Commercial Real Estate Financial Metrics

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---
schema: foundry-doc-v1
title: "Commercial Real Estate Financial Metrics"
slug: cre-financial-metrics
category: reference
type: topic
content_type: topic
quality: complete
short_description: "Definitions of the primary financial metrics used in commercial real estate investment analysis: NOI, DSCR, LTV, ICR, FFO, AFFO, NAV, IRR, and MOIC."
status: active
bcsc_class: public-disclosure-safe
language_protocol: PROSE-TOPIC
last_edited: 2026-06-29
editor: woodfine-editorial
paired_with: cre-financial-metrics.es.md
---

Commercial real estate investment analysis employs a standard vocabulary of financial metrics.
The definitions below reflect institutional usage as applied in Canadian commercial real estate
markets and in compliance with IFRS financial reporting requirements. These definitions are
consistent with the metrics used throughout the corporate knowledge base.

## Income metrics

**Net operating income (NOI)** — Income from property operations after deducting operating
expenses (property taxes, insurance, utilities, management, maintenance) but before debt
service, capital expenditure, depreciation, and income tax. NOI is the primary input to
property valuation through the direct capitalisation method. Two variants are in use: *cash
NOI* (actual cash flows) and *GAAP NOI* (straight-line rent under IFRS 16, with tenant
improvement allowances amortised). See [[net-operating-income]].

**Effective gross income (EGI)** — Gross potential income less vacancy and credit loss. The
intermediate step between the theoretical maximum revenue and NOI.

**Funds from operations (FFO)** — NOI less interest expense and general and administrative
expenses; essentially the net income of the property before depreciation and gains/losses
on disposition. FFO is the standard distributable income metric for REITs under the REALPAC
and NAREIT definitions. FFO adds back depreciation to net income, removing the accounting
non-cash charge that would otherwise understate the economic income of a property portfolio.

**Adjusted funds from operations (AFFO)** — FFO less normalised maintenance capital
expenditure and straight-lining adjustments. AFFO represents sustainable distributable cash
after the cash required to maintain the existing income stream. AFFO is the more conservative
and operationally accurate measure of distributable income.

## Leverage metrics

**Loan-to-value ratio (LTV)** — Outstanding mortgage principal divided by the current
appraised value of the property. LTV measures the degree of leverage in the asset structure.
A 65% LTV means 65 cents of mortgage debt for every dollar of appraised property value.
Institutional commercial lenders typically require LTV at or below 65–75% at origination.

**Debt service coverage ratio (DSCR)** — NOI divided by total annual debt service (principal
plus interest). DSCR measures the cushion between operating income and debt obligations.
A DSCR of 1.25× means the property generates $1.25 of NOI for every $1.00 of debt service.
Institutional lenders typically require DSCR of 1.20–1.30× at origination.

**Interest coverage ratio (ICR)** — NOI divided by annual interest obligations (excluding
principal repayment). Used as the distribution-gating metric in the direct-hold programme:
no distribution is declared when the ICR is below 1.2×. ICR is a more lenient measure than
DSCR when the mortgage has an amortising structure, because DSCR includes principal repayment
in the denominator while ICR excludes it. See [[interest-rate-transmission]].

## Valuation metrics

**Capitalisation rate (cap rate)** — NOI divided by market value. Applied in reverse (value
= NOI ÷ cap rate) in the direct capitalisation valuation method. Market cap rates are
observable from comparable transactions. See [[capitalization-rate]].

**Net asset value (NAV)** — The sum of the fair values of all properties in the portfolio
less all debt obligations and other liabilities. NAV is the primary balance-sheet-based
valuation measure for real estate entities. Book NAV uses appraised values; Adjusted NAV
incorporates adjustments for fair market value of liabilities, transaction costs, and
deferred taxes. Market Value NAV uses current market transaction evidence rather than
appraised values.

## Return metrics

**Internal rate of return (IRR)** — The discount rate that makes the net present value of
all cash inflows and outflows (including the terminal value at disposition) equal to zero.
IRR is the total return measure for a time-limited investment, expressed as an annualised
rate. It is sensitive to the timing of cash flows and to the assumed exit capitalisation
rate at disposition.

**Multiple on invested capital (MOIC)** — Total cash returned to the investor divided by
total cash invested. A MOIC of 2.0× means the investor received $2.00 back for every $1.00
invested over the holding period. MOIC does not account for the time value of money; a 2.0×
MOIC over five years and a 2.0× MOIC over twelve years represent very different IRRs.

**Levered vs. unlevered return** — Returns calculated on levered investments incorporate the
amplifying effect of debt. Unlevered return (sometimes called the "all-equity" return) measures
the return on the asset itself, independent of financing structure. The difference between
levered and unlevered IRR reflects the cost and quantum of debt deployed.

## Risk metrics

**Going-in cap rate** — The cap rate implied by the acquisition price relative to stabilised
NOI at the time of purchase. The entry yield on the investment.

**Exit cap rate** — The cap rate assumed at the time of disposition. Applied to projected
NOI at the exit date to estimate terminal value. The spread between going-in and exit cap
rates reflects the investor's assumption about future market conditions.

**Break-even occupancy** — The occupancy rate at which NOI exactly covers total operating
expenses and debt service, producing zero distributable income. Useful for stress-testing
the resilience of an asset to vacancy increases.

## See also

- [[net-operating-income]] — the full description of the NOI metric and its variants
- [[capitalization-rate]] — the valuation metric and its sensitivity to market conditions
- [[interest-rate-transmission]] — how changes in financing costs affect the leverage metrics