Course 1: Financial Analysis for Commercial Real Estate
How professionals price, finance and judge a commercial property, taught through one Florida deal from rent roll to sale. Every number is computed live, every term links to the glossary, and every lesson ends with a calculator you can use on your own deal.
By Michael R. Linton, Florida Broker #BK703722 · October 20, 2026
Commercial real estate is valued on income. Before you can negotiate a price, size a loan or compare two deals, you need five tools: the time value of money, a clean NOI, the cap rate, the effect of debt, and a discounted cash flow. This course builds each one on the same property, so you can see how they connect.
The case study used in every lesson
Example: Lakeland Commons: a 24,000-square-foot multi-tenant retail and flex center in Lakeland, Florida, offered at $3,600,000 ($150 per square foot). Asking rent is $18 per square foot, the lender offers 65% of price at 6.75% on a 25-year amortization, and the plan is a 7-year hold. The property is hypothetical; the assumptions are set close to recent Polk County figures in our Market Map.
Lesson 1. Time Value of Money
A dollar today is worth more than a dollar later, because today’s dollar can be invested. Every valuation in this course rests on two moves: compounding a value forward and discounting it back. At 6% a year, $100,000 grows to $179,085 in 10 years. Going the other way, $500,000 received in five years is worth $340,292 today if your required return is 8%.
Most real estate cash flows are streams, not single amounts. A tenant paying $60,000 a year for 10 years is worth $402,605 today at 8%, well below the $600,000 of total rent. And a loan payment is just an annuity solved backward: $1,000,000 at 7% over 25 years, paid monthly, costs $7,068 a month. Learn more in the time value of money glossary entry.
Check yourself: Why is the 10-year lease worth less than its total rent?
Apply it on a real deal
- When a broker quotes a price and a "cap rate," discount the future yourself: what is the asking price worth if you need 8%, 9% or 10%? That range is your negotiating zone.
- For any lease, discount the remaining rent at your required return to see what the tenant is worth to you, and compare it with what the lease adds to the asking price. The NPV calculator does this in a minute.
- Before you talk to a lender, solve the payment on the loan you need. If the payment is more than the property can carry, you know before you waste a week.
Lesson 2. From Rent to Net Operating Income
Net operating income (NOI) is what the property earns before debt and income taxes. It is the single most important number in commercial real estate, because value, loan size and returns all start from it. Build it in order:
| Line | Example: Lakeland Commons | How it is figured |
|---|---|---|
| Potential gross income | $432,000 | 24,000 SF × $18/SF |
| Less vacancy and credit loss | ($30,240) | 7% of potential income |
| Effective gross income | $401,760 | What you expect to collect |
| Property taxes | ($57,600) | Florida ad valorem, about 1.6% of price |
| Insurance | ($43,200) | Wind and flood make Florida coverage expensive |
| Repairs and CAM | ($31,200) | $1/SF |
| Management | ($16,070) | 4% of effective gross income |
| Reserves for replacement | ($4,800) | Roofs, parking lots, HVAC |
| Utilities and administration | ($9,600) | |
| Net operating income | $239,290 | Expenses are 40.4% of effective gross income |
What NOI leaves out matters as much as what it includes: no mortgage payments, no depreciation, no income taxes and no one-time capital costs. Florida adds two line items that out-of-state buyers routinely understate: property taxes that reset to the purchase price after a sale, and windstorm insurance. Check both with our Florida property tax and Florida insurance calculators, then build your own NOI with the NOI calculator.
Check yourself: A seller’s NOI uses their current property tax bill. Why might yours be higher?
Apply it on a real deal
- Ask for three documents on every deal: the trailing-12-month operating statement (T-12), the current rent roll, and the last two years’ tax and insurance bills. Never underwrite from the offering memorandum’s pro forma alone.
- Rebuild NOI line by line yourself. Replace the seller’s property tax with roughly 1.6% to 2% of your price, get a real insurance quote, and use a vacancy rate based on the submarket, not on today’s occupancy.
- Add a management fee and reserves even if the seller self-manages and shows none. A lender and the next buyer will.
- Compare your NOI with the seller’s. The gap, multiplied by the cap rate, is how much the asking price is overstated. Put it in your NOI calculator and save it for the negotiation.
