How The Equity Multiple Works In Commercial Real Estate

The equity multiple is a commonly used performance metric in commercial real estate, and yet it’s not widely understood. In this short article we’ll take a look at the equity multiple as it’s used in commercial real estate and we’ll also walk through several examples step-by-step.

What Is The Equity Multiple?

First of all, what exactly is the equity multiple? In commercial real estate, the equity multiple is defined as the total cash distributions received from an investment, divided by the total equity invested. Here is the equity multiple formula:

Equity Multiple

For example, if the total equity invested into a project was $1,000,000 and all cash distributions received from the project totaled $2,500,000, then the equity multiple would be $2,500,000 / $1,000,000, or 2.50x.

What does the equity multiple mean? An equity multiple less than 1.0x means you are getting back less cash than you invested. An equity multiple greater than 1.0x means you are getting back more cash than you invested. In our example above, an equity multiple of 2.50x simply means that for every $1 invested into the project, an investor is expected to get back $2.50 (including the initial $1 investment).

What’s a good equity multiple?  As always, this depends. Context is required in order to determine what a “good” equity multiple means. Typically, the equity multiple is most relevant when compared with other similar investments.

Equity Multiple Proforma Example

Let’s take a look at an example of how to use the equity multiple in a commercial real estate analysis. Suppose we have an acquisition that requires $4,300,000 in equity and we expect the following proforma cash flows:

equity multiple real estate example

If we add up all of the before tax cash flows in the proforma above, then we’ll end up with total profits of $9,415,728. This results in a calculated equity multiple of $9,415,728/$4,300,000, or 2.19x.

What does a 2.19x equity multiple mean? This simply means that for every $1 invested into this project an investor is expected to get back $2.19 (including the initial $1 investment).

Is 2.19x a good equity multiple? As mentioned earlier, the fact that it’s higher than 1.0x means the investor is getting back more money than initially invested. However, the equity multiple alone doesn’t say anything about the timing because the equity multiple ignores the time value of money. In other words, a 2.19x equity multiple is much better if the holding period is 1 year versus 100 years. This is why the equity multiple is most relevant when compared to equity multiples of other similar investments.

Equity Multiple vs IRR

What’s the difference between the equity multiple and the internal rate of return? This is a common question since the equity multiple is often reported along with the IRR.

The major difference between the IRR and the equity multiple is that they measure two different things. The IRR measures the percentage rate earn on each dollar invested for each period it is invested. The equity multiple measures how much cash an investor will get back from a deal. The reason why these two indicators are often reported together is because they complement each other. The IRR takes into account the time value of money while the equity multiple does not. On the other hand, the equity multiple describes the total cash an investment will return while the IRR does not. Let’s take a look at an example of how these two measures can be used together.

The equity multiple is a performance metric that helps put the IRR into perspective by sizing up the return in absolute terms. The equity multiple does this by describing how much cash an investment will return over the entire holding period. Suppose we have two potential investments with the following cash flows:

Equity Multiple vs IRR

As you can see, the first investment produces a 16.15% IRR while the second investment only produces a 15.56% IRR. If we were using the IRR alone then the choice would be clearly be the first set of cash flows. However, the IRR isn’t a silver bullet and doesn’t always tell the full story. This can be seen by looking at the equity multiple for both investment options. Although the second potential investment has a lower IRR, it has a higher equity multiple. This means that despite a lower IRR, investment #2 returns more cash back to the investor over the same holding period.

Of course there are other factors to consider. For example, Investment #1 returns $50,000 at the end of year 1 whereas with Investment #2 you have to wait for 4 years to get $50,000 of cash flow. Depending on the context of these deals, this may or may not be acceptable. For example, if you plan on putting all of the cash flow from Investment #1 into a checking account earning next to nothing, then perhaps Investment #2 would make more sense since your cash will be invested longer. On the other hand, perhaps the cash flows from Investment #2 are more uncertain and you’d prefer the peace of mind that comes with getting half of your investment back in Year 1 with Investment #1.

These are issues that would be addressed in a full investment underwriting and there are also several other metrics and qualitative factors that could be considered. With that said, the equity multiple allows you to quickly understand how much cash a project will return to the investors, relative to the initial investment. It also adds some additional context to the IRR when looking at a set of cash flows to help you quickly size up an investment’s absolute return potential.


The equity multiple is commonly used in commercial real estate investment analysis. In this article we defined the equity multiple, discussed what it means, and the walked through an example step by step. We also compared the equity multiple to the internal rate of return since these two metrics are commonly reported side by side. We showed an example of how the equity multiple can add some context to the IRR by indicating an investment’s absolute return potential.

