong, diversified markets that require minimal leverage to fully realize Core Plus: a moderate risk/return investment into a similar property as core, but utilizing a greater degree of borrowed capital to increase the property’s net operating income through modest property improvements Value-add: a medium-to-high risk/return investment that involves utilizing leverage to significantly improve a damaged, outdated or otherwise underperforming commercial property to increase both its value and net operating income Opportunistic: a high risk/return investment that requires significant leverage to enhance effectively non-operating properties, these generally also carry a medium-to-long-term time horizon to fully realize
Simply put, higher-risk strategies will potentially yield low or negative income within the initial stages of the project, but may deliver a better return on investment once the property improvements are reflected in its lease operations and property value. On the opposite hand, lower risk projects will potentially deliver steady passive income throughout the lifetime of the investment, but the ultimate yield could also be smaller .

Due to the high property values and low capitalization rate (a property’s net operating income divided by its purchase price) of the current commercial real estate, institutional real estate investors are increasingly interested in the higher risk/return investment approaches. The 2019 “CBRE Americas Investor Intentions Survey” shows that active real estate investors are consistently more interested in value-add and opportunistic investments as opposed to less risky core investments (the secondary and distressed categories are debt investments).

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While this is not an endorsement of any particular strategy, since each investor needs to choose investments based on his or her own objectives, the results speak to the current investment environment. Higher risk/return real estate strategies are currently being rewarded, while core investments lack the incentives to draw capital away from more profitable assets, even if they are marginally riskier.

Why We Focus On Value-Add Investments
Investments listed on the iintoo platform generally fall into the value-add category within middle-market commercial properties. These properties and their sponsors are highly vetted and extensively researched by our team and each investment represents what we feel is the best opportunity to reposition the property to a higher and better use.

Generally speaking, our value-add investments are funneled into meaningful property upgrades or operational improvements that require only moderate repositioning, re-tenanting or redevelopment. Our end goal is to extend internet operating income of the property without significantly disrupting its current income-generating operations, potentially resulting in the property appreciating in value.

Of course, the value-add strategy necessarily involves greater risk than core or core-plus approaches, although it also offers potentially higher return objectives. While this risk/return dynamic is at the core of all asset investing, our aim when researching property investments is to find opportunities that can best mitigate risk while displaying the fundamental characteristics that position the property to outperform expectations. This is also why we often focus on growing or undervalued markets that display strong and consistent demographic trends.

In addition to this vetting, we also strive to remain transparent about the specific costs and anticipated return that we expect will accompany renovations within each property. Because the value-add strategy generally involves taking on some amount of debt capital or interrupting the income-generating operations of a property, it’s important for investors to understand where that capital is intended to go and how it should ultimately return. For example, an investment with a more extensive development plan will include details that highlight how the initial income of the property will likely fluctuate, but also will include details about the appreciation potential of these renovations.

Nevertheless, investors who are interested in the value-add strategy should always bear in mind that any return estimates, even the best or most conservative, are still only estimates. Real estate is an inherently higher risk/return investment compared to other multi-year investment assets and it generally works best as part of a well-rounded and diversified investment portfolio. Investors need to determine on their own which strategy aligns with their level of risk tolerance and their overall investment goals.

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The A, B, Cs Of Property Classification
Apart from the investment strategy, properties themselves are classified—or graded—according to their specific architectural and ownership characteristics as either Class A, Class B or Class C properties. The grades generally consider things like the age of a building and its amenities, the demographics of its location, and the value of its rental income and clientele.

While there is no precise formula by which properties are placed into classes, the breakdown can generally be thought of as follows