Lesson 3. Cap Rates and Value
The capitalization rate is NOI divided by price. At $3,600,000, our property’s going-in cap rate is 6.65%. Turned around, value equals NOI divided by the cap rate, which is why a small change in either moves price a lot: the same $239,290 of NOI is worth $3,348,144 at a cap rate half a point higher, and $3,892,829 at half a point lower.
A cap rate is a market’s one-year opinion of risk and growth, not a return you will earn. Compare cap rates only among similar properties in similar locations, and pair them with price per square foot from actual sales. Our Market Map shows median sale prices per square foot from the tax roll for every county we cover. Try the cap rate calculator.
Check yourself: If NOI stays the same and cap rates rise by a point, what happens to value?
Apply it on a real deal
- Pull recent sale prices per square foot for the property type and ZIP code from the Market Map, and ask a local broker for two or three closed sales with known NOI.
- Value the property both ways: your NOI ÷ the market cap rate, and square feet × the market price per square foot. If the two disagree badly, find out why before you offer.
- Write your offer from your NOI and the cap rate you can defend with comps, not from the asking price. Show the seller your math; it moves the conversation from opinion to numbers.
Lesson 4. Financing: Loan Constant, DSCR and Debt Yield
Our lender offers 65% of price, a $2,340,000 loan at 6.75% amortized over 25 years. The monthly payment is $16,167, so annual debt service is $194,008. Lenders judge that loan three ways:
| Measure | Formula | Result | Typical lender test |
|---|---|---|---|
| Loan constant | Annual debt service ÷ loan | 8.29% | Compare to the cap rate |
| Debt service coverage | NOI ÷ annual debt service | 1.23× | 1.20× to 1.35× minimum |
| Debt yield | NOI ÷ loan amount | 10.23% | Often 8% to 10% minimum |
| Break-even occupancy | (Operating expenses + debt service) ÷ potential income | 82.5% | Lower is safer |
At 1.23×, this loan is near the edge of what most banks will do. If the lender requires 1.30×, the loan would have to shrink until debt service is no more than NOI ÷ 1.30. That is how the maximum loan is usually set: by coverage, not by loan-to-value. Size your own with the DSCR, debt yield and loan sizing calculators.
Check yourself: Which limit binds here, 65% loan-to-value or a 1.30× DSCR?
Apply it on a real deal
- Before you sign a letter of intent, call two lenders with the property type, price and your rebuilt NOI. Ask for their minimum DSCR, minimum debt yield, rate, amortization and maximum loan-to-value.
- Size the loan all three ways (LTV, DSCR, debt yield). The smallest answer is your real loan, and the difference from the asking-price loan is the extra equity you need.
- If the equity gap is too big, the price is too high for today’s debt. Use the loan sizing calculator to show the seller what a buyer can actually finance.
Lesson 5. Cash Flow After Debt and Leverage
Subtract debt service from NOI and you have before-tax cash flow: $239,290 − $194,008 = $45,282 in year one. Divide by the equity invested ($1,332,000, including $72,000 of closing costs) and the cash-on-cash return is 3.40%.
That is lower than the 6.65% cap rate, and the reason is the most important rule of leverage: debt raises your current return only when the property yields more than the loan costs. Here the cap rate (6.65%) is below the loan constant (8.29%), so leverage is negative on current cash flow. Every dollar of debt costs more than the property earns on it. Run your numbers in the cash-on-cash calculator.
When the cap rate is below the loan constant, the loan is borrowing against the future. You only come out ahead if rents grow and the exit holds. That can be a good bet; just make it on purpose.
Apply it on a real deal
- Compare the cap rate with the loan constant before you choose a loan. If the cap rate is lower, more debt lowers your cash flow; ask for a longer amortization, interest-only years or a lower loan amount.
- Decide what the investment is for. If you need income now, avoid negative leverage. If you are buying for growth and resale, negative leverage in year one can be acceptable, but only with a written plan for how NOI grows.
- Check break-even occupancy. If the property can lose a third of its tenants and still pay the loan, you can survive a bad year.