How The Mortgage Constant Works In Real Estate Finance

The mortgage constant, also known as the loan constant, is an important concept to understand in commercial real estate finance. Yet, it’s commonly misunderstood. In this article we’ll take a closer look at the mortgage constant, discuss how it can be used, and then tie it all together with a relevant example.

What is The Mortgage Constant?

First of all, what exactly is the mortgage constant? The mortgage constant, also known as the loan constant, is defined as annual debt service divided by the original loan amount. Here is the formula for the mortgage constant:

Mortgage Constant Formula

In other words, the mortgage constant is the annual debt service amount per dollar of loan, and it includes both principal and interest payments.

How to Calculate the Mortgage Constant

There are two commonly used methods to calculate the mortgage constant. The first simply divides annual debt service by the total loan amount. The second allows you to calculate the mortgage constant for any loan amount by solving for the payment based on a loan amount of $1. Let’s take a look at both methods.

Suppose we have a $1,000,000 loan based on a 6% interest rate and a 20 year amortization. With this information you can simply find the annual debt service using the above assumptions, then divide the annual debt service by the loan amount. On our financial calculator, if we plug in 240 months for N, -$1,000,000 for PV, .50% for I (6%/12), and 0 for FV, then we can solve for the monthly payment. To convert this to an annual payment amount we simply multiply by 12.

mortgage constant calculation

Since the mortgage constant is simply the ratio of annual debt service to the total loan amount, this calculation is just simple division. In this case we take $85,972 / $1,000,000 to get a mortgage constant of 0.085972. As a percentage this would be 8.5972%.

The method above works if you already know the loan amount, but what if you want to find the mortgage constant for any loan amount? If you only know the amortization period and the interest rate, then you can easily solve for the mortgage constant. This is accomplished by plugging this information in on a financial calculator, while using $1 as the present value. For example, consider the same loan terms above of a 20 year amortization (240 months) and a 6% interest rate (0.50% per month). Since we don’t know what the loan amount is (present value), we can simply use $1 as the present value:

Mortgage Constant Calculation 2

When we solve for payment we get 0.007164. Since this is a monthly payment we can multiply by 12 to get an annual mortgage constant of .085972. Notice this is the same 8.5972% mortgage constant we found above. Two different approaches that will result in the same result.

Mortgage Constant Example: Band of Investment

Once you have calculated the mortgage constant, it can be used in a variety of ways. Let’s take a look at a mortgage constant example that uses the band of investment approach to calculate the cap rate, which is commonly used by appraisers.

The band of investment method is a popular appraisal approach to deriving a market based cap rate. It’s frequently used by appraisers to support a market cap rate used in the income approach to valuation. The band of investment method is simply a weighted average of the returns to both debt and equity. These returns can be found by surveying lenders to find out their typical loan terms for a particular property, and also surveying investors to find out their required cash on cash returns for a particular property. Let’s take a look at how the mortgage constant is used with the band of investment.

Suppose we want to find an appropriate cap rate to value an office property in Orlando, FL. First, we can call around to several lenders in the area and ask them what their current loan terms are for this kind of property. If lenders are currently underwriting office properties at a 75% loan to value, with a 25 years amortization, and a 5% interest rate, then we can calculate the mortgage constant using one of the methods above. When we do this the resulting annual mortgage constant is 0.07015.

Next, we can survey local investors to see what their required cash on cash return would be in order to invest in a property like ours. Suppose our investor survey reveals an average 11% cash on cash return requirement. Now we can use these debt and equity returns to estimate a market based cap rate using the band of investment method.

To do this we simply take a weighted average of the two rates of returns to get 8.01%. This is found by taking the mortgage constant times the LTV ratio, then adding this result to the cash on cash return times 1 minus the LTV ratio: (7.015% x .75) + (11% x .25) = 8.01%.

Of course there are pros and cons to using the band of investment method to estimate a market based cap rate, but it’s frequently used in the commercial real estate industry and the mortgage constant is a critical component.


The mortgage constant, sometimes called the loan constant, is a commonly used calculation in real estate finance. In this article we defined the mortgage constant, discussed two common approaches to calculating the mortgage constant, and then we showed how the mortgage constant is used with the band of investment approach to calculating the cap rate.


Mezzanine Financing Basics and The Intercreditor Agreement

Financing short falls within the commercial real estate market have become a common occurrence. The great recession has made traditional lenders more sensitive to risk, frequently leaving developers and project investors with large financing shortfalls. Sponsors can seek out family and friends financing or a larger joint venture (JV) equity injection, but sometimes this gap may be too large to overcome through traditional methods of financing. Mezzanine financing is designed to fill this gap.  In this article we’ll give you a broad overview of mezzanine financing, common mezzanine loan structures, and we’ll also cover the importance of an intercreditor agreement.

