Gross Rent Multiplier: The Rubber Chicken of Commercial Property Analysis

January 5th, 2010 Dike Drummond Posted in Commercial Real Estate Investing, Due Diligence, Investor's Proforma, Market Research No Comments »

rubber_chickenNow a Rubber Chicken is pretty useless … except as a practical Joke. Let’s take a look at the most useless number in Commercial Real Estate. 

The Gross Rent Multiplier – the Rubber Chicken of Commercial Property Value Indicators.

The Gross Red Multiplier (GRM) is a number you will see on every Broker’s pro forma.  And it is touted as a measurement of the “Property’s Value”.  If anyone out there really sets a property’s value based on GRM … I have to wonder what they are smokin’.  I’m not really sure what a Gross Rent Multiplier measures, but it certainly is NOT the Value of the Property.
 

GRM is calculated by dividing the Property’s sales price or value by the Gross Potential Income. 

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Commercial Defaults Rising – Silly Bankers

January 12th, 2009 Dike Drummond Posted in Commercial Financing, Commercial Real Estate Investing, Investor's Proforma, The Economy No Comments »

In the January 8th edition of the Wall Street Journal article “Commercial Property Loses Shelter” the author details the rising rates of defaults on commercial loans. The defaults are mirroring the Residential Markets … although the default rates are much lower. Not surprising given the cratering of our economy … and the article goes on to tell us how people got in trouble … this is interesting stuff!

WSJ: “An unusually high number of the underlying CMBS loans that are going bad were made and securitized in the past three years. That is a sign that investors overpaid greatly for those properties and that underwriting standards were loose. In many cases banks lent money based on future income assumptions rather than current cash flows …”

The Lenders committed the Commercial Real Estate Cardinal Sin: they believed in Proforma Numbers.

We have always taught our Commercial Property Mentor clients the rule: NEVER buy on Proforma … and now here we find bankers lending on Proforma numbers. No wonder these loans are going sour in the current economy. You must Always Buy on Actuals!

EXAMPLE: Read the rest of this entry »

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