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Short Summary
Main recommendation: Learn the core commercial real estate terms and calculations (NOI, DSCR, cap rate, ROI, and key lease structures and clauses) before evaluating deals, since lenders and brokers use this language constantly. Tyler Cobble presents 14 terms as a foundation to build on, explaining what each means and how it affects value, financing, and lease negotiations.
Key Points
- The 14 terms covered are: (1) Net Operating Income (NOI), (2) Debt-Service Coverage Ratio (DSCR), (3) Capitalization Rate (cap rate), (4) Return on Investment (ROI), (5) Commercial Cash-Out Refinance (BRRR method), (6) Price Per Unit/Square Foot, (7) Building Classification (Class A, B, C), (8) Triple Net Lease (NNN), (9) Full Service Gross (FSG), (10) Modified Gross Lease (MG), (11) Sublease Clause, (12) Exclusivity Clause, (13) Rent Escalation Clause, (14) Delivery Conditions (vanilla shell, cold dark shell, second generation space).
- NOI equals gross rental income minus operating expenses, excluding mortgage payments and depreciation; it drives property value, offers, and cash flow.
- DSCR equals NOI divided by annual debt; at or below 1.0 means no excess cash flow, and lenders typically look for at least 1.2 to 1.25.
- Cap rate equals NOI divided by sales price and approximates the all-cash return; high caps (10 to 12 percent) suggest higher risk, low caps (4 to 6 percent) suggest lower risk.
- The speaker states he will not invest in a deal without at least a 15 percent cash-on-cash return.
Details Worth Noting
- Concrete instructions:
- Calculate NOI as gross rental income minus operating expenses (no mortgage or depreciation).
- Calculate DSCR as NOI divided by annual debt; treat 1.2 to 1.25 or higher as the lender-friendly range.
- Calculate cap rate as NOI divided by sales price.
- Calculate ROI as annual cash flow divided by down payment; set a target and stick to it (speaker uses 15 percent cash-on-cash).
- Price per unit = property price divided by number of units; price per square foot = property price divided by building square footage. Compare against your market to judge offers.
- Triple net rent = estimated annual expenses plus (price per square foot multiplied by rentable square footage).
- Full service gross rent = price per square foot multiplied by square footage.
- Modified gross rent = price per square foot multiplied by square footage, plus the specific expenses the tenant covers (e.g., electric).
- Have an attorney review leases, and check sublease, exclusivity, and rent escalation clauses (e.g., a 2 percent annual increase compounds significantly over time).
- Example: a $1 million building with 10 units equals $100,000 per unit; a $1 million building of 10,000 square feet equals $100 per square foot.
- Class B buildings are often targeted by value-add investors; Class C buildings offer high returns but require significant maintenance and management skill.
- The speaker notes Class A deals are generally not suited to new investors, since prices are high and competition is strong.
- Second generation spaces may need little build-out, but they reflect the previous tenant and may need updates if a long-term tenant occupied them.
Bottom Line
Commercial real estate jargon is learnable in stages, and mastering the core metrics and lease structures gives a new investor the tools to evaluate deals and negotiate leases with confidence.
