Break-Even Ratio Calculator
Break-even ratios are useful in determining the strength of an investment, but the metric is also important for many lenders. Calculate your property's BER here.
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What Is a Break-Even Ratio?
The break-even ratio, or BER, is an important calculation in industrial real estate investment — both for borrowers and lenders. The metric is the percentage of a property’s gross operating income required for the asset to cover its expenses. In other words, a break-even ratio indicates the level of occupancy your property must have to pay for all costs, including debt service.
Why Are Break-Even Ratios Important?
The break-even ratio is important to investors as a way of identifying potentially strong investments. If you are looking to invest in a distribution center, and you find out its BER is 95%, you may think twice about that acquisition. If one tenant moves out or downsizes, you may not be able to cover your costs. On the other hand, if an investment has a lower ratio — say, 75% — that will allow for significantly more wiggle room if things don’t go according to plan.
Lenders are also interested in a property’s BER as a way of identifying higher-risk loans. If a property’s ratio is 90%, and the market has an average occupancy of around 85%, this could raise some red flags. That said, many industrial mortgage lenders place greater importance on an asset’s debt service coverage ratio, or DSCR, but utilizing a break-even ratio is one way to assess default risk.
What Is a Good Break-Even Ratio?
In commercial real estate, an 85% break-even ratio is often cited as the maximum most lenders or investors should accept. With industrial real estate in such high demand, an investor may be tempted to throw caution to the wind and accept a ratio a bit higher than that. That may be unwise, however: Consider your investment’s in-place leases and when they expire. If you have a BER of 90% and most of your tenants’ leases expire in a single year, that may be a very difficult year — even if the market is still going strong.
What You Need to Calculate a Break-Even Ratio
To determine your return, you need three figures.
First, you need your property’s annual gross operating income, or GOI. This would include all your rental income, calculated at full occupancy, plus any other property revenues, such as parking fees or vending machine income.
Second, calculate your operating expenses. Include everything from third-party property management fees to normal maintenance costs, unless tenants are responsible for those.
Finally, you will need your annual debt service costs.
Once you have these data points, add them to the calculator below.
Break-Even Ratio Calculator
Break-Even Ratio Formula and Example
Break-Even Ratio = (Debt Service + Operating Expenses) ÷ Gross Operating Income
As an example, let’s examine a 100,000-square-foot warehouse. If the property is fully leased, rental revenues would be $500,000 per year. Add in some parking fees and other revenues, and your gross operating income for the year comes to $510,000.
You determine your total operating expenses for the year will be $250,000.
If you acquire the property, you know your mortgage payments will be $15,000 per month, or $180,000 per year.
Break-Even Ratio = ($180,000 + $250,000) ÷ $510,000
Break-Even Ratio = $430,000 ÷ $510,000
Break-Even Ratio = 84.3%
In this example, your break-even ratio comes to 84.3%. While that’s less than the general ceiling of 85%, it’s still awfully close. Given the often inexact nature of calculating operating expenses, it’s worth reviewing those calculations to ensure they are as accurate as possible. Also, keep in mind that in triple net-leased properties, most operating expenses are borne by the tenants, not the investor, and so would be excluded from this calculation.
In any case, you may wish to compare this BER with that of other investment opportunities to see if there are any potentially better choices. A lower break-even ratio could result in better, more competitive financing terms for your industrial acquisition, after all.