Commercial and Investment Real Estate
Investment analysis
Candidates must understand net operating income (NOI): gross income less vacancy allowance and operating expenses, excluding debt service, income tax, and capital costs. Know the capitalization rate, cash-on-cash return, gross rent multiplier, and debt service coverage ratio. Understand how leverage affects return and risk, and how a change in cap rate changes value.
Commercial leases
Know the difference between gross, net, and triple-net leases, and how operating costs are recovered. Understand rentable versus usable area, escalations, options to renew, and tenant improvements. Commercial transactions often involve longer due diligence, environmental review, and estoppel certificates.
Traps
A classic trap is including mortgage payments in operating expenses - they are debt service, not an operating cost. Another is using gross income instead of NOI in the cap rate formula. Questions also test whether a tenant's option to renew binds a purchaser: if registered or properly structured, it may run with the lease. Environmental contamination can create liability regardless of fault.
Worked example
A property produces $120,000 gross rent, 5% vacancy, and $40,000 operating expenses. NOI = $120,000 − $6,000 − $40,000 = $74,000. At a 7% cap rate, value = $74,000 ÷ 0.07 = $1,057,143. A buyer paying $1,200,000 would be accepting a 6.17% cap rate.