What is Mezzanine Financing?

First of all, what exactly is a mezzanine (mezz) loan? Mezzanine financing is a unique financing instrument which doesn’t cleanly fall into a specific category of the capital markets financing quadrant. It’s a general term that refers to any financing vehicle (debt or equity but typically issued by private sector participants) that bridges the gap between senior debt and sponsor equity. It can be structured as preferred equity or as debt.

mezzanine financing

In general, traditional mezzanine financiers are not entitled to receive returns on their investments until senior debt holders are fully compensated.   Because of its subordinate position, the mezzanine loan assumes a higher risk profile than senior debt but retains a less risky position than preferred equity. With this understanding, Mezzanine debt investors seek returns between senior debt lenders and preferred equity investors but this will largely depend on how the deal is structured.

mezzanine financing capital stack

Basic Mezzanine Financing Structure

Mezzanine deals that are structured as debt instruments usually have one of the following forms of collateral:

  • Second deed of trust – This is the most desirable form of collateral to the mezzanine lender because it provides the most tangible form of security. It allows the mezzanine lender to foreclose on the property if the borrower defaults on payments. This type of security is rare since the first mortgage lender typically does not allow this type of arrangement.
  • Assignment of partnership interest – This is the most common form of debt security in the mezzanine finance universe. An assignment of partnership interest gives the mezzanine investor the option to take the borrower’s ownership interest in the property in the event of default. Effectively the mezzanine lender becomes the equity owner and assumes the obligations to the first mortgage lender. This type of arrangement is supported by an intercreditor agreement with first mortgage lender. This intercreditor agreement is discussed in detail below.
  • Cash flow note – This gives the mezzanine lender an assignment of all cash flow from the property in exchange for the mezzanine loan proceeds as well as a percentage of the proceeds from sale of the property. The cash flow note is not a recorded instrument and typically does not need an intercreditor agreement. This is also sometimes called a soft second.

Deals structured as equity have a different set of characteristics. Equity deals are joint ventures between the equity/owner and the mezzanine lender that are guided by the partnership agreements. Major provisions in the partnership agreements cover decision-making authority and specify decisions that require approval from the mezzanine partner. In the event of default with respect to the mezzanine loan, the mezzanine provider may foreclose on the pledged equity interests, not on the underlining property itself, and become the owner of the equity interests in the property-owning entity. Therefore, the owner/sponsor has significantly less control over the project and may lose all control if the property does not perform as expected. These rules are typically enforced by Uniform Commercial Code (UCC) article 9.

With mezzanine financing, owners sacrifice flexibility, control, and upside potential, and will ultimately pay a higher price for the capital. However, in return, owners won’t be required to contribute as much cash and they also gain a partner who might step in to help if the property starts to falter. What actually determines what a mezzanine provider will and will not do in a default scenario is dictated by the intercreditor agreement, a key link between the senior debt lender and the mezzanine financing provider.

Mezzanine Financing and The Intercreditor Agreement

The intercreditor agreement is negotiated by the first mortgage lender and the mezzanine provider. The purpose of the intercreditor agreement is to outline communication channels and provide guidance between the first mortgage lender and the mezzanine investor. More importantly, the agreement gives certain rights to the mezzanine financing provider in the event of a borrower default.

Many first mortgage lenders, mainly conduit lenders, refuse to negotiate intercreditor agreements, especially if the loan has already closed. In fact, conduit loan documentation routinely prohibits selling or transferring more than 49% equity ownership in the property to a partner. Some non-conduit lenders take the attitude that their interests are already covered in the agreement with the borrower and there is no need to complicate matters by bringing in an additional financial partner with different and potentially conflicting objectives.

Other lenders see value in what mezzanine financing providers can bring to the deal. The additional capital can allow the borrowers to purchase the desired property, pay leasing commissions, tenant improvements and pursue other value-adding strategies. In this case, and especially when the mezzanine financing provider is an experienced real estate investor, the first mortgage lender will often welcome their participation. The depth of experience of a reputable mezzanine financing provider can be advantageous for senior lenders, especially if the borrower defaults.

According to David E. Watkins of Heitman Real Estate Investment Management in Chicago, the mezzanine financing provider typically negotiates for several elements in the intercreditor agreement. The big three are listed below:

  • Notification of non-payment or default on the first mortgage. The mezzanine lender wants to know, from someone other than the owner, that the property is being managed professionally.
  • The right to cure any default on the first mortgage. The mezzanine position wants to protect itself by taking over the property and not allowing the first mortgage to foreclose and take possession.
  • The right to foreclose on the property if the owner fails to pay the mezzanine position. First lenders rarely agree to this clause, as a building that is in foreclosure creates uncertainty among existing tenants (who might elect not to pay rent) and prospective tenants (who might view the property as tainted and unstable).

