Underwriting a Small Retail Strip: A Worked Example

A Fictional Retail Strip to Practice On

This example uses assumed figures to show the calculation steps. It is not a property offering, market benchmark, appraisal, or lender quote. Actual underwriting requires the leases, rent roll, payment records, operating statements, capital needs, and financing terms.

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Step 1: Gather the Starting Inputs

Start with these records, then list the supporting documents and specialist reviews you still need.

The Core Inputs

• Rent roll
• Current expenses
• Market rents
• CAP rates
• Vacancy, taxes, and insurance trends

Quick Intake Script for Owners

Use this when you’re on the phone with a seller or co-broker:

Example Script: “Before I run numbers, can you walk me through base rents, reimbursements, and any major expenses? I don’t need exacts; ranges are fine. I’m just looking for the operating picture.”

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Step 2: Build the Income Stack

Separate documented current operations from projections. The following table is fictional.

Example Rent Roll

Tenant	SF	Rent/Month	Annual Rent/SF	Notes
Nail Salon	1,200	$2,000	$20.00	NNN
Cell Repair	1,000	$1,800	$21.60	NNN
Vape Shop	900	$1,700	$22.67	NNN
Boutique	1,100	$1,600	$17.45	NNN

Monthly base rent = $7,100 Annual base rent = $85,200

Add Reimbursements (If NNN)

Assume tenants reimburse $6/SF for CAM, taxes, and insurance: Total building SF = 4,200 → $25,200 in reimbursements.

Total Income

Income before vacancy and credit loss = Base Rent ($85,200) + Reimbursements ($25,200) = $110,400

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Step 3: Apply Vacancy and Credit Loss

Consider vacancy and collection losses even when the rent roll is fully leased. Do not deduct losses twice from income already adjusted for them.

Illustrative Assumption

Use 5% in this example only. Support the actual allowance with the property’s history, lease rollover, tenant information, and market evidence. Vacancy/Credit Loss = $110,400 × 0.05 = $5,520

Adjusted EGI

Adjusted EGI = $110,400 − $5,520 = $104,880

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Step 4: Include the Reimbursed Costs

Reimbursements are income, but the corresponding taxes, insurance, and CAM remain expenses. Omitting those expenses overstates NOI. Assume the following costs, with no overlap between reimbursable costs and additional owner maintenance:

• Taxes, insurance, and CAM reimbursable under the assumed leases: $25,200
• Management: $4,195 (4% of EGI, rounded)
• Additional owner-paid repairs and maintenance: $6,000
• Other operating expenses: $2,000

Total operating expenses: $37,395

Keep the assumed $4,200 annual capital reserve below NOI. It is included later in the cash-flow illustration. Real lease obligations and expense definitions require document review.

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Step 5: Calculate NOI

NOI = Effective Gross Income − Operating Expenses

NOI = $104,880 − $37,395 = $67,485

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Step 6: Illustrate Value at an Assumed Cap Rate

Assume a 6.75% cap rate for the calculation. This is not a verified current market cap rate. A real analysis needs relevant comparable evidence and adjustments.

Value = NOI ÷ Cap Rate

$67,485 ÷ 0.0675 = $999,777.78, or about $1 million.

Cap rate is an unleveraged operating-income ratio. It does not represent total annual return and excludes financing, capital spending, transaction costs, investor income taxes, and appreciation.

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Step 7: Illustrate Cash Flow and Cash-on-Cash Return

Use a rounded $1 million purchase price and these additional fictional assumptions:

• 70% loan-to-value: $700,000 loan
• Down payment: $300,000
• Closing costs and initial reserves: $25,000
• Total cash invested: $325,000
• Annual debt service: $55,000, assumed solely for this example, not derived from a lender quote
• Annual capital reserve contribution: $4,200

Cash flow after assumed debt service and reserve contribution:

$67,485 − $55,000 − $4,200 = $8,285

Illustrative cash-on-cash return:

$8,285 ÷ $325,000 = 2.55%

This is before investor income taxes and any further capital spending or cash requirements. Actual loan terms, closing costs, reserves, and operating results may differ.

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Step 8: Identify the Upside (Realistic Only)

Identify possible changes, then estimate their costs, timing, and risks before treating them as upside.

Common Upside Levers

• Under market rents
• Signage upgrades
• Lease extensions
• Cosmetic exterior work
• Small-tenant rollover opportunities

Example Upside Statement

“As a sensitivity test only, an additional $9,000 of annual NOI would produce $76,485 of NOI. At the same assumed 6.75% cap rate, indicated value would be about $1.13 million. This does not establish that higher rent is achievable or that the cap rate will stay the same.”

A real plan also needs renewal probabilities, downtime, tenant improvements, commissions, capital costs, and evidence for the rent assumptions. Deduct the applicable costs and test less favorable outcomes.

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Step 9: Summarize the Assumptions

Hypothetical Investor Email

Subject: Practice underwriting summary: four-tenant retail strip

“Using the fictional assumptions above:

• Annual NOI: $67,485
• Assumed cap rate: 6.75%
• Indicated value: about $1 million
• Cash flow after assumed debt service and annual reserve contribution: $8,285
• Total initial cash: $325,000
• Illustrative cash-on-cash return: 2.55%, before taxes and further capital needs

The next step is to verify the leases, income, expense allocation, capital needs, and financing. The additional $9,000 NOI scenario is a sensitivity test, not an expected result.”

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Step 10: Present the Deal with Confidence

Make the calculation trail and open questions easy to follow.

Simple Framing

Use phrases like:

• “Here’s the story the numbers are telling.”
• “Here’s what I’m seeing and why it matters.”
• “Based on the underwriting, here are the next two steps.”

Keep assumptions visible when you present the summary.

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