What Every Real Estate Investor Needs to Know About Cash Flow... and 36 Other Key Financial Measures, Updated Edition by Frank Gallinelli

Author:Frank Gallinelli
Language: eng
Format: epub
Publisher: McGraw-Hill Education
Published: 2016-08-14T16:00:00+00:00

You are also going to have to pay that leasing commission. Let’s assume that you sign up the next tenant for five years at a flat $38 per square foot and that the commission is charged only on the base rent:

$38/sf per year × 2,500 sf × 5 years × 4% commission = $19,000

You also agreed to spot the new tenant $20 per square foot as a TI allowance:

2,500 sf × $20 = $50,000

Your pro forma now looks like this:

Rule of Thumb: “Cap rate” is a metric that’s attached to a point in time, and its meaning can get a bit fuzzy when you’re talking about some time after your purchase of the property. When you think about cap rate as part of a transaction rather than part of an appraisal, you typically translate “value” to mean “purchase price,” i.e., the actual rather than the potential price. If you puzzled over the calculation of the cap rate in year 2 of this example, it’s because we added the tenant improvements to the purchase price before we divided it into the NOI. Think of it this way: You first bought the land and building as a capital asset; then you bought the capital improvements as an addition to that asset. Hence, the sum of the two becomes your total purchase price for the asset when you weigh it against the income it produces in a given year.

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