Commercial real estate ranges from huge shopping malls and large office buildings to hotels, gas stations, restaurants, self-storage, apartments and corner grocery stores. Understanding the market and terms used to discuss commercial real estate investing and finance is a key to becoming familiar with the sector.
To that end, here are a few terms and definitions:
Cash-on-Cash Return is a widely used metric in commercial real estate. You calculate it by dividing the annual before tax cash-flow by the total cash invested in a project.
Free Cash Flow (FCF)
FCF measures the ability of property to generate cash after reserves. Reserves for capital improvements are important for maintaining the value of an asset..
Each repayment installment of an amortizing loan consists of both principal and interest as opposed to an interest-only loan where each payment is applied to interest then due with one lump-sum
principal payment at the maturity of the loan.
IRR (Internal Rate of Return)
IRR is a metric that is used to evaluate the amount of lifetime profit that an investment can earn; it is represented by the average annual return percentage. IRR is calculated by estimating the potential future returns or backward looking to measure the performance of the completed investment.
Cap (Capitalization) Rate
The Cap Rate measures a property’s annual yield and makes comparison from one property to another property simpler.
JOBS (Jumpstart Our Business Startups) Act
The JOBS Act passed in 2012 that eased the regulations related to funding small businesses. The Act was intended to increase American job creation and foster economic growth and provide easier access to the public capital markets and small but growing companies.
LTV (Loan-to-Value) Ratio
LTV is a risk assessment ratio that lenders commonly use when considering a real estate loan.
LTC (Loan-to-Cost) Ratio
LTC is the proportion of total project cost that is funded with debt.
Liquidity is used to measure how easily an asset can be purchased or sold. Commercial real estate is generally considered to be relatively illiquid.
Refers to recurring or residual income. A common goal, of course, is for your money to work for you as opposed to you working for your money.
Please contact us if you have more questions regarding any of these key terms or any other information you need regarding commercial real estate financing.