Pillar Post · Advisory Posture
When we tell a client we've "underwritten the deal," that phrase covers a lot of ground. Underwriting in commercial real estate is the difference between a recommendation that holds up under stress and one that looks good only on a clean trailing twelve months. We use a defined set of analytical tools across every engagement — the same tools, in the same order, every time — because consistency is what makes the analysis comparable across deals and defensible to clients.
These eight tools are the working core of our financial analysis. Each one answers a specific question. Run together, they produce the picture an investor or owner needs to make a real decision.
NOI is the foundation. Everything else builds on it. Gross rent and other income, less operating expenses (taxes, insurance, utilities, maintenance, management, reserves), produces NOI. The number itself is straightforward; the analysis is in the assumptions behind it.
The questions that matter: are the rents at, above, or below market? Are operating expenses normalized for ownership transition (often new owners face different property tax assessments, insurance carriers, and management arrangements than the seller)? Is there appropriate reserve for capex that doesn't appear in the trailing operating statement? Are there income line items (parking, vending, late fees) that are non-recurring or non-transferable?
A clean trailing-twelve-month NOI from the seller is a starting point, not an answer. We rebuild NOI from the lease abstracts and an independent expense underwriting.
Cap rate (NOI divided by purchase price) is the most-cited and most-misunderstood metric in CRE. It's a snapshot, not a return — it tells you what the unleveraged yield looks like at a single point in time, before debt and before any rent or expense changes.
Where cap rate analysis becomes useful is in comparison. We pull recent comparable transactions across asset class, sub-market, tenant credit, lease length, and condition, and triangulate where the subject property should price relative to that set. Cap rates in Eastern NC vary materially across sub-markets and asset classes — industrial in a strong corridor trades meaningfully tighter than secondary retail in a smaller market — and applying a regional average to a specific deal is a recipe for mispricing.
We track cap rate data from sources we trust (Boulder Group for net lease, market-specific brokerage reports, our own transaction observations) and document the basis for the cap rate range we apply to each deal. When we use judgment in the absence of perfect comps, we say so.
NOI is a single year. Cash flow projection extends it across the hold period, year by year, accounting for lease escalations, expected rollover, market rent assumptions on renewals, expense inflation, capex events, and debt service if leveraged.
This is where the picture starts to look different from a single-year cap rate. A property with a tenant rolling in year three at meaningfully below-market rent looks like one thing in year one and a different thing in year four. A property with deferred capex coming due in year five has a return profile that differs from one without it.
We build five- to ten-year cash flow models for every acquisition or hold-vs-sell engagement, with assumptions visible and labeled.
DSCR — NOI divided by annual debt service — is the lender's primary underwriting metric and a critical investor metric. It tells you how much cushion the property's cash flow has to cover its debt obligations.
Lenders in Eastern NC commercial real estate typically require DSCR of 1.20x to 1.35x, depending on asset class, tenant credit, and lender type. Below that, the loan doesn't size to the price, and the deal either requires more equity or doesn't pencil at the lender's terms.
DSCR also matters for stress testing. A deal that pencils at 1.40x today but projects to 1.10x in year four if a major tenant rolls and re-tenants at lower rent is a deal with embedded risk that cap rate alone doesn't reveal.
Break-even occupancy and break-even rent answer a simple question: how much can things go wrong before the property stops covering its debt service and operating costs?
We calculate break-even occupancy as the occupancy level at which NOI equals debt service plus essential operating expenses. A property that breaks even at 65% occupancy has more cushion than one that breaks even at 85%. Same with break-even rent — the rent level required to cover obligations versus what's currently in place.
Break-even analysis is particularly important for buildings with concentrated tenant exposure or with rent rolls meaningfully above current market. It's the test that surfaces whether a deal works only on its current cash flow or whether it can withstand the kinds of disruptions that happen across a real hold period.
For owners, the question often isn't "should I buy this," it's "should I hold what I already own." The Hold vs. Sell tool runs the comparison: projected cash flow plus terminal value if held versus net sale proceeds redeployed at a defensible return assumption.
The framework requires explicit assumptions on both sides — exit cap rate, alternative redeployment yield, tax treatment of the sale (recapture, capital gains, 1031 if applicable), and the timing of redeployment. The output is rarely close to a coin flip; one side typically wins by a meaningful margin once the assumptions are honest. The work is in making the assumptions honest.
We run this on every owner engagement where a sale is being contemplated — including engagements where we may be the listing broker. Sometimes the answer is "don't sell." We say so when it is.
Loan sizing translates DSCR and lender LTV constraints into the actual loan amount available against a given price. This is more involved than it sounds because lender constraints stack — the binding constraint may be DSCR, may be LTV, or may be a debt yield floor depending on the lender and the asset.
In Eastern NC, community banks remain a primary lender source for industrial and small-to-mid commercial assets, with life companies and CMBS more common on larger and longer-leased deals. Each lender type has different stack, different recourse posture, and different appetite for specific asset classes. Loan sizing has to reflect which lender pool actually wants the deal, not a generic blended assumption.
The implication for buyers: the loan you can actually get often determines the equity check required, which determines the levered return, which determines whether the deal is competitive. Mis-sizing the loan early in underwriting leads to deals that look attractive on paper and fall apart in financing.
For owners selling commercial real estate where 1031 deferral is on the table, the timeline runs the deal as much as the price does. Forty-five days from sale closing to identify replacement property; 180 days from sale closing to actually close on it. Miss either window and the deferral is lost.
Our role on 1031 engagements is the replacement real property side. We help clients identify, underwrite, and close on replacement assets within the deferral window, working alongside their qualified intermediary. We don't quote yields on DSTs, recommend specific syndication sponsors, or advise on the securities side of 1031 alternatives — those are securities products that require separate licensure, and we refer those questions to licensed partners.
The honest version of 1031 work: the timeline is tight, the inventory of suitable replacement properties is often constrained, and the temptation to force a fit on something marginal is real. The discipline is to know when the right answer is "pay the tax and reset" rather than acquire a replacement that doesn't actually fit the portfolio.
These eight tools aren't independent. NOI feeds into cap rate analysis and cash flow projection. Cash flow projection feeds DSCR and break-even. DSCR and LTV feed loan sizing. Loan sizing feeds the equity requirement, which feeds the levered return calculation. Hold vs. Sell pulls from the cash flow projection and the cap rate analysis to compare scenarios. The 1031 timeline shapes which deals are actionable for which clients.
Run together, they produce a picture of the deal that's coherent, stress-tested, and based on assumptions a client can challenge and adjust. That's the underwriting standard we apply to every engagement, regardless of size.
Want to see what this analysis looks like applied to a specific deal? Our Investor Toolkit walks through each of these tools with worked examples. Owners considering a sale, hold, or acquisition decision can request a portfolio review directly.