Common commercial real estate terms

Average Annual Return

The annual rate of return that one receives on an investment for all of the capital and cash flows invested. It does not factor in the net present value of all monies that go into and out of the investment. The Internal Rate of Return is typically slightly lower than the Average Annual Return because the profits at the end upon sale have a lower net present value than monies that are spent at the beginning of an investment.

Cash on Cash Return

Percent of cash out of an investment in a year relative to the amount of cash invested. It does not consider time value of money. It is a commonly referenced metric; however, it is seldom used professionally.

Depreciation

Commercial is 39 years linear depreciation, residential (to include multifamily) is 27.5 years. This assumes all physical assets will predictably depreciate to a value of zero after this time, and the losses from this offset income on a tax basis. Depreciation is one of the main benefits of investment real estate ownership.

Full-Service Lease

Tenant’s rent includes all the same components of a Gross Lease, but the landlord is also responsible for paying the utilities used by tenant.

Gross Lease

Taxes, insurance, and maintenance are the responsibility of the landlord. The tenant is still responsible for their utilities.

Internal Rate of Return (IRR)

The annual rate of return that one receives on an investment for all of the capital and cash flows based on the net present value for each when deployed. It is the discount rate such that the sum of today’s investment and future cash flows have a net value of zero. It expresses in the form of an interest rate the value of a given investment in today’s terms. It is the most accurate and one of the most widely used ways of calculating and comparing multiple investments by professionals.

NNN

A type of lease in which the tenant is responsible for the taxes, insurance, and maintenance of the building that the tenant leases. Often there is some landlord responsibility (e.g., roof and foundation, parking lot, HVAC, etc.).

NOI (Net Operating Income)

Income after vacancy and expenses and before debt service.

Rent Ratio

Monthly rent / purchase price or market value. Should be 1.0% or more for acceptable cash on cash return with 75-80% loan. Mostly used for rental homes.