Internal rate of return (IRR) and equity multiple are the two most-cited return metrics in commercial real estate. They measure different things and can disagree dramatically. A deal that hits 20% IRR over 3 years generates a 1.7x multiple; a deal that hits 12% IRR over 10 years generates a 3.1x multiple. Experienced LPs look at both.
IRR: Annualized Return
IRR is the annualized return rate where the NPV of cash flows equals zero. It captures time value: earlier cash flows are worth more. IRR favors short-hold, high-velocity strategies (value-add, conversion, flips) and penalizes long-hold core strategies. NYC value-add multifamily targets 13-18% IRR; conversion deals 18-25%; core ground leases 7-10%.
Equity Multiple: Absolute Return
Equity multiple is total cash distributions ÷ total equity invested. It captures absolute return regardless of timing. Multiple favors long-hold core and core-plus strategies. A 10-year hold at 10% IRR returns a ~2.6x multiple, which is substantial capital growth even though the annualized return looks modest. Manhattan trophy ground leases routinely produce 2.5-3.5x multiples over 10-15 years.
Why Both Matter
IRR can be gamed: pull cash forward with leverage and the IRR inflates even though the absolute return is the same. Multiple can't be gamed but doesn't reflect the cost of capital. LP investment committees evaluate both, plus deployment rate (how quickly capital is deployed across the fund), exposure concentration, and risk-adjusted return. The cleanest underwrites disclose both and explain which target is binding.
Structuring to Hit Targets
NYC commercial real estate sponsors structure deals to hit both metrics. Typical: 60-70% LTV senior debt to lift levered IRR, a 5-7 year hold to balance velocity and absolute return, a recap or refi at year 3-4 to return some equity tax-deferred (boosting multiple efficiency), and an exit cap rate assumption that doesn't require heroic compression. Each lever has a trade-off. More leverage boosts IRR but raises risk; recap timing affects DSCR and refi proceeds.
- Never look at IRR without the equity multiple. A short-hold, high-IRR deal can deliver less absolute return.
- Skyline Properties’ acquisition advisory uses dual-metric scoring on every assignment.
- Stress IRR and multiple against base, downside and severe-downside scenarios. Single-point estimates mislead.
- For 1031 exchangers, evaluate the deferred-tax-on-multiple framework, not just nominal IRR.
Robert Khodadadian and Skyline Properties have run acquisition underwriting and exit modeling on hundreds of NYC commercial real estate transactions across $976M+ of closed deals. Email info@skylineprp.com for confidential IRR + multiple analysis on a specific candidate.