Commercial Real Estate Nomenclature
questions with answers.
Discounted Cash Flow (DCF) ANS -Appraising a property by calculating the present value of future
income accounting for interest rates.
Net Present Value (NPV) ANS -the sum of the present values of expected future cash flows from an
investment, minus the cost of that investment
Net Operating Income (NOI) ANS -The income projected for a property after deducting losses for
vacancy, collection, and operating expenses.
Cap Rates ANS -The initial before-tax rate of return sought by a buyer of real property based on
expected Net Operating Income. The "capitalization" of pre-tax cash flows, used to estimate a value of a
property.
Initial Rate of Return (IRR) ANS -the discount rate that equated the NPV of an investment opportunity
with $0 (because the present value of cash inflows equals the initial investment); it is the rate of return
that the firm will earn if it invests in the project and receives the given cash inflows
Cash on Cash Return (CoC) ANS -Cash on cash return (CoC) refers the annual cash return of a property
divided by the amount of cash invested... the ratio between a property's cash flow in a given year and
the amount of initial capital investment required to make the acquisition (e.g., mortgage down payment
and closing costs).
When a property is purchased outright (no leverage), this is also referred to as the property's cap rate.
When a property is purchased using leverage, this number differs from the property's overall return, as
it does not include the equity gained by the principal portion of the mortgage payment.
Most investors usually look at cash-on-cash as it relates to cash flow before taxes during the first year of
ownership.
questions with answers.
Discounted Cash Flow (DCF) ANS -Appraising a property by calculating the present value of future
income accounting for interest rates.
Net Present Value (NPV) ANS -the sum of the present values of expected future cash flows from an
investment, minus the cost of that investment
Net Operating Income (NOI) ANS -The income projected for a property after deducting losses for
vacancy, collection, and operating expenses.
Cap Rates ANS -The initial before-tax rate of return sought by a buyer of real property based on
expected Net Operating Income. The "capitalization" of pre-tax cash flows, used to estimate a value of a
property.
Initial Rate of Return (IRR) ANS -the discount rate that equated the NPV of an investment opportunity
with $0 (because the present value of cash inflows equals the initial investment); it is the rate of return
that the firm will earn if it invests in the project and receives the given cash inflows
Cash on Cash Return (CoC) ANS -Cash on cash return (CoC) refers the annual cash return of a property
divided by the amount of cash invested... the ratio between a property's cash flow in a given year and
the amount of initial capital investment required to make the acquisition (e.g., mortgage down payment
and closing costs).
When a property is purchased outright (no leverage), this is also referred to as the property's cap rate.
When a property is purchased using leverage, this number differs from the property's overall return, as
it does not include the equity gained by the principal portion of the mortgage payment.
Most investors usually look at cash-on-cash as it relates to cash flow before taxes during the first year of
ownership.
