How to Analyze a Commercial Real Estate Deal

The rent roll is the foundation of every commercial real estate analysis. It tells you who’s paying rent, how much, on what lease terms, and when those leases expire. Examine each tenant’s lease type (NNN, gross, modified gross), rental rate per square foot, lease commencement and expiration dates, and any escalation clauses. Calculate in-place gross rent, effective gross income after vacancy, and weighted average lease term (WALT). A rent roll with long-term, credit-worthy tenants on NNN leases is fundamentally different from a month-to-month multi-tenant situation — even if the gross rent is identical.

Request trailing 12-month operating statements and compare them against market norms for the asset class and geography. Key expense categories include property taxes, insurance, CAM/common area maintenance, repairs and reserves, and management fees. Watch for owner-reported expenses that omit management fees (because the owner self-manages) or understate reserves. Lenders will normalize these when underwriting, and your analysis should too. Express expenses on a per-square-foot basis so you can benchmark against comparable properties.

NOI equals effective gross income minus operating expenses. This is the property’s operating profit before debt service, capital expenditures, and taxes. Calculate both in-place NOI (using current actual income and expenses) and stabilized NOI (projecting market rents, normalized vacancy, and market-rate expenses). The gap between in-place and stabilized NOI defines the value-add opportunity — or lack thereof.

With NOI and your financing assumptions, calculate the key metrics: cap rate (NOI ÷ purchase price), cash-on-cash return (annual pre-tax cash flow ÷ total equity invested), DSCR (NOI ÷ annual debt service), and price per square foot. Compare these against market benchmarks for the asset class. A deal that pencils at a 7% cap rate in a market where comparable properties trade at 6% either has hidden risk or is genuinely undervalued — your job is to figure out which.

Numbers only tell part of the story. Evaluate lease rollover concentration (what percentage of rent expires in the next 12, 24, and 36 months), tenant credit quality (publicly traded companies vs. local small businesses), market fundamentals (vacancy trends, new supply, rent growth trajectory), physical condition (deferred maintenance, environmental issues, ADA compliance), and location-specific risks (zoning changes, traffic pattern shifts, competitive developments). A property with strong current metrics but three leases expiring in 18 months is a different risk profile than one with the same NOI locked in for 10 years.

Every investment needs a disposition strategy. Model your exit by projecting NOI at the end of your hold period, applying an exit cap rate (typically 25–75 basis points higher than your going-in cap rate to account for aging), and deducting selling costs (typically 2–3% of the sale price). Calculate the total equity return including cumulative cash flow during the hold period plus the net sale proceeds. If the total return doesn’t meet your target IRR, either renegotiate the purchase price or pass on the deal.