Mezzanine Financing Example Structure

What makes the intercreditor agreement unique is how the instrument secures the mezzanine investor’s interest. It’s common that the agreement secures a 100% interest in the company which owns the underlying property through a bankruptcy remote “special purpose entity”  holding company. This entity will be loaded with special covenants and restrictions and would be structured to ensure the borrower is limited in its ability to file for bankruptcy. An independent director may be appointed as well in order for the special purpose entity to maintain neutrality. The diagram below illustrates what this hypothetical structure might look like:

mezzanine financing intercreditor agreement


As shown above, Plaza Building Holdings LLC is the special purpose entity which secures a 100% interest against the borrower, Plaza Building LLC.  Plaza Building LLC holds the ownership interest in the subject property. The borrower will then make payments to both the mortgage lender and the mezzanine financing provider.


Mezzanine financing can provide borrowers the necessary financing to get a deal done, but it doesn’t come without risk. If a project experiences cash flow shortfalls or otherwise gets stuck in a down market, sponsors/owners will have less control and flexibility in the deal. This article outlined mezzanine financing basics and also covered the importance of the intercreditor agreement.

U.S. Employment Growth Trends by State

Here’s our latest infographic on the jobs recovery. This infographic  shows job growth by state over the past month, year, 3 and 5 year periods. As visualized in the charts below, employment growth has been positive over the past few years, but in most states there’s still a long way to go.


Obtain Your CCIM Designation to Set Yourself Apart from the Crowd

A CCIM designation sets you apart from other commercial real estate professionals, establishes you as an expert in the field of commercial investment real estate and helps you achieve success in your chosen field. If you have been thinking of earning your Certified Commercial Investment Member designation but wanted to dig a little deeper before taking the time to pursue your CCIM designation, this is a good place to start. Read on as we will provide you with comprehensive look at this highly-regarded designation for commercial real estate professionals.

About CCIM

The CCIM Institute, headquartered in Chicago and an affiliate of the National Association of REALTORS®, awards the CCIM designation to individuals who complete a process based both on commercial and investment real estate theory and practice. We’ll review this process in a moment. But first, here’s a quick history lesson on Certified Commercial Investment Member designation.

Initially termed the CPE (Certified Property Exchanger) designation and established by the California Association of REALTORS®, the designation began to take shape in 1954. After becoming affiliated with the National Association of REALTORS® in 1967, the designation received the CCIM name two years later in 1969. Then in 1991, NAR assigned institute status to the Commercial Investment Real Estate Council. Today, the CCIM Institute is a global organization serving more than 15,000 members.

Obtaining Your CCIM Designation

REALTORS® and real estate agents are not the only individuals who obtain this professional designation. Some other professions who pursue and are granted a CCIM designation include appraisers, property managers, developers, commercial lenders, attorneys, bankers, asset managers and others interested in increasing their commercial investment real estate knowledge and business. No matter which profession these individuals come from, they must all go through a time-consuming process to achieve this designation.

However, before having the opportunity to earn your credentials as a CCIM, an individual must first become a candidate by becoming an Institute Member. There are also two other membership levels (Associate and Academic) for those individuals who wish to become part of the CCIM Institute without earning their CCIM designation. Once you achieve Institute Membership status, you will then begin the 3-step process toward achieving a Certified Commercial Investment Member designation.

The three parts of the CCIM designation process include education, experience and examination. Candidates must first complete coursework revolving around commercial investment real estate topics such as financial analysis, investment analysis, market analysis and decision analysis. There is also a professional ethics coursework requirement along with other required courses for some candidates.

Next, as CCIM designation candidate, you must show real-world experience in their profession. And it is not just experience the Institute is looking for, you must also show quality, successful, professional experience. You will need to provide transaction paperwork (i.e. settlement statements), a letter of recommendation, summaries of involvement in commercial real estate transactions, and much more. While daunting and time consuming, this portfolio requirement ensures that only the best of the best achieve a CCIM designation.

Finally, candidates must pass a comprehensive examination. This exam tests your knowledge on the CI 101 – 104 coursework. This is a full-day exam and candidates can also prepare ahead of time by taking a two-day review of course concepts.

Before we wrap up this section on obtaining a CCIM designation, we must also mention that there are six types of memberships – Institute Membership, Canada, International, U.S. Government Discount, Fast Track and University Fast Track. Depending on the membership level, a candidate may be able to avoid some of the requirements mentioned above. Before beginning the process, review the official CCIM Institute website to see which category you fall under.

