Commercial Real Estate Investors: Consider the CCIM Designation

So, a few years ago, I got my CCIM (Certified Commercial Investment Member) designation (yay for me!) and thought I would share the process and benefits with those who may be interested in pursuing a similar path.

A CCIM is for anyone in the commercial real estate space, be they brokers, investors, developers, appraisers, etc. In order to become a CCIM designee, you need to complete four classes, along with a few electives, and then submit a portfolio of the work, which includes about 800,000 documents. You can take the three-day classes in person at various locations, or you can take them online. The classes aren’t cheap, but they do provide a lot of very good information. You will also need a referral from a CCIM member. Then, once you’ve completed all of that, you have to take a final exam.

While my company mostly purchases houses, we also purchase a good number of apartments. And that’s something I would like to increase in the future, especially after the market cools down a bit. The program CCIM has developed helps you learn how to value these larger properties, as well as markets in general.

It also puts you “in the club” with other CCIMs, which can be great for networking and the like. Indeed, other CCIM designees noted how when they are evaluating another market, they just look up a CCIM member there and give that person a call. It’s almost like you have a bond already, given the shared trauma experience of becoming a CCIM member.

Here I will give a very brief outline of the four major modules that make up the bulk of the coursework in order to become a CCIM. If you believe gaining further knowledge in these areas would be helpful for your real estate aspirations, I recommend you consider pursuing a CCIM.

Module 1: Financial Analysis—IRR and NPV

One of the first things they provide you with when you start to pursue a CCIM is their financial calculator. I believe it is proprietary, so I can’t share it. But the calculator is very powerful and allows you to evaluate a property’s IRR (internal rate of return) and NPV (net present value) much better than anything else I’ve come across before. Still, there are IRR calculators and the like online that you can use for the time being.

Most of us read about cap rates early on when learning about real estate. A cap rate is simply the net operating income divided by the total price. This is a useful tool, especially for valuation (comparing one property’s cap rate to another similar property), but it doesn’t tell the whole story. The IRR tells you what your actual return is given all the cash flow you expect from the property and the sales proceeds upon disposition.

So, say you have the following assumptions based on your research:

Purchase Price: $1,000,000
Cost to Purchase: $30,000
Annual NOI: $100,000
Annual Increase in NOI: 3%
Hold Period: 5%
Sales Price: $1,200,000
Sales Cost: $40,000

Then, you can find the IRR by simply plugging in those numbers:

But it gets better. Let’s say that you know your cost to raise funds is 9 percent or you have an alternative investment that could get you 9 percent. You can then set that as your discount rate and figure out what the net present value of this investment is.

In this case, the net present value is $134,839. In other words, that’s the amount this property is worth above your 9 percent cost of funds. So, if your cost of funds was 9 percent, you should be indifferent to paying $134,839 more than the purchase price of $1,000,000 to acquire this asset.

Of course, there are a lot of assumptions you have to make in this regard, but IRR is a much better tool to evaluate how an investment will do (and how it has done in the past) than a cap rate, because cap rates don’t take anything into account about what the property will do in the future. The IRR looks at the total investment like a it was a movie, where a cap rate only takes a picture right as you purchase the property.

There’s much more to this module, including evaluating how leverage, taxes, and depreciation affect an investment, but since I’m only providing a tiny morsel of a taste, I will move on to the next section.

Module 2: Market Analysis—Vacancy, Absorption, and Market Forecasting

In this section, you look at the market you are investing in. First, there is vacancy and absorption. The only point I’ll make with vacancy is that there are two kinds: the simple average and the weighted average.

The simple average is just the average of each building’s vacancy. The weighted average weights those buildings by the amount of space each has. So, for example, say you are looking at industrial space and there are three buildings in this market or submarket:

As you can see, the weighted vacancy rate is almost twice as high as the simple average vacancy rate. Generally, since the simple average can be distorted by very small or large buildings, the weighted vacancy rate is more helpful.

