Commercial real estate underwriting: A practical guide with examples

A commercial real estate acquisition can meet a sponsor’s return target while requiring more equity than expected. That often happens when the lender uses different income assumptions or a lower borrowing limit.

Both reviews concern the same property. The sponsor evaluates the business plan and investor returns; the lender assesses repayment, collateral and borrower support. Comparing their assumptions helps identify financing gaps before the capital raise is finalized.

The OCC’s commercial real estate lending guidance provides a useful framework for understanding the lender’s review. Sponsors also need a complete equity cash-flow model and clear distribution terms.

This guide covers the underwriting inputs, key metrics and a worked loan-sizing example, followed by development and exit risks to test before committing capital.

What is commercial real estate underwriting?

Underwriting turns property information and financing terms into a supported forecast of cash flow, value and risk. It helps a sponsor decide what to pay and how to finance the business plan, and helps a lender decide how much credit to extend and on what terms.

The analysis starts with current performance and builds a forecast for the intended hold. Rent changes, vacancy, capital work, operating expenses and the exit need explicit assumptions. Loan sizing should be reconciled with the lender’s accepted cash flow and value before the equity requirement is treated as final.

12 CFR 34.62 requires national banks to maintain written real estate lending policies. The OCC handbook discusses measures such as LTV, DSCR and debt yield, alongside loan terms and property cash flow.

The underwriting file: what goes in it

Collect the source records before building the forecast, then identify the questions each record needs to resolve.

Document or input	Why it is there	What to verify
Trailing-twelve operating statement (T-12)	Actual income and expense	Reconcile collections, timing and nonrecurring items
Rent roll and leases	In-place rent, expirations, tenant credit	Confirm rent, concessions, rollover and guarantees
Real-estate tax and insurance bills	Current costs and possible changes after acquisition	Obtain current quotes and assess reassessment risk
Property condition and environmental reports	Capex, reserves, deferred maintenance	Budget repairs, timing and required reserves
Market comps: rents, sales, cap rates	Mark-to-market and exit	Adjust evidence for location, condition and lease terms
Sources and uses	Purchase, closing costs, capex, reserves, fees	Balance total costs with committed debt and equity
Borrower and guarantor financials	Liquidity, net worth, contingent liabilities	Review sponsor capacity and available financial support
Business plan and sensitivity cases	Vacancy, rate, exit cap	Support the base case and define downside scenarios

The metrics that come out of that file:

Metric	Formula	What it answers
NOI	Effective gross income minus operating expenses	Operating income before financing and capital spending
Cap rate	NOI / value	Income relative to property value
DSCR	NOI / annual debt service	Cash flow relative to required debt payments
LTV	Loan amount / accepted property value	Leverage relative to collateral value
Debt yield	NOI / loan amount	Property income relative to loan balance
IRR and equity multiple	Equity cash flows over the hold	Timing and total size of equity returns

Existing buildings and developments

For an existing building, review the operating history, current rent roll, lease terms and physical condition. A trailing statement provides evidence of past performance, but expenses, tenant occupancy and lease obligations may change after acquisition.

Compare contractual rent with collections, concessions and tenant credit. Two properties collecting the same rent today may have different risk if one has near-term lease expirations or substantial tenant-improvement obligations.

New development may have little or no operating history. Underwrite land and approvals, construction costs, schedule, contingency, interest carry, completion support and lease-up. A conversion also requires detailed assessment of how the existing structure can accommodate the proposed use.

AP reported in July 2026 that buckled columns halted work on an office-to-apartment conversion at Pfizer’s former New York headquarters. The cause was under investigation at the time. For conversion underwriting, the incident illustrates why engineering diligence, schedule contingency and funding for delays belong alongside projected rents in the feasibility analysis.

T-12, occupancy, and tenant quality

The trailing-twelve-month statement records the property’s income and expenses for the preceding year. Confirm the accounting basis and reconcile unusual items, arrears and recurring costs before using it as the starting point for the forecast.

NOI generally excludes debt service, income tax, depreciation and capital expenditures. Show replacement reserves and other lender deductions separately when they are used to calculate adjusted underwritten cash flow. This preserves a clear reconciliation to property NOI.

The pro forma projects future operations. Support rent changes with relevant leases or market evidence, expense savings with a credible operating plan, and occupancy with a leasing schedule. Include the capital and leasing costs needed to achieve those results.

Lenders may consider stabilized income for appropriate loan structures, but they assess the evidence, time and execution risk behind it. Identify which assumptions the lender accepts and what conditions apply to future funding or conversion to permanent financing.

Review tenant concentration and lease rollover as well as occupancy. A high occupancy percentage alone does not show whether collections are sustainable or how much space will need to be re-leased during the loan term.

Worked example: Reconciling the loan and equity requirement

Riverside Court is a hypothetical 80-unit apartment acquisition at $12 million. Assume the lender accepts that value. Trailing NOI is $840,000, giving a 7.00% going-in cap rate. The figures illustrate loan sizing, not current lender terms or a market survey.

The trailing operating statement is:

• Gross potential rent: $1,500,000
• Vacancy and credit loss (8%): ($120,000)
• Other income: $40,000
• Effective gross income: $1,420,000
• Operating expenses: ($580,000)
• Net operating income: $840,000
• In-place cap rate: 7.00%

The sponsor’s year-one forecast raises gross potential rent to $1,575,000, reduces vacancy to 5%, increases other income to $48,000 and lowers operating expenses to $560,000. Projected NOI is $984,250. The business plan separately assumes stabilized NOI of $1,020,000 from year three. Each improvement requires supporting evidence and an implementation schedule.

