Formulae in Commercial Real Estate

Loan to market value (target leverage 80% or less, ie downpayment of 20% minimum, if market situation allows. Avoid PMI by putting at least 1/5th of purchase price down or 20%)

Loan to cost value compares financing amount of real estate to its cost. It compares loan amount to the expected value of completed project. It is loan amount divided by construction cost + acquisition cost

CAP RATE  = Net operating income/Selling price or Value

Cap rate helps to determine properties current value
It is the rate of return expected from the property minus any debts

High cap rate means lower value and vice versa
Value goes up —IRR AND COC GO UP

Goal is to have a cap rate based on your local area but preferably > 8%

Examples:
Manhattan, NY cap is average 3-4
A class property - 3-6
B class property - 6-8
C class property - 8-12
D class property - 7-12

US treasury bond return - cap rate = Risk Premium eg 2% - 8% = 6%

Cap rates are calculated initially when a property is purchased, known as the initial cap rate. Another common use is the exit cap rate, which is calculated when a property is sold. However, it's certainly possible to calculate a property's cap rate at any point of ownership, using the past 12 months' worth of NOI and the property's current value.

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Cap rate compression refers to a phenomenon of cap rates falling because a real estate market is rising

Cap rate compression refers to an increase in commercial real estate prices without an increase in rental income. This can be caused by a few reasons. For example, high demand or low inventory can create a "hot" market, and prices can rise in order to satisfy the demand. Falling borrowing rates also tend to lead to cap rate compression -- as it becomes cheaper to borrow money, sellers can demand higher prices from buyers.

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Cap rate compression typically helps a seller as they will sell for more money. Buyer mostly has to pay more for the property including renters having to pay higher rents.

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Annual pre-tax cash flow divided by your total cash invested

It ignores profitability influencers like depreciation, tax benefits, and cost of the mortgage over the life of the loan

Return in investment is your net profit divided by your total costs.

Cash flow annually/cash invested X 100%

Target > 8- 10%

Cash on cash = cash flow / down payment 

Cash on cash = NOI - DSCR / downpayment

It is the annual rate of growth that an investment is expected to generate.

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In other words, it is the interest rate (also known as the discount rate) that will bring a series of cash flows (positive and negative) to a net present value (NPV) of zero (or to the current value of cash invested)

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Calculating IRR needs a few assumptions below:

• The level of annual distributions to investors (COC)

• The date at which the project will be sold.

• The price at which the project is sold.

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High irr typically means majority payments towards end of term/project 
Low irr means majority payments towards early part of term/project

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Rough IRR ESTIMATES :

Core: 4% – 8% IRR
Core Plus: 8%-12% IRR
Value-Add: 12% – 16% IRR
Opportunistic: 16+% IRR

DSCR = Net operating income/Annual debt
It is very important metric to know, before approaching bank for loans/financing
DSCR of 1 is generating enough money to pay mortgage
DSCR of 1.2+ is generating enough money for mortgage and extra expenses (taken in account)

Banks typically want 1.1 or higher

Gross Rent Multiplier= Purchase price of property/Annual rental income
It provides an estimate of property value
Be wary of properties with GRM < 4 or > 10
Lower GRM is better

 It is the monthly expected rent for a property/purchase price of the property. 
The higher the rent to value ratio, the better an investment. 
An ideal rent to value ratio is 0.7%, and 1% or higher is excellent

Total income generated minus total operating expense.

Typically, most CRE MF properties have 50% of its income allotted to purely all expenses. 

Innovative Reduction in expenses results in higher Income compared to raising rents

NOI - DSCR

It is the cost of a market.

Lower rent shares means affordable market