For investors and business owners, commercial real estate (CRE) is often the cornerstone of a diversified portfolio — but it can also feel like navigating a foreign landscape. You may encounter terms like “CAM reconciliations,” “1031 Exchanges,” or “mezzanine debt” and wonder exactly how they impact your bottom line and tax position.
While your external assurance and tax advisers are a critical part of your team, this high-level guide will help investors, business owners and even professionals new to the CRE landscape bridge the gap between technical accounting concepts and practical investment reality — helping you better understand and maximize the value of your real estate holdings.
CRE refers to assets purchased with the intent to generate a return on investment (ROI) through cash flow (rents) and capital appreciation (the value of the property increasing). Unlike residential homes, CRE investments are income-producing engines that form the backbone of institutional portfolios and private equity strategies.
While the industry has many niches, four sectors dominate the CRE investment landscape:
The multifamily category consists of apartment buildings with more than four units, ranging from suburban garden-style walkups to urban high-rise towers. It also includes specialized sub-sectors like student housing and senior living (independent versus skilled nursing).
Retail properties are those that house direct-to-consumer businesses. These range from local, small strip centers with your favorite coffee house or dry cleaners; to power centers anchored by big-box retailers, such as large home improvement or electronic stores, and regional malls.
Office workspaces classified by quality:
Note: The office sector currently faces the highest vacancies due to remote work trends.
The industrial sector is the logistics backbone of the economy. This includes bulk distribution centers for large online retailers; flex warehouses, such as office/industrial mix; and cold storage for perishables, such as grocery chains.
Why is CRE such a popular investment? It usually comes down to three drivers: cash flow, appreciation and tax efficiency.
CRE offers the possibility of additional cash flow for investors. They collect rent and pay operating expenses (taxes, insurance, maintenance). The remaining amount is net operating income, which illustrates the investment’s core earning power and value. Note: Your accounting team must distinguish between available cash and net income. A property can generate positive cash flow while showing a tax loss due to depreciation.
Real estate also offers unique tax benefits:
Real estate is a tangible asset, something an individual can visit and touch. Even if the building loses value, the underlying land remains. Furthermore, rents typically rise with inflation, preserving an owner's purchasing power.
Determining the ownership structure of a property is the first step in acquiring CRE, as it dictates the legal framework.
This is the most common modern structure. A manager runs operations while members are passive investors. LLCs are typically taxed as partnerships, allowing income to pass through to owners via Schedule K-1 tax forms.
REITs are corporations that avoid corporate income tax by meeting strict IRS requirements. A few of the many tests/requirements are listed below:
For your accounting team, the lease agreement is the ultimate source of truth. It dictates revenue recognition and expense allocation. Understanding who pays for what is critical.
Below are a few core CRE concepts that help explain how costs are shared, leases are structured and tenant improvements are handled in practice. Understanding these basics makes it easier to interpret lease terms and understand how they affect both landlords and tenants.
In CAM, a tenant pays a share of costs for shared spaces (parking lots, lobbies, etc.). These are estimated at the start of the year and reconciled at year-end. The tenant’s amount is calculated by a ratio of the tenant’s square footage (tenant square foot ÷ total square foot).
To protect landlords from rising costs, a lease may include an expense stop. The landlord pays expenses up to a base-year amount; the tenant pays any increase above that baseline.
This is when tenants are given a construction allowance to customize their space. With tenant improvements, it’s important to determine if these costs are lease incentives (amortized) or landlord assets (capitalized and depreciated) based on who retains ownership of the improvements.
Real estate is rarely purchased with 100% cash. Investors use leverage to amplify returns. The financing methods below are common in CRE.
Conventional mortgages, such as from banks or insurers, typically cover approximately 75% of the cost.
High-risk, high-return debt that sits between senior debt and equity. It often functions like preferred equity.
SOFR (Secured Overnight Financing Rate) has replaced LIBOR (London Interbank Offered Rate) — a key global benchmark interest rate used for decades as the standard benchmark for variable-rate loans. SOFR is based on actual transaction data, making it less susceptible to manipulation.
Unlike other industries where accounting principles generally accepted in the United States (GAAP) is the default, real estate entities often have flexibility, depending on their investors.
GAAP basis financial statements are required for public companies and REITs. GAAP involves complex requirements, such as straight-line rent (smoothing rent steps over the lease term) and impairment testing.
This framework is popular for private partnerships. It aligns financial reporting with the tax return (Form 1065), eliminating straight-line rent adjustments and reducing accounting costs.
Used by institutional funds (pension funds), fair value basis follows investment company standards, marking investments in real estate on current market value rather than historical cost to measure performance accurately.
CRE is a dynamic industry where tangible assets meet complex financial structures. By understanding these fundamentals — from lease mechanics to ownership structures — you can better understand your clients, investors or your next big investment.
Contact Nick Antonopoulos or a member of your service team to discuss this topic further.
In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.