Real Estate 101

Defining Property Classes

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

Kelly Anne Tully

Kelly Anne Tully

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!