Introduction to Commercial Real Estate Discounted Cash Flow Analysis
The business plan for all commercial real estate (CRE) assets is essentially the same. An investor purchases a property and leases the space in it to a series of tenants. The resulting income is used to pay for the property’s operating expenses (including debt service) and anything left over is distributed to owners/investors at the […]
Introduction to Commercial Real Estate Stress Testing
When a Commercial Real Estate (CRE) investor is considering the purchase of an asset, one of their first underwriting activities is to create a proforma projection of the property’s cash flows. These cash flows are used to determine how much they are willing to pay for the property and what the potential return could be. […]
Typical Assumptions Used To Create a Commercial Real Estate Proforma
In its most basic form, the business plan for a commercial real estate asset is to purchase a property and lease the space in it to individuals and businesses. The resulting rental income is used to pay for the property’s operating expenses (including debt service), and anything left over is distributed to the property owner(s). […]
How an Investment’s Internal Rate of Return (IRR) Can Be Manipulated
When soliciting capital from potential investors, commercial real estate transaction sponsors—such as private equity firms and fund managers—like to advertise their success in previous deals, along with the potential returns for the one for which they’re seeking capital. One of the ways they do this is by stating a targeted internal rate of return (IRR). […]
Where to Look For the Risk in a CRE Transaction
It’s a given that every commercial real estate transaction involves some level of risk. In addition, there is a direct correlation between the level of risk involved and the variance in potential returns. A low risk investment—such as a credit tenant triple net leased property—typically provides low but stable returns, whereas a higher risk investment—such […]
What Does a Commercial Real Estate Property Manager Do?
Often, investing in commercial real estate is described as a way to earn passive income. But this is a bit misleading. Commercial real estate management is anything but passive, and there is a significant amount of work that must be done to keep the asset in good working order. When it comes to earning passive […]
Understanding the Major Components of a Commercial Real Estate Lease
When evaluating a property for purchase, one of the most important elements of the due diligence process is a review of the existing commercial leases. The intent of the review is to identify the major components of the lease and to use them in a financial model or in the risk assessment of the deal. […]
Understanding the Importance of a Shopping Center’s Tenant Mix
In our day-to-day lives, most of us probably go to a shopping center without giving much thought to how or why certain retailers came to occupy space within it. In reality, retail real estate owners invest a significant amount of time and effort to populate their properties with a mix of tenants who will serve […]
Understanding the Importance of Property Intangibles
There are many things to consider when trying to decide whether or not to purchase a commercial property. For example, potential investors should review the rent roll to see how much revenue the property produces and they should look at the operating statement to see how much it costs to manage the asset on an […]