Lesson 6. Discounted Cash Flow: NPV and IRR
A cap rate looks at one year. A discounted cash flow looks at the whole hold: every year’s cash flow plus the sale. We assume NOI grows 3% a year, and that after 7 years we sell at a 7.25% cap rate on the next year’s NOI, for $4,059,256, less 3% selling costs. The loan balance then is $2,018,482.
| Year | NOI | Debt service | Cash flow to equity |
|---|---|---|---|
| 0 | — | — | ($1,332,000) |
| 1 | $239,290 | ($194,008) | $45,282 |
| 2 | $246,468 | ($194,008) | $52,460 |
| 3 | $253,862 | ($194,008) | $59,854 |
| 4 | $261,478 | ($194,008) | $67,470 |
| 5 | $269,323 | ($194,008) | $75,315 |
| 6 | $277,402 | ($194,008) | $83,394 |
| 7 | $285,724 | ($194,008) | $2,010,712 incl. sale |
The internal rate of return is the discount rate at which these flows are worth exactly what you paid. Without debt, the property’s IRR is 7.88%. With the loan, the equity IRR is 9.59%, and the equity multiple is 1.80×.
Notice what happened: leverage hurt year-one cash flow but helped the total return, because the property’s IRR (7.88%) is above the 6.75% interest rate. Over a full hold, debt helps whenever the asset earns more than the debt costs, even if it doesn’t in year one.
Net present value asks a sharper question: at the return you require, is the deal worth its price? At a 9% discount rate, the levered NPV is $46,317 (the deal clears your hurdle), while the unlevered NPV is −$213,072: on its own, the property does not earn 9% at this price. Test both in the NPV and IRR and equity multiple calculators.
Check yourself: Why can NPV be negative while IRR is positive?
Apply it on a real deal
- Build a year-by-year cash flow for your hold period: NOI growth you can justify from the leases and the market, debt service, capital spending in the years it happens, and a sale.
- Set the exit cap rate at or above today’s going-in cap rate. Buildings get older, and assuming a lower exit cap is the most common way a model overstates return.
- Choose your discount rate before you run the numbers: what you could earn on an alternative of similar risk. Then accept or reject the deal on NPV at that rate.
- Keep the model; it becomes your asset management plan. Each year, compare actual NOI with the model. Use the IRR and equity multiple calculator to check your spreadsheet.
Lesson 7. Taxes: Depreciation, Recapture and 1031
Commercial buildings depreciate over 39 years for federal income tax; land does not depreciate. If 20% of our basis is land, about $2,937,600 is depreciable, roughly $75,323 a year. That deduction shelters part of the cash flow, but it reduces your basis, and much of it is taxed again at sale as depreciation recapture.
Two tools change the timing: a cost segregation study moves parts of the building into shorter lives, and a 1031 exchange defers gain by rolling it into a replacement property. Florida has no state personal income tax, which makes after-tax returns here stronger than in most states. This lesson is general education, not tax advice; work with a CPA on any real transaction. See our cost segregation and 1031 boot calculators and the 1031 exchange desk.
Apply it on a real deal
- Before you close, ask your CPA whether a cost segregation study pays for itself on this property, and estimate first-year depreciation with and without it.
- If you are selling a property you own, model the tax on the sale, including depreciation recapture, and compare it with a 1031 exchange before you list. The 45-day identification clock starts at closing.
- Write the land and building allocation into your purchase file now; it drives depreciation for the next 39 years.
Lesson 8. Comparing Deals and Testing Assumptions
No single measure decides a deal. Read them together: the cap rate tells you what the market thinks, DSCR and debt yield tell you what a lender thinks, cash-on-cash tells you what you will live on, and NPV and IRR tell you whether the whole hold is worth the price.
Then break the model on purpose. The two assumptions that move this deal most are the exit cap rate and rent growth. If the exit cap is a point higher, the sale price drops to $3,567,225, about $492,031 less. Run those cases in the hold period sensitivity and pro forma calculators before you make an offer, not after.
Apply it on a real deal
- Run the two-way stress test on every deal: exit cap rate one point higher, and rent growth one point lower. If the deal still clears your hurdle in the bad case, it is a good deal; if only the base case works, it is a bet.
- Compare deals on the same measures: NPV at your required return, IRR, DSCR and break-even occupancy. Don’t compare one deal’s cap rate with another’s IRR.
