How to underwrite a multi-tenant retail deal
Worked on a 73,000 SF grocery-anchored centre. Three things here behave unlike any other asset class — percentage rent, expense recoveries, and co-tenancy clauses that turn one departure into several.
A 73,000 SF centre, worked
Sample inputs
- Gross leasable area
- 73,000 SF
- Occupancy
- 95.1%
- Base rent, annual
- $1,002,400
- Percentage rent
- $24,000
- Recoverable expenses
- $4.75/SF
- Purchase price
- $12,900,000
- Loan
- $7,740,000 @ 6.75%
A grocery-anchored neighbourhood centre: one anchor, six inline tenants and one empty unit. The anchor is on a long lease at a low rate; the shops pay two to three times as much per foot on shorter terms.
| Suite | SF | Rate | Annual rent | Percentage rent |
|---|---|---|---|---|
| Anchor grocer | 45,000 | $11.00 | $495,000 | — |
| 101 — QSR | 3,000 | $30.00 | $90,000 | 6% over $1.5M |
| 102 — Salon | 1,600 | $28.00 | $44,800 | — |
| 103 — Cleaner | 1,500 | $26.00 | $39,000 | — |
| 104 — Gym | 12,000 | $14.00 | $168,000 | — |
| 105 — Medical | 4,500 | $24.00 | $108,000 | — |
| 106 — Coffee | 1,800 | $32.00 | $57,600 | — |
| Vacant | 3,600 | — | — | — |
Base rent totals $1,002,400. After percentage rent and recoveries, and after the expenses, NOI is $955,058 — a 7.404% cap rate on the $12,900,000 price, covering the debt 1.585 times at a 12.339% debt yield.
That is a comfortable-looking deal. The rest of this page is about the three ways retail can undo it.
1. The anchor's real share is not the one on the site plan
The anchor occupies 61.6% of the gross leasable area. It contributes 49.4% of the base rent.
Those are very different numbers and the second is the one that matters. Anchors sign long leases at low rates precisely because they generate the traffic the inline rents are priced off — $11.00 a foot against $26 to $32 for the shops.
A concentration figure read off square footage overstates the anchor and understates the shops. The leased inline suites are 33.4% of the area and 50.6% of the base rent — which also means they are where the rollover risk lives: shorter terms, higher rates, and six of them against one anchor.
2. Percentage rent, and the breakpoint most people get backwards
The quick-service restaurant pays 6% of sales above a natural breakpoint. Natural means the breakpoint is not a number the lease states — it is derived from the base rent: $90,000 ÷ 6% = $1,500,000.
At $1,900,000 of sales, the excess is $400,000 and percentage rent is $24,000. Below $1,500,000 it is zero — never negative, and never an offset against base rent.
Underwrite it as its own line. It is real income and it is the first thing to vanish in a soft year for that one tenant, so folding it into base rent overstates the quality of the income even when the amount is exactly right. It also disappears entirely in the scenario below, because it rides on the traffic the anchor brings.
3. The vacant unit costs you twice
The centre carries $4.75 per foot of recoverable expense — common area maintenance, taxes and insurance — which is $346,750 across 73,000 feet. Tenants reimburse their proportionate share, so 69,400 leased feet recover $329,650.
The landlord carries the other $17,100. That is the vacant unit’s share, and it is on top of the rent it is not paying.
It is a small number on this centre and it is the principle that matters: in a recovery-bearing property, vacancy is a double hit, and a model that treats it as lost rent alone is understating it every time.
A 49.4% anchor that takes 60.9% of the rent with it
This is the mechanism that makes retail its own asset class. Four of the six inline leases carry co-tenancy clauses, and they all fire on the same event.
- 23.1% of base rent is exposedThe QSR, the salon, the cleaner and the coffee shop each drop to half rent if the anchor goes. The gym and the medical suite have no clause.
- Rent falls from $1,002,400 to $391,700A 60.9% reduction driven by an anchor worth 49.4%. The extra eleven and a half points are the clauses.
- And the percentage rent goes tooIt rides on anchor traffic, so it is zeroed in the same scenario rather than surviving alongside reduced base rent.
