r/CommercialRealEstate • u/irepresentprespa • 9d ago
Deal Analysis Institutional-level shopping center / NN STNL underwriting — what does the full process actually look like?- I had chat clear my thoughts**
I had chat gpt clear and clean up my thoughts**
This may be a basic question, but I’m trying to understand the full underwriting and asset-management process at a more institutional level for shopping centers and single-tenant NN/STNL deals.
When you’re first presented with an OM, rent roll, A/R aging, leases, and historical operating statements, how do you go from the seller’s presentation to your own underwriting and pro forma?
More specifically, how do you determine reasonable assumptions for things like:
Management fees
Leasing commissions
Tenant improvements / build-out
Vacancy and credit loss
Tax reassessment/increases
Insurance increases
Repairs and maintenance
Capital reserves
Roof/HVAC/parking lot obligations
CAM leakage or unrecoverable expenses
Renewal probability
Downtime between tenants
Market rent at rollover
Exit cap rate and selling costs
I’m also interested in how the underwriting turns into an actual operating roadmap after acquisition.
For example, once you own the property, how does the original pro forma tie into annual budgets, tenant invoicing, A/R aging reports, CAM reconciliations, collections, lease renewals, capital projects, and ultimately preparing the property for sale?
How do institutional owners think about the exit from Day 1? Are you underwriting each tenant’s remaining lease term, rollover costs, market rents, future NOI, and the quality of the income stream the next buyer will actually be purchasing at your projected exit?
My biggest question is how you build assumptions that are conservative enough to realistically cover the risks of owning and operating a shopping center without making the model so pessimistic that it becomes meaningless.
If anyone here has worked at an institutional owner/operator, REPE shop, family office, shopping-center fund, net-lease fund, or similar platform, I’d really appreciate hearing how your process works from:
OM → underwriting → acquisition → budgeting/accounting → A/R and invoicing → asset management → lease rollover → exit.
Also interested in how this process differs between a multi-tenant shopping center and a single-tenant NN/NNN property.
curious of two questions:
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u/jamesmoorerealestate 7d ago
I’d keep an assumption register beside the model. For each material line, note the source, date, whether it came from a lease, actuals, a market quote, or judgment, and who owns updating it after close. Then the first operating budget is the acquisition model rolled forward, with actual-to-underwriting variances for collections, CAM leakage, TI/LC, downtime, and capex. That also gives you a defensible bridge from the original thesis to current NOI.
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u/mbingaman_CRE 7d ago
I think the biggest thing is not trusting the OM at face value. I use it as a starting point, but I want to rebuild the NOI myself from the leases, rent roll, operating statements, CAMs, taxes, insurance, and A/R.
For a shopping center, I’m really looking tenant by tenant. What are they paying today, what can actually be recovered, when do they roll, are they likely to renew, and what is it realistically going to cost if they leave? TI, commissions, free rent, downtime, HVAC, demo, all of that matters.
I also wouldn’t make every assumption overly conservative just for the sake of being conservative. I’d rather use realistic assumptions in the base case, then stress test the actual risks. What happens if a tenant leaves, downtime doubles, insurance jumps, or the exit cap moves out 75 or 100 basis points?
The other piece people miss is the exit. If you’re selling in year five, you have to think about what the rent roll looks like to the next buyer in year five. If half the tenants are close to rollover, that buyer is going to price that risk even if your trailing NOI looks great.
STNL is simpler operationally, but the rollover risk is much more concentrated. One tenant leaves and you can go from 100% occupied to zero overnight. So tenant credit, lease term, guaranty, market rent, replacement rent, and re-tenanting cost matter a lot more.
To me, the OM is the seller’s story. The leases and actual financials are the reality.
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u/CABusinessSpace 8d ago
I'm a San Diego retail broker, and this is roughly how I approach it.
Fee assumptions vary by market, but I'd generally pencil ~8–12% property management, 5–6% lease-up commissions, ~3% renewals, and 1–2% for exercised options.
The biggest budget item I see landlords neglect? TIA. If you want a reputable regional/national tenant, be prepared to spend. Medical can run $85–$175/SF+ in TIA, but those tenants can stay for decades and add stability.
Always underwrite property taxes based on the new purchase price, not the seller's current bill. And check the leases: gross leases can prevent tax increases from being passed through, materially impacting NOI and value.
