A lot has changed in this world since this article was first written. The pandemic has had an enormous effect on commercial real estate, but its longterm impact may not be known for years. Although the pandemic has accelerated change, it has not affected the basic economic indicators and analysis for commercial real estate.

An attorney or other advisor for commercial real estate must have some familiarity and understanding of the fundamental economic analysis of a specific property in order to make judgments about that real property. The purpose of this article is to review some of the concepts and the methodologies for measuring commercial real estate returns and compare and contrast them. In addition, it looks at some mistakes often made in projecting the returns of a specific real estate property as an investment, including the possible pitfalls that confront an investor when the investor pushes the numbers to justify an expensive purchase price.

As an investment, commercial real estate is an asset. The return to an investor is tied to two basic economic components:

• The annual income it produces over the term of ownership; plus
• The proceeds of any capital transaction, such as a refinancing or sale

The Practical Real Estate Lawyer

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