Welcome to the official blog of Block Real Estate Services, LLC (BRES). BRES seeks to offer insight and news concerning commercial real estate, financial investments, construction and development of the 212 communities we serve locally and nationally.

Monday, August 3, 2015

Valuation of Commercial Real Estate: Part 2

Valuation of Commercial Real Estate: Part 2There are three ways to build wealth in commercial real estate: Cash Flows, Debt Principal Reduction, and Appreciation.

Cash Flows
  • Net Operating Income
    • Operating Revenues – Operating Expenses = NOI
    • Maximizing NOI is most important aspect of asset management
    • Market assumptions have big impact on NOI projections
  • Impact of debt on cash flows
  • Key cash flow return criteria:
    • Capitalization rate
    • Cash-on-cash return
Debt Principal Reduction
  • Varies depending on capital structure
  • Even most institutional buyers use leverage
    • Enhance returns by “positive leverage”
      • Compare loan constant vs. cap rate
    • Diversify holdings by increasing purchase capacity
  • Each month principal balance is reduced
    • Lowers risk
    • “Make money in your sleep”
  • Importance of loan terms
    • Amortization, maturity, perm/short-term, recourse/non-recourse, prepayment ability, stated vs. effective rate
  • Driven by demand
  • Driven by increases in replacement costs
    • Important as commodity prices increase rapidly
  • Appreciation higher in U.S. in costal cities
  • Depreciation risks
    • Functional obsolescence
    • Changing market fundamentals
    • Unexpected occurrences
      • Construction, traffic patterns, natural disasters
Valuation of Commercial Real Estate
  •  Sales comparables approach
    • Good for quick benchmark
    • Hard to get “apples to apples” in commercial RE
  • Cost approach
    • Know “top of market” pricing not to exceed
    • Good philosophy = buy below replacement cost
  • Income capitalization approach
    • NPV, IRR, Capital Accumulation
  • Instinct

Click here to see the entire Valuation of Commercial Real Estate.


Aaron Mesmer - Block Real Estate Services, LLC (BRES) 
Aaron Mesmer
Acquisition & Sales

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