Co-tenancy stress test
If the anchor grocer (49.4% of base rent) leaves at expiry
- 101 QSR, 102 Salon, 103 Cleaner, 106 Coffee−$115,700/yr
Co-tenancy clauses cut rent to 50%
- Anchor grocer−$495,000/yr
Rent ends entirely
- 104 Gym, 105 MedicalNo change
No co-tenancy clause
Base rent falls 60.9% to $391,700. NOI drops to $320,358, the cap rate to 2.483% and coverage to 0.53x — the deal stops paying its debt.
What the stress test is actually saying
Coverage goes from 1.585x to 0.532x. A deal comfortably paying its debt stops paying it at all. NOI falls from $955,058 to $320,358, and the cap rate on the price you paid goes from 7.404% to 2.483%.
This is the anchor leaving, not going dark while continuing to pay rent. Those are different events and the second is much less severe — a dark box still servicing its lease costs you traffic and triggers some clauses, but not the $495,000.
The finding is not that this centre is uninvestable. It is that the anchor lease expiry date is the most important number in the deal, and that a co-tenancy clause a rent roll records as a blank column is worth reading every single time. The gym and the medical suite carry none, and that is why almost 40% of the income survives.
What to check before you believe a retail pro forma
- When does the anchor lease expire, and what are the options? Everything else on this page is downstream of that date.
- Which leases carry co-tenancy, and on what trigger? They vary enormously — what counts as the anchor, what counts as going dark, what remedy is granted.
- Is percentage rent shown as base rent? It should be its own line, and it should be sized off actual reported sales rather than a projection.
- Who carries the recovery on vacant space? The landlord does, and a pro forma that recovers 100% of expenses at less than 100% occupancy has an error in it.
- Are recoveries grossed up? Many leases allow it, and whether the seller has applied it materially changes the income.
- Is there a replacement reserve? Parking lots and roofs are the two largest capital items in a centre and both come due eventually.
Questions people ask
What makes underwriting retail different from office or industrial?
Three things that do not exist elsewhere. Percentage rent means income moves with a tenant's sales. Co-tenancy clauses mean one departure can trigger rent reductions across the centre. And expense recoveries are large enough relative to base rent that how they are calculated changes the answer materially.
How is percentage rent calculated?
A tenant pays a percentage of sales above a breakpoint. With a natural breakpoint — the common case — the breakpoint is the base rent divided by the percentage, so a suite at $90,000 with a 6% rate breaks at $1,500,000 of sales. Above that, the landlord takes the rate on the excess. Below it, percentage rent is zero, not negative.
Should I underwrite percentage rent as income?
Cautiously, and separately from base rent. It is real income and it is also the first thing to disappear in a bad year for that tenant. Treating it as equivalent to contractual base rent overstates the quality of the income even when the amount is right.
What is a co-tenancy clause and why does it matter so much?
A provision letting a smaller tenant cut rent or leave if an anchor closes or occupancy falls below a threshold. It matters because it converts one vacancy into several. On the centre worked through on this page, an anchor at 49.4% of base rent takes 60.9% of the rent with it when it goes, because four inline clauses fire at the same time.
How do expense recoveries work in retail?
Tenants reimburse their proportionate share of common area maintenance, taxes and insurance. The share is usually their square footage over the centre's, which means the landlord carries the share attributable to vacant space. In a centre with $4.75 per foot of recoverable expense, every empty square foot costs you the rent and the recovery.
What occupancy should I underwrite for a retail centre?
Start from the centre's actual occupancy and be explicit about the path to whatever you assume it reaches. The more important question in retail is usually not the percentage but which space is empty — 3,600 feet of inline is a leasing problem, and the same footage of anchor space is a different deal entirely.
Keep reading
Co-tenancy stress test
The model behind the number on this page.
Percentage rent calculator
Run a breakpoint yourself. Free, no signup.
CAM charges explained
How the recovery side actually works.
Multifamily, worked
The other asset-class guide, with its own arithmetic.
What is a rent roll?
The table all of this is derived from.
NNN, gross and modified gross
Which structure decides who pays the recoveries.
Read the co-tenancy clauses before you price the centre.
Upload the leases and DealWise reads the co-tenancy language, the percentage rent terms and the recovery structure out of each one, then models what an anchor departure would actually trigger. Free plan, no credit card.