Commercial property is valued off income, so the underwriting has to be precise. This analyzer builds effective gross income from gross rent, other income and vacancy or credit loss, subtracts operating expenses including owner-paid CAM, and produces true NOI, cap rate, annual and monthly debt service, DSCR, debt yield, cash flow and cash-on-cash return. It also projects future NOI and an estimated exit value at your target exit cap rate.
What's included
- Effective gross income with vacancy and credit loss
- Owner-paid CAM as its own expense line
- True NOI and cap rate on purchase price
- Amortizing debt service with separate amortization period
- DSCR and debt yield for lender screening
- Annual and monthly cash flow plus cash-on-cash return
- Projected future NOI and estimated exit value at a target cap rate
Commercial underwriting starts with the lease structure
Who pays which expense changes NOI entirely. Under a triple-net lease the tenant covers taxes, insurance and maintenance; under a gross lease the owner does. Owner-paid CAM is broken out separately here for exactly that reason. Before entering numbers, read the leases: rent escalations, expense reimbursements, renewal options and remaining term drive both income and risk.
Why DSCR and debt yield matter more here
Commercial loans typically have shorter terms than their amortization schedules, meaning a balloon or refinance event years before the loan is repaid. Lenders size those loans with DSCR and debt yield, so a deal that fails those tests either does not get financed or gets financed on worse terms. Checking both before you go to a lender saves weeks.
How to interpret the exit value projection
Exit value is the least reliable figure in commercial underwriting because it depends on a cap rate years in the future. Run it with an exit cap rate above your entry cap rate — that is the conservative case, since rising rates generally push cap rates up and values down. If the deal only works because you assumed cap rate compression, you are underwriting a market forecast rather than a property.
Key formulas
Effective Gross Income = (Gross Rent + Other Income) × (1 - Vacancy %) True NOI = Effective Gross Income - Operating Expenses Cap Rate = NOI / Purchase Price Annual Debt Service = Monthly Amortizing Payment × 12 DSCR = NOI / Annual Debt Service Debt Yield = NOI / Loan Amount Cash-on-Cash = Annual Cash Flow / (Down Payment + Closing Costs) Estimated Future Value = Future NOI / Target Exit Cap Rate Future NOI = Current NOI × (1 + NOI growth)^hold years
Worked example: $1.5M building with $180,000 gross rent
- Gross rent $180,000 + other income $6,000 = $186,000; vacancy and credit loss 8% → EGI $171,120
- Operating expenses: taxes $22,000 + insurance $9,000 + management $7,500 + maintenance $12,000 + owner-paid CAM $8,000 + utilities $6,000 + other $4,000 = $68,500
- True NOI: $171,120 - $68,500 = $102,620 → cap rate 6.84%
- Loan: 30% down ($450,000) → $1,050,000 at 7.25% over 25 years = $7,585/month, $91,020/year
- DSCR: $102,620 ÷ $91,020 = 1.13x · debt yield: $102,620 ÷ $1,050,000 = 9.8%
- Annual cash flow: $102,620 - $91,020 = $11,600 → cash-on-cash 2.4% on $480,000 invested
- Exit: NOI growing 3% for 5 years = $118,970; at a 7.5% exit cap rate → about $1,586,000
DSCR of 1.13x sits below the 1.25x many lenders want, so this deal likely needs a lower price, more equity or higher NOI to finance comfortably.
Frequently Asked Questions
What DSCR do commercial lenders require?
Commonly 1.20x–1.35x depending on asset type, tenant quality and loan program. Riskier property types and shorter lease terms usually mean higher requirements.
What is debt yield and why does it matter?
Debt yield is NOI divided by the loan amount. It tells a lender the return they would earn if they took the property back, independent of interest rate. Many lenders set a floor around 9–10%.
How should I choose an exit cap rate?
Conservative underwriting uses an exit cap rate at or above your entry cap rate. Assuming cap rate compression means betting on market conditions rather than on the property's performance.
Does this work for triple-net properties?
Yes. Set owner-paid expense lines to zero or a small amount for items you still carry, and be careful to include any expenses that revert to you during vacancy.
Is this a substitute for professional underwriting?
No. LocateMyWealth tools are provided for educational and planning purposes only. Results depend on the assumptions entered and are not financial, tax, legal, lending or investment advice.
Educational tool only — results are hypothetical projections from your assumptions, not financial, tax, legal or investment advice.