Lease structure changes everything
Gross leases (tenant pays rent, landlord pays taxes/insurance/maintenance) require ~35–45% opex assumptions. Absolute NNN leases (tenant pays all) can run 3–7% opex. The same building, same rent, has wildly different NOI depending on which lease type sits in place.
- • NNN: tenant pays taxes, insurance, CAM. Landlord opex is minimal.
- • Modified gross: landlord pays some operating costs, tenant reimburses excess.
- • Full-service gross: landlord pays everything. Common in older office.
Exit cap rate is the silent variable
A 50 bps cap-rate expansion on a stabilized commercial asset can erase 10–20% of value. Always stress-test exit cap +50 bps and +100 bps from your going-in assumption — if the deal only works at a compressed exit, it's a speculation, not an investment.
Tenant credit + WALT matter as much as cap rate
A 7% cap on a 10-year lease with an investment-grade tenant is a fundamentally different asset than a 7% cap on a month-to-month mom-and-pop. Weighted Average Lease Term (WALT), tenant credit, and lease renewal probability are baked into a real underwriting model — they don't show up in a back-of-envelope cap rate.
FAQ
What's a good cap rate for commercial property?
Class A urban industrial trades 5–6%, Class B multifamily 5.5–7%, suburban office 7–9%, single-tenant NNN retail 5.5–7% depending on tenant credit. Cap rates move with interest rates — what was a 'good' cap in 2021 is a different number in 2026.
What's the difference between cap rate and cash-on-cash?
Cap rate is unleveraged — NOI / price. Cash-on-cash is leveraged — annual cashflow after debt / cash invested. Always quote both.
Why does the calculator use a 5-year exit?
Most commercial deals are underwritten on a 5–10 year hold. Year-5 exit is the standard institutional baseline and matches typical bridge or 5-year fixed loan terms.
Does it model rent growth?
This is a year-1 stabilized model — it does NOT compound rent growth into the exit NOI. For a full pro forma with year-by-year rent escalators, build it out in Excel with this as your year-1 baseline.
Can I use this for syndications?
It's a good sponsor-side underwriting check. For LP-facing returns, layer on acquisition fees, asset management fees, the waterfall split, and refinance assumptions.