The sponsor requests $8.4 million of debt, or 70% of the purchase price, at 6.75% interest-only. With $400,000 of capital work funded at closing, modeled uses total $12.4 million and equity is $4 million. Closing costs, fees and other reserves are excluded here and would increase the actual funding requirement. A year-five exit at a 6.25% cap on $1,020,000 of forward NOI implies a $16.32 million gross sale value.

For the example, the lender retains 8% vacancy and $580,000 of operating expenses, accepts $20,000 of other income, and deducts a $24,000 replacement reserve. That produces $796,000 of adjusted cash flow for its coverage and debt-yield tests. The reserve is shown as a lender adjustment rather than an operating expense.

Assume the following limits apply. Loan amounts are rounded to the nearest $1,000 for comparison:

Constraint	Result	Binds?
65% LTV on $12,000,000	$7,800,000	Yes
Supervisory LTV reference for improved property: 85%	$10,200,000	No
1.25x DSCR on adjusted cash flow, 6.75% interest-only	$9,434,000	No
9% debt yield on adjusted cash flow	$8,844,000	No

The 65% LTV limit produces the lowest permitted amount: $7.8 million. Equity therefore rises to $4.6 million for the same $12.4 million of modeled uses. The sponsor must raise an additional $600,000, reduce the acquisition cost or other uses, or revise the financing plan.

Interest-only debt service on $7.8 million at 6.75% is $526,500. Adjusted cash flow of $796,000 provides 1.51x coverage. Meeting the DSCR requirement does not override the more restrictive LTV limit.

The DSCR test alone would allow $636,800 of annual debt service ($796,000 ÷ 1.25), equivalent to about $9.434 million at 6.75% interest-only. A test using amortizing or stressed payments would produce a different loan amount.

Test the exit value and refinancing separately

At the same $1,020,000 of forward NOI, a 6.25% exit cap implies $16.32 million of value, while a 7.00% cap implies about $14.57 million. The approximately $1.75 million difference comes entirely from the cap-rate assumption. The following comparison also changes the income assumption, so its wider value gap reflects both inputs.

Assumption	Sponsor scenario	Flat-income scenario
Forward NOI at exit	$1,020,000	$840,000, assuming no growth from trailing NOI
Exit cap	6.25%	7.00%
Implied value	$16,320,000	$12,000,000
LTV-only refinance proceeds at 65%	$10,608,000	$7,800,000

The flat-income case implies $7.8 million of gross refinance proceeds using LTV alone, equal to the example’s outstanding interest-only balance. That leaves no allowance for refinancing costs. Actual proceeds also depend on coverage, debt yield, rates, appraisal and lender requirements at maturity.

OCC Bulletin 2024-29 on refinance risk directs banks to assess the borrower’s ability to replace debt at maturity on reasonable terms. A commercial loan’s maturity can arrive well before the property’s economic life ends, leaving a substantial balance to repay.

Underwrite the next lender before closing the first loan. Today’s approval establishes the current financing terms; it does not commit another lender to repay the balance at maturity. Build a second loan-sizing calculation using the projected remaining debt and supported assumptions for income, value and financing terms at maturity.

Riverside Court’s flat-income case makes the distinction visible: $7.8 million of LTV-limited refinance proceeds would only match its $7.8 million loan balance, leaving no room for refinancing costs. Any lower limit from coverage or debt yield would widen the funding need. This is separate from the $600,000 acquisition gap created by the original lender’s 65% LTV limit. Include fees and reserves, show how a maturity shortfall would be funded, and carry that additional equity requirement into investor cash flows.

The interagency lending guidelines list an 85% supervisory LTV limit for improved property, with provisions addressing exceptions. This is a regulatory reference, not an entitlement to that leverage. The hypothetical lender’s 65% limit is more restrictive.

Use the cap-rate calculation consistently: annual NOI divided by value. Match the income period and condition of the property to the market evidence used for the rate.

Recalculate investor returns after changing the debt amount or exit assumptions. A defensible IRR requires the complete dated equity cash-flow schedule, including capital contributions, operating distributions and net exit proceeds. The loan-sizing figures above are insufficient to establish a specific IRR.

A three-percentage-point change in vacancy on $1.5 million of gross potential rent changes annual revenue by $45,000. Holding other items fixed, that changes value by about $643,000 at a 7% cap. The loan impact then depends on which constraint is binding.

Update the sources and uses, capital plan and offering documents to reflect the financing actually available. In this example, the equity requirement is $4.6 million before omitted closing costs and fees, rather than the original $4 million assumption.

Carry the underwriting into ongoing reporting

Keep an approved base case and compare actual occupancy, collections, operating costs and capital spending against it. Explain material differences and update the outlook without losing the original assumptions.

The supporting rent roll, operating statements, financing terms and capital budget should remain accessible throughout the hold. This makes it easier to explain how property performance affects the cash available to investors.

Agora’s data rooms help sponsors present offering terms and supporting materials, while investor reporting supports ongoing communication. The approved underwriting provides context for explaining results and changes in the business plan.

Conclusion

Effective underwriting connects source records to a supported operating forecast, a feasible financing plan and explicit downside cases. Reconcile lender assumptions before treating the equity requirement or projected returns as final.

Riverside Court’s $600,000 funding gap results from one clear difference: a 70% loan request versus a 65% lender limit. Identifying that difference early lets the sponsor revise the raise and investment analysis before committing to the original plan.