My commercial real estate career has focused solely on leasing, however, I will be working on a team that has an investment sales component as well. My role will remain primarily leasing however I want to have a better understanding of the sales side of the business as well.

Looking at some of the math involved, how often are internal rate of return, net present value, and cash on cash return used on investment properties? Primarily on larger transactions...or are they also used on smaller commercial transactions as well? No need to mention cap rates...I've got that one down.

Thanks!

I feel that it plays a role in any investment. However, each client and property is different.

You will see that many "investment" properties have loans that need to be assumed at the terms and conditions set forth by the lender or else there are sizable penalties that they impose which kills your return. This will make an investor that has $4 Million in cash unable to be free and clear on a $4 Million property that has $3 Million in debt. At a 7.5% interest rate on the debt, and a 6.5% Cap Rate the calculation isn't what it seems. The interest on the property (the remaining $3 Million) would be $225,000. The income on the property would be $260,000. Therefore your client's net income would be $35,000 or .875% CAP Rate.

Net present value is important to some investors more than others. If you have a property with a 10% rent escalation at year 5 (of say 15), and they are 4 years into their lease, then your investor will have a higher rate of return that the current CAP Rate listed. A 6.5% Cap Rate will (at the point of the escalation) increase to 7.15%. And after 6 years, the CAP Rate would be 7.865%. Doing a NPV on that example would not be as attractive as 3% escalations annually if at the start of the tenant's term (12.55% Increase vs. 10%).

Hopefully this helps some.