- Write down the three assumptions that matter most for this property and what would prove each wrong. Check them every quarter after you buy.
Capstone: Underwrite a Real Listing in One Afternoon
Pick a commercial listing in your market and work through it in this order. The goal is a one-page decision: what it is worth to you, what you would offer, and why.
- Context (15 minutes). Look up the ZIP code on the Market Map: commercial price per square foot, distress, building age and the housing and job trends behind demand.
- NOI (45 minutes). Get the T-12, rent roll, tax and insurance bills. Rebuild NOI with your property tax, a real insurance quote, market vacancy, management and reserves.
- Value (20 minutes). Value it by cap rate and by price per square foot. Note the gap from the asking price.
- Debt (30 minutes). Size the loan by LTV, DSCR and debt yield; take the smallest. Compute equity required and cash-on-cash.
- Hold (45 minutes). Build a five-to-ten-year cash flow with a conservative exit. Calculate NPV at your required return and the IRR.
- Stress test (15 minutes). Raise the exit cap rate a point and cut rent growth a point. Write down whether the deal survives.
- Decision (15 minutes). One page: your value, your offer, the three assumptions that matter and what would make you walk.
Want a second opinion on your capstone? Send it to Michael at mike@lintonglobal.com; on a live deal, we will walk through it with you.
Key Takeaways
- ✓NOI is the foundation: $239,290 on our example, before debt and income taxes.
- ✓Cap rate = NOI ÷ price (6.65% here); it is a one-year snapshot, not a return.
- ✓Lenders size loans by coverage: 1.23× DSCR and 10.23% debt yield on this deal.
- ✓Leverage is negative on cash flow when the cap rate is below the loan constant (6.65% vs 8.29%).
- ✓Over the full hold, debt raised the IRR from 7.88% to 9.59% because the property out-earned the 6.75% rate.
- ✓Test the exit cap rate and rent growth before you offer; they move value the most.
Frequently Asked Questions
What is financial analysis in commercial real estate?+
It is the process of turning a property’s rents, expenses, financing and sale into numbers an investor can compare: net operating income, cap rate, cash-on-cash return, debt coverage, and the present value and internal rate of return of the whole investment. In our worked example, a $3,600,000 Lakeland retail center produces $239,290 of NOI, a 6.65% cap rate and a 9.59% levered IRR over 7 years.
What is the difference between a cap rate and an IRR?+
A cap rate is one year’s NOI divided by price: a snapshot. An IRR is the discount rate that makes the present value of every future cash flow, including the sale, equal to what you paid: a whole-hold return. Our example has a 6.65% going-in cap rate but a 7.88% unlevered IRR, because NOI grows and the property is sold at the end.
Can leverage be negative on cash flow and positive on IRR at the same time?+
Yes. In the example the cap rate (6.65%) is below the loan constant (8.29%), so year-one cash-on-cash falls to 3.40%. But the property’s unlevered IRR (7.88%) is above the 6.75% interest rate, so over the full hold the loan raises the equity IRR to 9.59%. Which measure matters depends on whether you need income now or total return.
How do I apply this to a real property?+
Each lesson ends with “Apply it” steps for a live deal, and the capstone walks through underwriting a real listing in one afternoon: market context from the Market Map, a rebuilt NOI from the T-12 and rent roll, value by cap rate and price per square foot, loan sizing by LTV, DSCR and debt yield, a hold-period cash flow with NPV and IRR, a stress test, and a one-page decision.
Is this course free?+
Yes. Every lesson, worked example and calculator on this site is free. The course teaches widely used financial analysis methods with original examples; it is not affiliated with, and does not lead to, any professional designation.
Who wrote this course?+
Michael R. Linton, Florida Broker #BK703722, with 39 years in commercial real estate and banking-side distressed asset work. Questions about a real deal: (312) 612-1031 or mike@lintonglobal.com.
Next: Course 2, Market Analysis
How to read supply, demand, rents and absorption for a submarket, using the Linton Global Market Map. See the full curriculum →
Educational content only, not investment, tax or legal advice. The worked example is hypothetical. This course is original material from Linton Global Solutions and is not affiliated with, endorsed by or a substitute for any professional designation program.