1. Property operations
Lease terms, market rent, vacancy, recoveries, operating expenses, management, repairs and a defensible stabilized NOI.
Commercial property analysis BC
Is this commercial property a good investment?
A good investment is not defined by cap rate alone. It should produce an acceptable return after realistic vacancy, operating costs, financing, reserves, capital spending, tax and exit costs—and remain financeable in a downside case.
Short answerNormalize the NOI, model the debt and all owner cash flows, test refinancing and exit assumptions, then compare the risk-adjusted return with the owner's alternatives and concentration limits.
Underwrite the property in four layers
2. Financing
Loan-to-value, rate, amortization, debt service, covenants, renewal timing and the owner's guarantee exposure.
3. Owner cash flow
Down payment, closing costs, leasing costs, reserves, capital spending, tax considerations and distributions.
4. Exit and downside
Future NOI, exit cap rate, selling costs, refinancing, vacancy shocks, major repairs and concentration risk.
Start by testing NOI quality
Seller-presented NOI may exclude recurring management, understate repairs, assume full recoveries or include non-recurring income. Review the quality of NOI before applying a cap rate.
A cap rate also ignores financing and owner-level cash flows. See why cap rate is not cash flow.
Illustrative first-year cash view
| Normalized NOI | $420,000 |
| Annual debt service | ($285,000) |
| Capital and leasing reserve | ($45,000) |
| Pre-tax owner cash flow | $90,000 |
Illustrative only; tax and property facts vary.
Run the scenario the investment cannot control
- A tenant leaves or renews below expectations.
- Interest rates are higher at renewal.
- A roof, building system or environmental issue requires capital.
- Exit cap rates expand while NOI growth slows.
- The owner needs liquidity before the planned exit.
Fit matters as much as property return
Consider concentration across the owner's operating business, guarantees, personal balance sheet and other real estate. Use the real estate investment stress test to identify portfolio-level exposure.
General financial analysis, not appraisal, investment-product, legal or tax advice. Property, lease, financing and tax assumptions should be confirmed by the appropriate professionals.