The Value of CCIM Designation

The one question most professionals in the commercial real estate industry want answered is, “Why should I go through the trouble and the cost to obtain a Certified Commercial Investment Member designation?” The value of this designation goes way beyond another title next to your name on a business card. When you obtain your CCIM designation, you are receiving the knowledge needed to take your commercial investment real estate business to a new level.

This designation will not only open you up to a world class education, but it will also instantly connect you to 15,000+ other members all over the world. The CCIM institute makes it very easy to find and connect with other CCIMs, who regularly make deals and exchange knowledge on a private member only email group. Even outside of the CCIM network, the designation also carries a lot of weight. Other commercial real estate professionals will have the confidence to refer business to you and to complete commercial transactions with you.

For us it is easy to see why one should pursue a Certified Commercial Investment Member (CCIM) designation. The value of this designation far outweighs the time and monetary cost involved with obtaining it. If you are a commercial real estate professional or someone who works in a related industry, then do yourself a favor and begin your pursuit of a CCIM designation today.

Understanding the Full Service Lease in Commercial Real Estate

Understanding a full service lease in commercial real estate is easy when you have the right information. Commercial real estate professionals understand the ins and outs of this type of lease on commercial property. However, a full service lease is one of the commercial real estate terms that often confuses the general public. Here, you will find full service lease information and how this type of lease compares to other commercial real estate leases.

We’ll start with a simple definition of a full service lease. But first, it’s important to note that the term “full service lease” isn’t clearly defined and standardized. As with any legal agreement, it’s crucial that you actually read the lease terms and calculate a total cost of occupancy, which is rarely provided by the landlord. On its simplest terms, a full service lease typically refers to a leasing agreement in which the owner (lessor) is responsible for covering the building’s operating expenses in the rent. Those expenses that are covered in the rent can include – but are not limited to – real property taxes, insurance, utilities, maintenance, etc. So, to be clear, the full service rate of this commercial property lease covers building operating costs in the rent.

To someone renting commercial space, this sounds like a great deal. You pay a monthly rent based on square footage, and the building’s owner pays the operating expenses for the building. However, when it comes to full service leases, there are more terms involved than just paying a set rate. If you were to negotiate a deal to pay a quoted rental rate that did not change throughout the term of your lease, then you would most likely be negotiating what’s often called a gross lease and not a full service lease.

Here’s the big difference – one which all potential tenants must understand. The terms of a full service lease usually require the tenant to be monetarily responsible for any increases in the owner’s building operating expenses beyond the base year of the lease. What is the base year?

In most cases, the base year references the first calendar year of your lease. For example, during the first year of your full service lease, the owner of the commercial building pays $15 per square foot for operating expenses. Now, as you begin the second year of your lease term, the owner sees his building operating expenses increase to $18 per square foot. In this scenario, you would see your full service lease rate increase to cover that additional cost.

As you can see from the previous example, it is not just important that tenants have in writing exactly what operating expenses are being covered by the owner of the building. It is also extremely important to understand how those operating costs have risen each year in the past. While you can not predict the exact cost of increases in expenses like insurance, property taxes, or utilities; a tenant can review the trends in those increases to have a general idea how much their full service lease will increase year to year.

What You Should Know About Commercial Real Estate Leases

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Now let’s take a quick look at some other commercial leases. We’re not going to explain in detail all of the types of commercial real estate leases available. However, it is good for you as a business owner and potential tenant to know the major differences between these leases. Below are a few more lease terms you may run across while researching commercial space to lease.

We mentioned gross lease earlier. There are also modified gross leases. These leases are similar in regard to a full service lease because the owner usually covers some operating expenses. It is unlike a full service lease because you usually pay a set rent throughout the term of the lease along with paying agreed upon expenses as well (i.e. tenant may be responsible for utilities.)

Another popular lease for commercial property is a triple-net lease. These are also referred to as NNN leases. What’s the difference between triple-net and full service leases? Simply put, a NNN lease normally requires the tenant to cover all building operating costs in addition to the agreed upon rent.

Finally, there are occasions where you may see a full service plus lease. You can probably guess exactly what this lease entails. When you sign a full service plus lease, you are agreeing to let the owner exclude a specific operating expense(s) from the rent. An example is that you may agree to cover utilities while the owner covers all other operating expenses for the building.

As you can see from the different commercial real estate lease structures, it is very important to understand what terms you agreeing to when you sign the dotted line. You might think that signing a $0.75 per square foot NNN lease is a great deal when compared to a $1.35 square foot full service lease. And, in fact, it could be a great deal. However, now you know that you can not make that call until you understand how much the annual operating costs are and how much they increase each year. When comparing alternative lease options, it’s critically important that you understand the total cost of occupancy for each lease. If you’re working with a good leasing broker, these calculations will be calculated and presented to you.

