Commercial Development
Investment Analysis
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Commercial Real Estate Articles
Proforma Income Statement Terms and Methods
for Investment and Development Cash Flow Analysis

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Commmercial Real Estate Measure Explanations

Learn how these real estate investment Measure are calculated and used.

  • Time Value of Money (Discounting Cash Flows)
    • Have you heard the phrase Time Value of Money and wondered what that is? If you want to invest in anything that takes multiple years to complete (like a Bank CD, Bonds, or Commercial Real Estate) then the Time Value of Money should be something you want to know about. The concept of the Time Value of Money, in its simplest form, is that receiving the same amount of money now is better than receiving that same amount of money later. It gets more complicated when the amounts aren't the same when comparing two or more investments. The Time Value of Money measurement tools (NPV and IRR) help us when it gets complicated. The video and article look at the idea of the Time Value of Money in depth.
  • Net Present Value (NPV) (Discounted Cash Flow Measure)
    • NPV is the foundation of the discounted cash flow (DCF) process. With NPV you assume a discount rate (defined here as the yield you would like to get). The NPV is the amount you need to adjust the beginning amount (ie the purchase price) by so that the investment cash flows will give you that yield. The nature of the NPV is that it takes everything into account that made up the cash flow. The only weakness is that it is hard to calculate (not with planEASe, of course), and that it uses all the assumptions (which is where Sensitivity Analysis becomes incredibly useful).
  • Monthly vs. Yearly IRR or NPV (Discounted Cash Flow Measure Comparison)
    • Does calculating an IRR monthly vs yearly make a difference? What about the question of whether to use the beginning or end of period? This article and video use the XIRR (and XNPV) process introduced by Microsoft Excel in 1997 to show why monthly calculation is important, and using the XIRR (and XNPV) means the question of beginning or end of period does not matter.
  • Net Future Value (NFV) or Capital Accumulation
    • Net Future Value (NFV) is most helpful in non-real estate investments where cash flows are reinvested in the investment. However, there are real estates situations where cash flows can be reinvested when portfolios and other structures are in place, and the Net Future Value Reinvestment Rate can be more reflective of the overall performance of the combined properties.
  • Lender Yield
    • How is the Lender Yield calculated for commercial real estate investments and developments? What are the factors that the Lender Yield takes into consideration when shown in a proforma income statement, and what is ignored? Why is the Lender Yield useful for investment real estate? These are the questions that are explored using the Proforma Example in this article.

Written by
Michael Feakins, CCIM
of planEASe Software