Related: How to Use Commercial Real Estate to Add $1MM to Your Net Worth in 5 Years

Absorption is the rate at which unoccupied space is being filled. This is important to know, as it tells you how competitive a market is. If the absorption rate is low, then the market is not filling vacant space very fast and is probably not the best place to invest.

The calculation is very simple:

End of Year Occupied Units (or Sq. Ft.) / Beginning of Year Occupied Units (or Sq. Ft.) = Units Absorbed

Put that into percentage terms, and you have the absorption rate.

The last part of this module has to do with evaluating a market in general. In this, it looks at two types of employment:

Non-Basic Employment: Workers who produce the goods and services needed in the local economy.
Basic Employment: Workers who produce a surplus that can be exported.

Basic employment is the driver of a local economy since it is what brings in capital from outside. When you find which job sectors in your local economy have basic employees and then look at the national forecast for job growth, it can help you forecast the job and population growth of any given market. Namely, if the market you’re looking at has a lot of basic employees in a sector that is rapidly growing, that means the city you are looking at will likely expand.

The calculations for this get a little arduous (with fun stuff like location quotients and shift share analysis), so I’ll leave it off here.

Module 3: User Decisions—Leases and Lease Vs. Buy Decisions

When dealing with commercial properties, leases are a much bigger deal than they are with houses. For a large office, retail, or industrial property, lease decisions need to be taken just as seriously as decisions regarding acquisition and disposition. Indeed, you need to perform the same kind of IRR and NPV analyses on a lease with these types of deals that you would have done on a purchase.

You also have to know the many types of leases and various terms that come into play. For example, a full-service lease requires the owner to pay all the operating expenses. A net lease requires the tenant to pay the operating expense. There’s even something called a “percentage rent lease”—most common in retail—where the tenant has to pay a percentage of their gross sales above a certain threshold in addition to their base rent.

Lease agreements also often have many other stipulations, such as cost-stops, where the owner will pay up to a certain amount and then the tenant is responsible. Sometimes the owner will provide for some or all of the tenant’s moving expenses or costs to refurnish the building. All of this has to be taken into account when coming up with an IRR and NPV, or those numbers will be meaningless.

One reason that this analysis is so important is that a lease versus buy decision is one that many space users face. If you don’t do this analysis properly, you may pick the more expensive option.

Module 4: Investment Decisions—Comparing Investments and Capital Accumulation

The final module looks at investor decisions more closely. This includes partitioning out certain parts of an investment and running them at different discount rates. So, for example, say you are less sure about getting percentage rent than the base rent from a tenant with a percentage rent lease. Since it’s more risky to assume you’ll get the percentage rent, you would run it at a higher discount rate (a higher rate of risk requires a greater return).

Or say you are building a mixed-use property with retail on the bottom floor and offices above it. If you believe, for whatever reason, that the offices are riskier, you would run that part of the investment at a higher discount rate in order to determine your net present value.

In addition, this module discusses capital accumulation. To explain this, assume that you are purchasing an apartment you intend to hold for five years. Each year, you make money from the building’s cash flow. But you don’t just stick that money in the bank and earn nothing on it. You reinvest that money into whatever type of investment you can get the best return from.

So, let’s say you have the following situation:

Investment (Plus Acquisition Costs): $100,000
Annual Return (After Taxes): $10,000
Reinvestment Rate: 6%
Holding Period: 5 Years
Sales Price (Minus Sales Costs and Taxes): $125,000

To simply sum up all of your cash flows, you would have made $75,000. But it’s actually more. Turning again to CCIM’s fancy calculator:

In this case, because you reinvest your earnings each year at 6 percent, you actually made a total of $81,371 ($181,371 – $100,000).

Conclusion

I have, of course, just barely scratched the surface of the concepts that CCIM goes into. These concepts are most useful for higher order and more expensive real estate investments, but if that is the direction you want to go in your business, you should strongly consider pursuing a CCIM. And of course, it will add to your credibility and provide an array of networking opportunities, as well.

Do you have your CCIM? Why or why not?

Leave your questions and comments below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.