Defining Property Classes

    Learn more about the grading system commercial real estate investors use to assess and categorize properties.

    Defining Property Classes

    What are Property Classes Used For?

    The term property class typically refers to a system of grading
    that can give a commercial real estate investor an idea of the quality of the property at a glance. These quality classifications translate to the level of risk and return a property
    represents to an investor. Properties are classified based on several factors such as:

    • Location
    • The property’s age
    • Amenities
    • Rental income if the property is being let
    • Tenant income
    • The potential for growth in an area

    The following three classifications aren’t set in stone – renovations or upgrades may bump a
    property up a grade. Some real estate investors use more intensive metrics to determine property class, some grade from A-F instead of just A-C, and some may use subclassifications to demonstrate the grade of properties within a class.

    Class A Properties

    Class A properties tend to be less than a decade old and well-maintained. They are typically turn-key; they don’t require any renovations or updating to demand high rents and bring in upscale, high-income tenants. They’re the highest quality properties in their area, and the areas where Class A properties can be found are typically affluent. Class A properties that are serving as rentals are typically professionally managed to ensure the property stays in great condition. 

    Class B Properties

    Class B properties tend to be a little older, not quite as well-maintained, possibly in need of upgrades, or with small issues that need to be addressed. These properties are often found in good areas but not great areas. They may be owner-managed or professionally managed. 

    Class C Properties

    Class C properties tend to be fixer-uppers. They are often 20 years old or older, located in less affluent areas, and may have visible maintenance issues and wear and tear. Vacancy rates are typically high and tenant income is typically low. Due to the condition of the properties and less desirable locations, Class C properties tend to be considered highest risk to investors. 

    Understanding property classes and what they mean regarding commercial real estate investment is a key lesson for investors, whether you’re investing in income properties or property for your business. Unsure of your property’s class or what it might mean if you decide to use a sale-leaseback to gain access to capital? Feel free to contact the team at Keyway. We’re always happy to help!

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