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Commercial Real Estate By The Numbers

Monday, June 26, 2017  
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Mathematical formulas
Orlando REALTOR® | JulyAugust 2017

Do the math! The complex formulas involved in commercial real estate go far beyond basic arithmetic

By Brenda Bray

So, you think you want to pursue listing, leasing, or selling commercial real estate. Experienced investors who crunch numbers like computers in their heads can create heart-stopping moments for agents new to commercial real estate. Creating a comprehensive investment analysis for a commercial investor may be a deciding factor in whether you elect to learn it — or refer it and collect a nice referral fee.

Cynthia Shelton, noted commercial broker and Certified Commercial Investment Member (CCIM) instructor, shared an overview of Commercial Real Estate by the Numbers with residential agents at the Orlando Regional Commercial Council’s May networking event. The following summarizes steps and approaches Shelton presented to prepare a financial analysis for commercial investment decision making. The object is to bring awareness to the expertise involved and encourage those interested in commercial real estate to seek further education. Or, refer commercial opportunities outside your area of expertise to a qualified expert.

Step 1
Calculate Initial Investment
To begin, determine investor’s initial investment in the asset.
Purchase Price + Acquisition Costs + Loan Costs – Mortgage = Initial Investment

Step 2
Determine Annual Cash Flows Before Tax (CFBT)
The cash flow model addresses how many, and when, dollars go into an investment as well as how many, and when, they come out over the time period the investment is held (i.e. number of years).

Step 3
Select the appropriate approach(es) for measuring investment performance
Let’s review some uses and characteristics of performance measures.

Gross Rent Multiplier (GRM) factors the multiplier of potential rent income that the investor pays as a purchase price.
GRM = Purchase Price/One Year Potential Rent Income

  • Relatively easy to obtain needed information.
  • Covers only one holding year.
  • Quick estimator for multi-family.

Capitalization Rate is like using a compass to find direction. Simplified, it is the favored approach to comparing first year returns.

  • Considers vacancy, credit losses, other income, and operating expenses.
  • Doesn’t consider mortgage financing and rent increases.
  • Doesn’t require forecasting future annual cash flows or disposition (selling) price.
  • Is not a total yield measure. It derives the first year net operating income (NOI) and percentage of purchase price NOI represents. CAP RATE % = NOI Year One / Purchase Price

Before-Tax Cash on Cash indicates how much cash may be received year end based on how much was put into the asset at the time of acquisition. In addition to cap rate characteristics this approach:

  • Considers mortgage financing.
  • Is not a total yield measure. It measures the percentage of the initial investment that the cash out (CFBT) represents. Year One CFBT / Initial Investment = Cash on Cash

Internal Rate of Return (IRR) allows for comparing investments based on their yields over the holding period (the length of time the asset is owned).

  • Dollars received must exceed dollars put into the investment.
  • Requires forecasting cash flows for the number of periods an investment is held.
  • Requires projection of a future sales price and costs to sell.

Net Present Value (NPV) is used to price an investment. What is an investor willing to pay today?

  • Shows whether the investment achieves a target yield (IRR) at a given initial investment.
  • NPV quantifies needed adjustments to initial investment to achieve a target yield, all else being the same.

When commercial opportunities arise, learn it or refer it!

Brenda Bray, Charles Rutenberg Realty, is a member of the Orlando Regional Commercial Council. She can be reached at

Learn more about the Orlando Regional Commercial Council (it’s free to join!) and its upcoming events

Find additional information about commercial real estate resources and courses

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