Full service leases are just one piece of the puzzle when it comes to commercial real estate leases. And yes, educating yourself on the terms and differences in leases is important. However, before you make any decisions and sign any lease for commercial space, we recommend that you have representation from a commercial real estate broker to ensure you are fully informed on the type of deal you are signing.

A Commercial Real Estate Professional’s Introduction to the SIOR Designation

Are you a licensed commercial real estate broker thinking of obtaining your SIOR designation? Have you often wondered what is required to become a SIOR designee? Are you curious to find out if a professional designation from the Society of Industrial and Office REALTORS® is right for you? Well, if you answered yes to any of the above questions, then our comprehensive guide to the SIOR designation is a great place to start.

According to SIOR publications, “The Society of Industrial and Office REALTORS® is the leading professional commercial and industrial real estate association.”  Throughout its decades of existence, this association certified thousands of members both nationally and internationally.  Today, SIOR designees are recognized as top-producing commercial real estate professionals with the highest level of knowledge and ethics in the commercial real estate profession.

So, how did SIOR earn its prestigious place in the commercial real estate industry?  The answer to that question can be found by first reflecting on the history of SIOR.   In the late 1930’s, industrial realtors Frank G. Binswanger and David T. Houston understood that the industrial real estate sector was going to continue to grow at a rapid pace.  They also understood that there was a lack of representation for real estate professionals who specialized in industrial property.

Those factors led these two men to form the concept for the Society of Industrial REALTORS® (now known as SIOR).  In 1940, the National Association of Real Estate Boards (now known as NAR or National Association of REALTORS®) granted sponsorship to SIR giving industrial real estate professionals a recognized national organization.

By its 25th anniversary, the organization’s members were responsible for the majority of industrial real estate transactions in the United States.  Other important milestones in the organization’s history include producing the first annotated bibliography on industrial real estate, focusing on becoming a politically active organization in the 1970s, changing its name to SIOR in 1986, and finally expanding into a global entity in the 2000s.

With each decade, the Society of Industrial and Office REALTORS® grew its reach and importance as it pertains to commercial real estate.  The designation is now highly recognizable and desirable on, not only a national level, but also a global level.  Now that you understand a bit about SIOR’s history, let’s discuss how you can add this valuable designation to your list of professional achievements.

The SIOR designation is one that demands commercial real estate brokerage specialists to meet a number of requirements that are designed to ensure only the best of the best become designees.  Generally speaking, to become an SIOR designee you must be experienced (5+ years in most cases), a top producer (30+ transactions closed per year on average), a specialist in industrial and office markets, pass educational courses and meet ethical requirements.

SIOR also offers numerous designation categories including: Industrial, Office, Industrial & Office (Dual), Sales Management, Executive Management and Advisory Services.  Along with these designation categories, there are also three levels of SIOR membership – Active, Candidate and Associate.

Because of the amount of membership levels and categories within each membership designation, it is impossible to explain the exact stringent qualifications required to become SIOR designated in the space available here.  We recommend you take a few moments to review the detailed information on the official SIOR website.  However, we will go over the basics of what is required to become a Dual (Industrial and Office) designee in the United States.

To obtain an Industrial and Office (Dual) SIOR designation for an Active Individual Membership in the United States, you must meet a the following requirements.  You must have a minimum of 5 years of documented experience.  You must meet and maintain a level of production measured by Gross Fee Income and specified by your local chapter.  Two active individual members from your local chapter must provide you with written recommendations.  You must pass three mandatory core courses along with completing three elective courses.  Finally, you must pledge to uphold SIOR’s stringent ethical requirements and pass an ethics course.

Why should a commercial real estate professional who specialize in industrial and office markets obtain a SIOR designation?  There are a number of reasons and benefits why you should take the time and effort to become a member and maintain your SIOR membership.  As a designee, you will be part of a worldwide network of commercial real estate professionals.  Because SIOR designees have a global reputation of being the best of the best, other brokers and agents will happily put their own reputation on the line and refer you business.  The designation also offers a wealth of training, networking and career-enhancing opportunities.

However, the bottom line is that with a SIOR designation you will become recognized among your peers and the public as an extremely experienced and knowledgeable commercial real estate professional who closes deals.  By ensuring that its designees maintain their status as top producers, SIOR guarantees that they are putting their members in a position to be known as the go-to professional when you want a deal done.  That reputation, in itself, is an excellent reason to make it a point to earn your Society of Industrial and Office REALTORS®.

