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Saturday, October 22, 2011

Understanding the Gross Rent Multiplier (GRM)

Because most commercial real estate properties are for investment, the decision by an investor to purchase the commercial property is primarily based upon a financial performance analysis of the asset.  A couple months ago, we discussed CAP rates, one of the fundamental components of the financial analysis.  Another primary component is the Gross Rent Multiplier.

What is the Gross Rent Multiplier (GRM)?

The GRM is calculated as follows:

GRM = Price/SGI, where SGI is the Scheduled Gross Income of the asset and Price is the price of the property. The GRM is a function of Price and Income. To better understand the GRM, we can use algebra to change the calculation so that Price = GRM X SGI.  This formula demonstrates that the Price is expressed by the GRM in relative “multiples” or “orders of magnitude” of the annual income.

For example, if an investor purchases a commercial property for \$1,000,000 and the Scheduled Gross Income is \$95,000, then the GRM = \$1,000,000/\$95,000 = 10.5. Therefore, in this case the \$1,000,000 Price is 10.5 times the Scheduled Gross Income of \$95,000.

GRMs may vary substantially by geographic submarket for investment products within the same asset class, and may also vary over time throughout a real estate economic cycle. GRMs are identified as “current” or “market” (proforma) rates.

Of course, the commercial property’s Scheduled Gross Income (SGI) is needed for the GRM calculation. The SGI is determined from the asset’s rental income (Rent Roll). An investor (buyer) typically obtains the necessary financial information by requesting it from the seller or the seller’s agent prior to executing a commercial real estate sales transaction.

It is customary that the sale transaction purchase contract sets forth the details by which the buyer and his agent verifies or determines a GRM and other important components of his financial analysis by his own due diligence work while in escrow.

4:55 pm pdt

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