Commercial Investors: Do You Factor Exit Cap Rates in Your Underwriting?

Question

When running numbers, do you underwrite conservatively with higher exit cap rates, or assume stability and focus on current income?

Ronald Rohde · Answer

I underwrite cap rate expansion unless we touch all surfaces for renovation or place a credit tenant.

Henry Clark · Answer

OP. We always underwrite the same way when discussing with our lenders.

1. Occupancy rate of 90%.

2. Cost overrun of $100,000. Size relative to our projects.

3. Rental Rate failure by 10%.

4. Financing impact- interest rate adjustment of 1% point at a 5-year balloon.

We do each one of the above independently and not altogether. My failure twice has been to not include the interest cost during construction. Part of our modeling now.

OP. As a lender, what adjustments do you normally have to make to deals coming to you?

Commercial Investors: Do You Factor Exit Cap Rates in Your Underwriting?

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