Methodologies for CRE

Financial and Investment Analysis for Commercial Real Estate
by Joseph L. Petrole, CCIM, MAI.  2007.  Dearborn Financial Publishing, Chicago.  179 pp.

Expertly written, Financial and Investment Analysis for Commercial Real Estate is the go-to source for understanding: analysis of income and expenses; valuation of property; financing its acquisition with components of debt and equity; and measuring investment performance.  The author is Joseph L. Petrole, CCIM and MAI—for readers unfamiliar with the acronyms, that’s Certified Commercial Investment Member issued by the CCIM Institute; and Member of the Appraisal Institute.  

Each of the four chapters begins with key terminology.  Can you imagine the time-savings if each of your deals did?  Petrole continues with an overview of each chapter and sets out learning objectives for his readers.  To reinforce retention, the author includes chapter summaries as well as review questions.  Unlike some academic texts, Financial and Investment Analysis for Commercial Real Estate provides readers with an answer key, which would also be nice for your deals. 

Financial returns are the name of the game for investors in commercial real estate.  Value and performance weigh on the decision-making of investors who are rightly concerned with risk and price.  If you’re going to be active in the industry, or if you need a better handle on what savvy buyers are interested in, this book from 2007 remains ripe.  Petrole extols the virtue of caveat emptor.  The income statement, or profit and loss statement, is the key financial to review when purchasing an investment property.  But you’ve got to test the numbers—financial information is subject to ridiculous interpretation.  And when conversation settles in to the easily bantered about “cap rates,” define for yourself what you’re after.  “Whereas information pertaining to capitalization rates abounds, finding the correct capitalization rate is another issue entirely.”  The author stresses the significance of credible capitalization rates and differentiation between return on capital and return of capital.

By far, commercial investment property still necessitates the use of debt financing on the vast majority of transactions in the U.S.  An overarching point of Petrole’s in his financing chapter is, the acquisition of investment property is possible without having, or owning, the capital.  Of course, financing the acquisition affects investment returns to lenders and equity investors, and property value.  The author examines the ideas of positive leverage and negative leverage with discussions of borrowed funds on rates of return.  Where investors take unleveraged positions via acquisition, Petrole extends the example of a multi-unit income-producing property from earlier chapters as a case study.

- March 2012