Prese

Analyzingnts:
a Commercial Real
Estate Investment

Westfield North Building, 2730 University

Blvd, Ste. 200, Wheaton, Maryland 20902
301-949-1771 (Phone)
301-949-5441 (Fax)
www.pditraining.net
By
D. Scott Smith, CCIM
443.691.8153
www.expertcre.com
expertcre@gmail.com

Class Room, DLLR, and MREC Rules!!!

You must sign in and out to get CE (show ID)
No eating, sleeping, or using electronics
You must be on time
Raise your hand to ask questions
Be polite

Analyzing a Commercial Real

Estate Investment
Today We Will:

Review 4 basic steps to find a pulse on an

investment.
Part 1. Determine Net Operating Income (NOI)
Part 2. Loan Selection
Part 3. Determine Cash Flow Before Tax (CFBT)
Part 4. Calculate Returns
NOTE: There are many additional steps needed to
fine-tune each analysis.

Analyzing a Commercial Real

Estate Investment
A few things first:
Analysis Paralysis is over analyzing a deal to attempt
to remove risk.
The only way to completely avoid risk is to not invest.
Different methods often provide different results.
Garbage in, garbage out

Analyzing a Commercial Real

Estate Investment
Some Industry Standards for Analysis
Internal Rate of Return (IRR)
Cash-on-Cash Return (COC)
Financial Management Rate of Return
And Cap Rate, to name a few

Analyzing a Commercial Real

Estate Investment
The Key to a successful investment is to be able to
answer :
What is your risk tolerance?
Does the investment make sense to you?
Does it meet your goals?

Analyzing a Commercial Real

Estate Investment
Step 1. Net Operating Income (NOI)

Analyzing a Commercial Real

Estate Investment

Step 1. Net Operating Income (NOI)

Potential Rental Income
- Vacancy and Credit Loss
= Effective Income
+ Other Income
= Gross Operating Income
- Operating Expenses
= NOI

Analyzing a Commercial Real

Estate Investment

Step 1. Net Operating Income (NOI)

Operating expenses consist of:
Real estate taxes
Property insurance
Property management and maintenance
Utilities
Legal fees
Advertising
And accounting, to name a few

Analyzing a Commercial Real

Estate Investment

Step 1. Net Operating Income (NOI)

A few more things
BOMA Expense Ratios for each asset
class in each market
Income statements may include many
additional income streams for the current
owner

Analyzing a Commercial Real

Estate Investment

Step 1. Net Operating Income (NOI)

A few more things
A Cap Rate as a Way of Measuring an
Investment and is not THE RETURN of the
investment.
Cap Rate is a measurement rate of the
first year NOI as it relates to the current
value of the investment.
Is a Cap Rate complete?

Analyzing a Commercial Real

Estate Investment

Step 1. Net Operating Income (NOI)

INCOME

RATE

VALUE
X

IRV Formula
Note: A Cap Rate does not account for debt
service and income tax for the investment.

Analyzing a Commercial Real

Estate Investment
Step 2.

Loan Selection

Analyzing a Commercial Real

Estate Investment
Step 2.

Loan Selection

What you need to know:

Types of loans available
Types of loan structures (Hard Money, Swap, Equity)
Which lenders offer the loans you need/want
Always have your own trusted lender for custom
packages.

Analyzing a Commercial Real

Estate Investment
Step 2.

Loan Selection

Consider the Debt Service Coverage Ratio (DSCR)

when evaluating loan options.
DSCR will be provided by your lender.
DSCR is the net operating income divided by the
annual debt service.
You will need to reflect and negotiate what loan
structure will be available and achievable for the
asset.

Analyzing a Commercial Real

Estate Investment
Step 2.

Loan Selection

Its important to do the following:

Build relationships with lenders.
Find a mentor.
Ask questions.

Analyzing a Commercial Real

Estate Investment
Step 2.

Loan Selection

We will use the following loan structure for the

remainder of the steps and analysis today.
25-year mortgage, fully amortized
8% interest
Monthly payments
Debt Service Coverage Ratio (DSCR) of 1.25

Analyzing a Commercial Real

Estate Investment
Step 3. Cash Flow Before Tax (CFBT)

Analyzing a Commercial Real

Estate Investment

Step 3. Cash Flow Before Tax (CFBT)

CFBT is the heart of the analysis.
This will give you the amount of income before tax
your property is providing.
This is the benchmark to calculate your return.

Analyzing a Commercial Real

Estate Investment

Step 3. Cash Flow Before Tax (CFBT)

NOI of $50,000 / DSCR or 1.25 = $40,000
This means that $40,000 is the max annual debt a
NOI of $50,000 can cover.
If the NOI drops below $50,000, DSCR will change
and increase the lenders risk of losing on the
investment.

Analyzing a Commercial Real

Estate Investment

Step 3. Cash Flow Before Tax (CFBT)

NOI of $50,000 / DSCR of 1.25 = $40,000
The above analysis will have a result of:
$10,000 a year CFBT (NOI of $50,000 ADS of
$40,000 = $10,000 CFBT) or
NOI of $4166.67 a month
Mortgage payment of $3,333 a month
CFBT of $833.33 a month

Analyzing a Commercial Real

Estate Investment
Based on an NOI of $50,000,
with a DSCR of 1.25, the max
loan amount would be
$431,838.
With an asking price of
$500,000 (or a 10% Cap
Rate), you would have to put
down $68,161.45.

