An investor is considering Oakview Industrial Center, a fully leased industrial property with an asking price of $4.75 million. All three tenant leases expire during his planned five-year holding period. He has asked us to underwrite the acquisition and help him determine what he can afford to offer. His plan is to renew the existing …
Suppose we are considering a property whose owner reports $414,750 of net operating income for the past year. Before using that figure in a valuation, we would want to understand what produced it and how much we can reasonably expect during our first year of ownership. A new tenant may explain part of the difference. …
Commercial real estate investing means buying, developing, or financing nonresidential properties, such as office buildings, retail centers, and warehouses, as well as multifamily properties commonly financed as commercial investments. Investors participate directly or through partnerships, funds, and real estate companies. Earning rent does not, by itself, make a property commercial. A house rented to a …
In commercial real estate, one of the key metrics investors and lenders use to assess a property’s stability and risk is the Weighted Average Lease Term (WALT). WALT measures the average remaining lease term of tenants in a property, weighted by their rental income contribution or square footage occupied. A longer WALT indicates more predictable …
The XIRR formula, included with Excel and other spreadsheet programs, is commonly used to measure investment performance in commercial real estate. The XIRR formula is popular because, unlike the IRR function, XIRR can handle irregular cash flow patterns. However, although XIRR is widely used, it is also widely misunderstood. In this article, we will take …
The Internal Rate of Return (IRR) is a fundamental measure of investment performance in commercial real estate. While IRR provides an overall picture of return, understanding the specific sources of this return—whether from operational cash flows or from the sale of the property—can provide deeper insights. Partitioning the IRR allows you to dissect the overall …
The loan to value ratio (LTV) is widely used in commercial real estate. It is calculated by dividing the loan amount by the value of the property and expressed as a percentage. In this article, we will review the loan to value formula, how to calculate LTV, its significance, and its use in real estate …
Effective gross income is a line item on a real estate proforma that is commonly used by appraisers, investors, and other commercial real estate professionals. Although the effective gross income is easy to understand conceptually, the calculation itself can sometimes be confusing. In this article, we’ll take a closer look at effective gross income and clear …
The yield on cost is a commonly used metric when evaluating real estate development and value-add projects. It is calculated as a property’s stabilized net operating income (NOI) divided by the total project cost. It’s easy to calculate and is useful as a back-of-the-envelope calculation. In this article, we’ll take a closer look at the …