DfwAg11 said:

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I am trying to learn how potential owners underwrite these deals and what makes a good investment from a bad one.

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I have zero experience with retail other than doing appraisals on some strip centers a decade ago. So probably not the best to answer. Best I can offer..

You have the building(s), the land, and the spaces inside the building. Most buildings have defined unit sizes for tenants, but some can be flexible. Each unit/space will be on a different term and most likely different price. Rentable space is priced in $/SF. Some owners/managers will offer gross, but most will offer NNN (triple net - lower priced lease but tenant is responsible for their share of taxes, insurance, and maintenance). Some owners might even have different types of leases in the same building. There's a lot more to do it, but that's the basics.

So if you are underwriting a 4-unit retail building with 8,000 SF of rentable space and they break down as follows..

Unit 1: 1,000 SF
Unit 2: 2,000 SF
Unit 3: 4,500 SF
Unit 4: 500SF

You would simply go somewhere like Costar, Loopnet, or Crexi and look up what similar retail unit sizes are going for in similar locations. Note if they are gross, NNN, or some other structure. Go on the county website and figure out the appraised value and tax rate and determine the taxes. Each year of your pro forma should include tax growth of at least 3%. Call some brokers (maybe even the one representing that building) and get an estimate for insurance. If they can give you an estimate for maintenance as well, great.

Here's the Q4 2025 report from Cushman & Wakefield q42025usretailmarketbeat.pdf
Here's Colliers list of reports Research That Matters | Colliers

Most national brokers offer sector and sometimes regional sector quarterly and national reports. Huge amount of info.

So figure out what rental rates are going for and plug them in. If the building has existing tenants and you can find what they are paying and their terms, even better. Structure each lease on a 5-10 year proforma (monthly over 5-10 years works even better). Sum up rent for each year as "Gross Potential Rent" as your top line. Factor in vacancy (can be small if all spaces are filled for 5 years. But try to assume 6m -1y vacancy for each unit upon termination of lease. Then assume a factor for bad debt (might be able to find that in the reports linked above). I would say 1% per year, but again, I have no experience with retail. Sum up the GPR, vacnacy loss, and bad debt loss for each month and year as your "Net Revenue". Add on taxes, insurance, and maintenance since tenants are paying lower and need to be billed that based on the SF they occupy. There might be some other income items but I probably wouldn't get too far in the weeds with that. So your net revenue plus NNN charges can be your EGI (Effective Gross Income). If you want to add a gross revenue multiplier to each year for market rent growth, do that off the top line. I would not go higher than 3% in an urban / suburban market, and probably no higher than 2.5% in a secondary or tertiary market.

Then you need to subtract expenses. Taxes, insurance, property management (might be able to find the going rate in those reports, or ask a broker), administrative costs, marketing costs, maintenance, contracts (landscaping, window cleaning, power washing, trash, etc) etc. Subtract out reasonable amounts to get your NOI (Net operating income). Take the NOI and divide it by market cap rate for that area (should definitely be able to get that from reports). Boom. There's a ballpark valuation.

If you know how size loans based on DSCR or debt yield, you can figure out how much loan the NOI can afford. But lenders will be more stringent on the underwriting, so try to be conservative where you can. If it comes out to 70% debt, then you will need 30% equity. But you will also likely need some capital. If the building is in good shape, it can be lower. But try to include a reasonable amount, as leaving yourself with little to no capital to operate with is not smart. Add that to the equity. Don't forget to add in a 0.50% - 1% lender origination fee, some stub payments, and general loan related items to your closings costs that are funded through additional equity.

Create an amortization schedule to figure out debt payments. I would use 200-300 basis points over the 5, 7, or 10 year treasury as your rate. Maybe you can get 2-3 years of interest only payments. Subtract the debt payments from your NOI. Subtract an amount for reserves (might find it in the reports, it usually depends on class of property). If you plan to take an asset management fee, this is where you subtract it out. Usually 1% of EGI.

What's left is cash flow. Divide by your total equity and you get Cash on cash return %. Anything below your cost of funds (or annual constant) and the price likely needs to be lower. You don't want to cash flow a less % of your equity than you are paying for the larger size of debt. Not unless you are creating value through remodeling or something where higher cash flows come in later years.

After that, all that's left is determining the IRR. Excel can do that and theres plenty of online tutorials. If you're likely at a property listed with a defined price, then instead of using NOI to determine value, you simply put in the price and divide the NOI into it to figure out the cap rate. I'm not familiar with retail cap rates, so those reports will likely come in handy for that.

I'm leaving out a bunch of nuts and bolts. You can make this stuff extremely detailed or extremely light. Essentially, a good deal should be one that sizes well for debt, cash flows decently on day 1, sizes to a market or above market cap rate, and doesn't require a ton of capital just to operate where the market is.

Lastly, check out A.CRE - Real Estate Financial Modeling, AI, Careers, Education. They have tons of models you can download. Might have to create an account, but most models should be free with the option to pay if you want to.

You have to learn to underwrite as if you were a firm buying it yourself. The best brokers know how owners look at things, so its awesome you're asking.