In simple words, Commercial Real Estate (CRE) can be described as any property which is used for non-residential purposes such as housing buildings, hotels, restaurants, gymnasiums, hospitals, condominiums, shopping malls, office blocks, theatres, amusement parks, cold storages, warehouses, educational institutions, industrial parks etc. In terms of Basel II definition if the repayment primarily depends on other factors such as the repayment will depend on the cash flows generated by the economic activities of the units, quality of goods and services, SEZ developed by a company for its own us, etc. where the sources of revenue is other than real estate, should not be classified as Commercial Real Estate.
Commercial real estate also refers to Income-producing real estate (IPRE), a method of providing funding to real estate where the prospects for repayment and recovery on the exposure depend primarily on the cash flows generated by the asset. The primary source of these cash flows would generally be lease or rental payments or the sale of the asset. However, in case of default of the loan, the recovery will also be made from sale of the property if the exposure is secured by these assets as would generally be the case.
As per Basel II Framework, the loans secured by a single or small number of condominiums (apartment block) or co-operative residential housing societies are not treated as CRE. However, the National regulators of the country may set limits on the maximum number of housing units per exposure to be classified as CRE Exposures. Generally, the exposure for the third residential unit and onwards are treated as Commercial Real Estate (CRE) Exposure as the borrower may be renting these housing units and the rental income would be the primary source of repayment.
