Commercial Real Estate
Commercial Real Estate
The Commercial Real Estate domain tests how well you classify assets, read lease structures, and translate income into value. Expect property-type distinctions (office, retail, industrial, multifamily, hospitality, land), lease economics, and the income approach rather than generic sales comparison.
Core rules
- NOI is potential gross income less vacancy/collection loss and operating expenses, before debt service, income tax, depreciation, and capital expenditures. Do not subtract mortgage payments to get NOI.
- Lease structures shift expenses. Gross: landlord pays operating expenses. NNN: tenant reimburses taxes, insurance, and CAM; base rent is usually lower. Modified gross splits selected expenses. Percentage rent adds overage rent above a natural breakpoint.
- Cap rate = NOI ÷ price (or value). It is an unlevered, one-year yield proxy; it is not IRR and not cash-on-cash.
- CAM reconciliation compares estimated recoveries with actual expenses; tenants pay only their pro-rata share and only recoverable items, subject to caps, base-year stops, or gross-up provisions.
Worked example
A 12,000 SF retail strip has base rent of $240,000, stabilized vacancy and collection loss of 5% ($12,000), and operating expenses of $60,000. NOI = $240,000 − $12,000 − $60,000 = $168,000. At an 8.0% market cap rate, indicated value = $168,000 ÷ 0.08 = $2,100,000. If the leases are NNN and recover $50,000 of the $60,000 expenses, the landlord's net operating expense is $10,000, so NOI rises to $218,000-but only if recoveries are collectible and not capped.
Traps
Deducting debt service from NOI; applying a cap rate to gross rent; ignoring vacancy and collection loss; treating capex reserves as an operating expense without checking the definition; and assuming all CAM is recoverable. Estoppel certificates and lease audits often reveal recoverable-income gaps.