Analyzing a Commercial Real

Estate Investment
Step 4. Calculating Returns

Analyzing a Commercial Real

Estate Investment
Step 4. Calculating Returns
Determine the maximum loan amount and
down payment based on:
Net Operating Income (NOI) of $50,000
Debt Service Coverage Ratio (DSCR) of 1.25
Annual Debt Service (ADS) of $40,000
Loan 8% interest, fully amortized over 25 years
Current asking price of $500,000

Analyzing a Commercial Real

Estate Investment
Step 4. Calculating Returns
Compare the $10,000 CFBT you receive against
the down payment amount of $68,161.45.

Which is called

Analyzing a Commercial Real

Estate Investment
Step 4. Calculating Returns
Cash-on-Cash Return (COC) is:
The first years Cash Flow Before Tax (CFBT) / Initial
Capital
$10,000/$68,161.45 = 15% Return on Equity
Investors usually think of this percentage as
THE return!

Analyzing a Commercial Real

Estate Investment
Step 4. Calculating Returns
Internal Rate of Return (IRR):
A rate of return earned on each dollar, for as long
as it stays inside the investment.
More appropriately, the discount rate, if you add
up all the future cash flows, reduced to present
value where that total equals the initial capital
investment. That percentage would be the
Internal Rate of Return.

Analyzing a Commercial Real

Estate Investment
Step 4. Calculating Returns
In order to achieve a desired IRR of 10%,
determine:
Amount at which you need to sell the property
When you would need to sell
(Assuming all things remained the same inside the
investment over the holding period.)

Analyzing a Commercial Real

Estate Investment
Step 4. Calculating Returns
Suggestion: You may want to
use
the HP10BII to complete this
advanced step.
1. (-$68,161) down CFJ key
2. $10,000 CFBT in CFJ 1-4
3. $10,000 + $50,000
a. $550,000 sales price in 5
years
$500,000 of initial
purchase)
in the CFJ 5 key.

Analyzing a Commercial Real

Estate Investment
Step 4. Calculating Returns
4. Push Gold key then IRR key
5. IRR = 10.34
You could also achieve this
result by
putting down $50,000 less of
initial capital.

Analyzing a Commercial Real

Estate Investment
Case Study

Analyzing a Commercial Real

Estate Investment
Case Study
A property is currently on the market for a sales
price of $750,000 with a Cap Rate of 9%.
What purchase price would you need to achieve
to receive a 9% COC return?

Analyzing a Commercial Real

Estate Investment
Case Study
Step 1:
The NOI (if real) should be ________ based on
a 9% Cap Rate and market price of $750,000.
Step 2:
If the NOI is $67,500 and you know that your
lender has a loan program of 8% interest, fully amortized
over 25 years, no points, and a DSCR of 1.25, your max
Annual Debt Service (ADS) will be:
$67,500 / 1.25 = ___________ ADS

Analyzing a Commercial Real

Estate Investment
Case Study
Step 3: $67,500 NOI
- $54,000 ADS = $4,500 a month
= $13,500 CFBT = $1,125 a month
Step 4: A monthly payment of $4,500 consisting of 8%
interest over a 25-year term will bring the max loan amount
to $583,040. Compare that to your
purchase price of $750,000.
You will have to put down $166,960 and
receive $13,500 a year. The COC is 8%.

Analyzing a Commercial Real

Estate Investment
Case Study
Step 3: $67,500 NOI
- $54,000 ADS = $4,500 a month
= $13,500 CFBT = $1,125 a month
Step 4: A monthly payment of $4,500 consisting of 8%
interest over a 25-year term will bring the max loan amount
to $583,040. Compare that to your
purchase price of $750,000.
You will have to put down $166,960 and
receive $13,500 a year. The COC is 8%.

Analyzing a Commercial Real

Estate Investment
Case Study
You could look at the following to achieve 9% COC:
1. Lower your asking price.
2. Achieve a higher NOI.
3. Get a lower interest rate.
4. Any combination of the above.
All of these will get you there! Lets look!

Analyzing a Commercial Real

Estate Investment
Case Study
By reducing the asking price to $735,000 or by 2%, a COC of 9% can be
achieved.
If you increase the NOI by 2% a year ($1,350), your NOI would be
$14,850, giving you a COC of 9%.
An interest rate of 7.75%, but keeping monthly payments at $4,500, would
produce a COC of 9%.

Analyzing a Commercial Real

Estate Investment
Case Study

GOT QUESTIONS?

We Thank You and hope to

see you again!
Westfield North Building, 2730 University
Blvd, Ste. 200, Wheaton, Maryland 20902
301-949-1771 (Phone)
301-949-5441 (Fax)
www.pditraining.net

By
D. Scott Smith, CCIM
443.691.8153
www.expertcre.com
expertcre@gmail.com