The document discusses the calculation of return on investment (ROI) for commercial real estate, emphasizing that ROI is typically measured over one year while investments usually span multiple years. It explains that various profitability ratios exist to assess annual investment performance but do not provide a comprehensive ROI figure comparable to other long-term investments. Additionally, it distinguishes between ROI metrics and time value of money measures, such as net present value and internal rate of return.

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Return on Investment (ROI)
for commercial real estate
investments and developments

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How is Return on Investment ROI calculated?
If you ask someone what the Return on Investment ROI is for an investment analysis,
what should you expect as an answer? This quote illustrates the problem.
"In finance, rate of return (ROR), also known as return on investment (ROI), rate of
profit or sometimes just return, is the ratio of money gained or lost (whether realized or
unrealized) on an investment relative to the amount of money invested. The amount of
money gained or lost may be referred to as interest, profit/loss, gain/loss, or net
income/loss." (Source: Rate of Return From Wikipedia, the free encyclopedia; redirected
from Return on Investment). Wikipedia lists several different calculations under the ROI
term.
In commercial real estate, Return on Investment ROI normally refers to a group of one
year ratios that assume the original investment is returned at the end of the year. Since
most commercial real estate investments are multiple year investments, the Return on
Investment (ROI) ratios only reveal part of the picture.

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Where is the Return on Investment (ROI) on the report?
Many people getting into commercial real estate wonder where the Return on
Investment (ROI) is included on real estate reports. While there are no specific
measures or ratios in commercial real estate that are called Return on Investment (ROI),
there are many that can be described as Return on Investment (ROI) type ratios. All the
ROI ratios are essentially a single year cash flow divided by an investment
corresponding to the cash flow. Since almost all commercial real estate investments last
multiple years, and it is highly unlikely that the sale of the property will return the exact
amount of the original investment, none of the ratios produce a number that is a rate of
return number (like the IRR) that can be compared to yields on other multiple year
investments. The ROI ratios (or, as planEASe calls them, profitability ratios) attempt to
spotlight how the investment is doing each year. Each ratio listed (except the Gross
Income Multiplier) uses a cash flow number divided by an investment number.

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Net Capitalization Rate or Cap Rate (Ratio)
Net Operating Income divided by the Price of Property at Acquisition
Adjusted Capitalization Rate (Ratio)
Net Operating Income divided by the Price of Property at Acquisition adjusted for additional investments and
dispositions made since acquisition. Additional Investments includes any and all TI's and Commissions scheduled
due to the use of Market Profiles.
Cash-on-Cash (Ratio)
Net Operating Cash Flow divided by Initial Equity
Adjusted Cash on Cash (Ratio)
Net Operating Cash Flow divided by Initial Equity adjusted both for additional investments and dispositions
made since acquisition, and for additional loans and loan repayments since acquisition.
Gross Income Multiplier (Ratio)
Sale Value divided by the Gross Income, testing the assumption for the appreciation of the property.
NOI/Property Value (Ratio)
Net Operating Income divided by the Sale Value. This ratio is also known as the overall capitalization rate, which
tests the assumption for the appreciation of the property.
Where is the Return on Investment (ROI) on the report?
These are all ratios that show a Return on Investment (ROI):

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What about the Rate of Return?
Usually, when someone asks for the Rate of Return on an investment, they mean
the Internal Rate of Return (IRR) and they expect a 'Time Value of Money' measure to
be the answer. These are all 'Time Value of Money' measures:
• Net Present Value (NPV) (Discounted Cash Flow Measure)
• Internal Rate of Return (IRR) (Discounted Cash Flow Measure)
• Modified Internal Rate of Return (MIRR) (Discounted Cash Flow Measure)
• Lender Yield (Discounted Cash Flow Measure)

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