Difference Between Cap Rate and Discount Rate

What is the difference between a cap rate and a discount rate? Because these concepts are often confused, this article will discuss the difference between a capitalization rate and a discount rate in commercial real estate, and leave you with a clear understanding of the two concepts. As you follow along, you might also find our Discounted Cash Flow Valuation Guide helpful.

First, let’s go over a couple of definitions, and then we’ll dive into a specific example.

Cap Rate

The capitalization rate, often just called the cap rate, is the ratio of Net Operating Income (NOI) to property asset value. So, for example, if a property was listed for $1,000,000 and generated an NOI of $100,000, then the cap rate would be $100,000/$1,000,000, or 10%.


cap rate


What is a cap rate in commercial real estate useful for? Because individual properties differ greatly in size and magnitude, it’s helpful to talk about property prices and values in a common language. Thinking of property value per dollar of current net income achieves this objective.

The cap rate is simply a measure that quantifies property value per dollar of current net income. Another way to think about the cap rate is that it’s the inverse of the popular price/earnings multiple used in the stock markets.

Discount Rate

The discount rate is the rate used in a discounted cash flow analysis to compute present values.

When solving for the future value of money set aside today, we compound our investment at a particular rate of interest. When solving for the present value, the problem is one of discounting, rather than growing, and the required expected return acts as the discount rate. In other words, discounting is merely the inverse of growing.

What is the discount rate used for in commercial real estate analysis? In commercial real estate the discount rate is used in a discounted cash flow analysis to compute a net present value. Typically, the investor’s required rate of return is used as a discount rate, or in the case of an institutional investor, the weighted average cost of capital. This ensures that the initial investment made in a property achieves the investor’s return objectives, given the projected cash flows of the property. The intuition behind IRR and NPV is that it allows us to determine how much an investor should pay for a property, given his required rate of return, or discount rate.

Cap Rate vs Discount Rate

So, back to the original question – what’s the difference between the cap rate versus the discount rate? The cap rate allows us to value a property based on a single year’s NOI. So, if a property had an NOI of $80,000 and we thought it should trade at an 8% cap rate, then we could estimate its value at $1,000,000.

The discount rate, on the other hand, is the investor’s required rate of return. The discount rate is used to discount future cash flows back to the present to determine value and account’s for all years in the holding period, not just a single year like the cap rate.

If a property’s cash flows are expected to increase or decrease over the holding period, then the cap rate will be a misleading performance indicator. Consider the following two investment alternatives:

cap rate vs discount rate

Both properties have a cap rate of 10% based on the NOI in year 1. But clearly the cash flows are better for Building B and it therefore provides a higher rate of return. The exact rate of return can be quantified using the Internal Rate of Return (IRR). Also, assuming equal risk, any rational investor should be willing to pay more for Building B because its future cash flows are expected to grow more than Building A’s. But how much more could you pay for Building B while still achieving your required return?

By completing a multiyear discounted cash flow analysis we could quantify exactly how much we can pay for this property with a Net Present Value (NPV), given an investor’s discount rate. The cap rate, on the other hand, will not be able to answer this question for us. In short, while the cap rate and the discount rate may appear similar, they are two different things used for different purposes.

Debate: Gary Shilling vs Mark Kiesel – Will Home Prices Fall Another 20%?

There’s an interesting video debate between Mark Kiesel and Gary Shilling on the direction of home prices in the United States. Gary Shilling argues that another 20% decline is coming, while Mark Kiesel contends that housing has bottomed and it’s now time to buy. Both of these analysts warned about the bubble as far back as 2004 which makes this an interesting debate.

For a bit of background, Mark Kiesel is a PIMCO portfolio manager who sold his home in 2004 and rented because he saw the bubble coming. And Gary Shilling is a popular economic forecaster who saw the housing bubble before it burst and has recently been talking about why he thinks another 20% decline is coming.

Gary Shilling’s argument:

  • There are 2 million excess units in inventory over and above normal working levels.
  • We built about 1.5 million units per year back in normal times, so 2 million is an enormous number.
  • The robo-signing fiasco is over and therefore banks will start foreclosing again.
  • NAR says that when foreclosures are sold they are sold at a 19% discount.
  • Another 20% decline is required to get back to long-term trend in terms of median prices

Mark’s counter-argument: 

  • There are currently 2.5 million homes in existing inventory, down in the last 7 years from 4 million.
  • There are only 144,000 new homes for sale, which is at a 49 year low. 
  • Existing inventory is at a 7 year low.
  • There were 3.9 million 90+ days delinquent 2 years ago, and today it’s at 2.9 million. 
  • So, no matter what inventories you look at, they are all coming down.

Shilling’s response:

  • Yes, inventories are coming down but they are still huge.
  • When you count in the shadow inventory you’re still over 2 million above a normal working levels.

