Translating complex commercial property language

Sometimes looking at commercial real estate language feels like learning the language of quantum physics. At first glance, the language seems overly and unnecessarily complex. But just like quantum physics, or any other profession, the language is there for a reason, to ensure accuracy and specificity.

Cap Rate

According to Investopedia, Cap Rate, short for Capitalization Rate, is the expected rate of generated return on an investment property. While it’s not exactly quantum mechanics, it does involve some simple math. Basically, Cap Rate is a percentage calculated by dividing the net operating income by the property asset value. It’s not meant to be the only measure used to estimate the profitability of a property, but is a useful tool to get a rough idea of an investor’s potential return on a commercial real estate investment.

Capitalization Rate = Net Operating Income / Current Market Value

There are other ways to measure Cap Rate, but this method is the most common and a good place to start understanding the subject.

Net Operating Income

Since we use Net Operating Income in our formula, we should go ahead and explain what that means in commercial real estate. Bungalow defines Net Operating Income (NOI) as “a real estate term representing a property’s gross operating income, minus its operating expenses. Calculated annually, it is useful for estimating the revenue potential of an investment property. NOI is not affected by how you finance a property—whether you get a mortgage or buy with all cash.”

Net Operating Income = Gross Operating Income – Operating Expenses

Current Market Value

This one is more complex than we have time for in a blog, but it’s worth reading Investopedia’s summary of Current Market Value as it relates to commercial real estate. In fact, this site is a good resource for many terms you’ll encounter in commercial real estate. But as with any online resources, it’s often worth finding more than one source if you’re looking to truly understand a topic.

You can also always reach out to us with questions about complex property language. We’re here to help and we would rather take the time to fully explain a topic than leave you confused. We’re certainly not experts in our clients’ businesses, and don’t expect you to be an expert in ours. We’re here to help every step of the way. Never hesitate to get in touch.

Mark Nelson, President of Roy R. Fisher, Recognized for Excellence

Mark Nelson, President of Roy R. Fisher, was formally recognized with the MAI Designation by the Appraisal Institute – the world’s leading organization of professional real estate appraisers. He has distinguished himself through his impressive record of work experience and professionalism in the real estate industry for the past 35 years.

Mark Nelson manages the day-to-day operations of Roy R. Fisher, as well as performing duties as the primary appraisal professional in the practice. As an active member of the Quad Cities community, Mark has chaired the Davenport Park and Recreation Advisory Board, serves on the legislative committee of the Quad Cities Chamber of Commerce, and he is active in local politics. Learn more about him here.

The Appraisal Institute is a global association made up of almost 20,000 appraisal professionals across 50 countries. Since 1932, it has advocated for the advancement of global standards of professionalism and practice, as well as nondiscrimination and ethical conduct within the appraisal industry. The Appraisal Institute provides several designations for outstanding members, including the MAI Designation, to foster a desire for continued education and professional excellence. This follow through on its mission makes it the leading professional organization for real estate appraisers for over 85 years.

The presentation of the MAI Designation is reserved for members of the appraisal community who have demonstrated good moral character, are certified in good standing as a General Real Property Appraiser and meet stringent standards of professionalism and ethics. Candidates are required to pass a rigorous, comprehensive final exam to test their knowledge, qualifications and professional experience against the Appraisal Institute’s strict criteria. Mr. Nelson will be presented with his certification at an official meeting of the Iowa Chapter of the Appraisal Institute. Congratulations from the entire Roy R. Fisher Team!

Roy R. Fisher