Mortgage Constant

The mortgage constant (also called the loan constant) is the annual debt service expressed as a percentage of the total loan amount. It represents the true annual cost of the loan including both principal and interest. For example, a $1,000,000 loan with annual debt service of $75,000 has a mortgage constant of 7.5%. This metric is critical for NNN investors because it determines whether leverage is positive or negative. Positive leverage occurs when the cap rate exceeds the mortgage constant - meaning the property generates more income than the cost of debt. Negative leverage occurs when the mortgage constant exceeds the cap rate, meaning leverage actually reduces returns. At a 6.5% mortgage rate with 25-year amortization, the mortgage constant is approximately 7.8-8.0%, meaning NNN cap rates must exceed this threshold for positive leverage.

Mortgage Constant is a key concept that affects property valuation, financing decisions, and investment returns in the triple net lease market. Understanding Mortgage Constant helps investors make informed acquisition and management decisions.

Mortgage Constant directly influences how commercial properties are valued, financed, and traded. Changes in Mortgage Constant can impact cap rates, NOI calculations, and overall investment performance for net lease properties.

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