Mark’s response:

  • Housing is regional.
  • The implied rental yields are 5-12% in some markets and therefore this inventory will get absorbed pretty quickly by investors.
  • We’ve added 2 million jobs in the private sector over the past 2 years. Energy, technology, autos, and manufacturing are all doing well.
  • Some housing markets have shortages and most foreclosures are concentrated in two markets, Florida and Arizona. 
  • Again, housing is regional.


  • People used to say that the real estate bubble was local and concentrated in sub-prime or particular regions. 
  • They said the problems were only concentrated in Arizona, Florida, etc.
  • To say there are a lot of shortages here and there is begging the question. Overall there is still a lot of inventory.

Final points:

Mark: We aren’t in a recession anymore, job growth is occurring in many markets, banks are gradually willing to lend, and the fed is pursuing a reflation policy. Therefore you want to own a hard asset like real estate.

Gary: It would still take a 22% decline to get housing back to it’s long term average identified by Bob Shiller.

August 2012 Employment Growth Rates by State

Here’s a table from our database showing total non-farm employment growth for all 50 states in the US, as well as the District of Columbia. Growth rates are in descending order by year-over-year growth, and the table also includes growth rates for the past month, as well as 3 and 5 year periods. For comparison the growth rates for the entire US were 0.07%, 1.37%, 2.59%, and -3.15%, respectively. How’s your state doing?

State Last Month Growth Year Over Year Growth 3 Year Growth 5 Year Growth
North Dakota 0.40% 6.75% 15.31% 17.89%
Oklahoma 0.65% 2.90% 4.38% 1.49%
Texas 0.35% 2.45% 6.05% 3.98%
Hawaii 0.69% 2.40% 2.69% -3.37%
Indiana 0.18% 2.29% 4.57% -3.01%
Arizona 0.08% 2.27% 2.32% -8.17%
Louisiana 0.12% 2.22% 2.78% 1.50%
Kentucky 0.14% 2.15% 4.02% -1.70%
California 0.08% 2.13% 2.95% -5.64%
Wyoming 0.45% 2.03% 3.36% 1.00%
Ohio -0.04% 1.93% 3.16% -4.33%
Utah 0.32% 1.81% 4.85% -1.64%
Idaho 0.64% 1.62% 2.07% -6.12%
Washington -0.31% 1.53% 2.54% -2.36%
Colorado 0.00% 1.47% 3.03% -1.77%
Oregon 0.54% 1.44% 2.73% -5.17%
New York 0.09% 1.40% 3.10% 0.94%
New Jersey 0.14% 1.33% 0.93% -4.22%
Montana 0.44% 1.31% 0.96% -2.67%
Georgia 0.09% 1.30% 2.41% -5.07%
Massachusetts -0.15% 1.26% 2.49% -1.24%
Nebraska -0.17% 1.25% 1.32% -0.57%
Vermont -0.79% 1.24% 2.26% -1.69%
District of Columbia -1.52% 1.20% 3.74% 5.27%
Michigan -0.17% 1.16% 4.02% -6.41%
Kansas 0.15% 1.08% 1.47% -2.44%
Florida 0.32% 1.07% 2.21% -8.22%
Maryland 0.05% 0.94% 2.29% -1.55%
Tennessee -0.19% 0.93% 3.36% -4.32%
Arkansas 0.22% 0.92% 0.76% -3.06%
Minnesota -0.07% 0.84% 2.62% -2.39%
Virginia -0.33% 0.84% 2.43% -1.25%
Iowa -0.03% 0.78% 1.23% -1.79%
South Carolina -0.32% 0.76% 2.36% -5.27%
North Carolina 0.03% 0.71% 1.87% -4.89%
Illinois 0.17% 0.69% 1.72% -4.68%
Alabama 0.15% 0.61% 0.13% -6.48%
South Dakota -0.37% 0.59% 1.64% 0.17%
Nevada -0.09% 0.46% -0.17% -12.30%
Alaska 0.52% 0.40% 3.03% 3.87%
Missouri 0.68% 0.30% -0.29% -4.94%
Pennsylvania -0.02% 0.27% 2.20% -1.67%
Connecticut -0.42% 0.07% 0.72% -4.47%
New Hampshire -0.10% -0.06% 0.32% -3.36%
Delaware -0.48% -0.10% 0.39% -5.42%
Wisconsin 0.29% -0.16% 0.24% -5.49%
Maine -0.32% -0.20% -0.47% -4.29%
Mississippi -0.17% -0.39% -0.75% -6.27%
Rhode Island 0.24% -0.61% -0.04% -7.23%
West Virginia -0.31% -0.70% 1.28% -1.11%
New Mexico -0.74% -1.65% -2.11% -6.17%