Same with NNN leases—check leases and estoppels for annual caps on CAM/tax increases. Those caps can create leakage that directly affects future NOI.
STNL/NNN is different: 10-year leases + 5–10 year options typically mean lower expenses and little/no management fee because the tenant handles maintenance, etc
For multi-tenant centers, I heavily underwrite rollover, downtime, TI/LC, credit loss and renewal probability. More so for neighborhood and community type centers with more mom and pop operators, than your nationally anchored ones.
Finally, don't blindly accept an OM's cap rate. Talk to several brokers active in that specific asset class and submarket about where comparable assets are actually trading.
I ultimately rebuild the NOI and go from there on current pricing and upside potential.
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u/Dry_Donut_4275 8d ago edited 8d ago
Long post but it's a good question, so here's the short version of how I approach it.
The assumption list you wrote out mostly doesn't come from judgment calls; it comes from documents. Read every lease before you touch the model. Recovery language, caps, exclusions, co-tenancy, renewal options at fixed rates vs FMV - that's where CAM leakage and your real rollover exposure live. The OM is marketing; the leases and the trailing 12 are evidence.
For the numbers people argue about:
- Mgmt fee: 3-8% of EGI Depending on property type. (Contact a local property managment company to get a more accurate read) Include this even if you'll self-manage, because your exit buyer will.
- LCs (Leasing Commissions): get a local broker's actual schedule, don't guess. Usually 4-6% of total lease value new, half that on renewals.
- Renewal probability: 65-75% is the standard retail assumption but I'd rather underwrite tenant by tenant. A pad site QSR doing 3x occupancy cost renews. A struggling inline tenant at above-market rent doesn't, no matter what the average says.
- Downtime: 6-12 months inline, longer for junior boxes. Be honest here, this is where deals die.
- Exit cap: going-in plus 25-75 bps depending on how much lease term you're burning off during the hold. The next buyer is underwriting YOUR rollover.
On your biggest question, conservative vs meaningless: the fix is to stop stacking haircuts on every line. Underwrite each line at your honest expectation, then run downside as scenarios (anchor goes dark, rates up 100 at exit) instead of baking pessimism into the base case. A model where every assumption is 10% worse than reality tells you nothing about which risk actually kills the deal.
STNL vs multi-tenant is really binary vs distribution. A center is a probability problem across a rent roll. An NN single-tenant is credit analysis plus one giant rollover event, so lease term, guarantor strength, and re-tenanting cost ARE the underwriting.
What's the deal size range you're looking at? The institutional process scales down further than people think.
Here's how I lay remaining term out when I'm screening (sample deal, numbers illustrative): https://imgur.com/a/do7tYCJ
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u/RDW-Development Investor 8d ago
Yup, there's a bunch of questions like this here from time-to-time, and I never get them.
The prospect of future success and profit is nearly impossible to predict. Even with something as "safe" as a Treasury Bond, there are a lot of factors that can make it a risky investment (rates go, and the value of your bill goes down, inflation eats away at the return, etc.). The most basic of basic investments is indeed at times, a "throw your hands up in the air and take a wild guess" type of bet.
Underwriting is even more insane. I don't get how large shops do it. Small guys - we do it differently for a variety of reasons (none of which may be valid, smart or good, but at least they tend to work for me - your mileage may vary):
1- I think of a property in terms of fundamentals. Is it in a good area? Does the property have good "juju"? Will a prospective tenant say, "okay this place is cool, I want to host my business here." I think of it from a tenant's perspective, number one.
2- Is it under-rented? I like properties that are under-rented, as they tend to have a lot of margin to work with. If the numbers make sense at a low rent, then they will make more sense (hopefully) when inflation pushes rents higher.
3- Is it over-rented? Counter to point #2 - if a property is underpriced but over-rented, then there's plenty of margin there too. We bought something at auction at a 13% CAP rate that was over-rented (in my opinion). I could cut the rent in half (preventing vacancy) and still make a decent return.
4- How much work does it need? I have a restaurant building in Mississippi. The market says it's worth $600K or so. It's really nice - if the building were in California, it would be worth $3-$4M. But the insurance is killer - replacement cost on this is $1.5M according to my insurance company. Contractors are so expensive these days, that replacing anything is insane. So, I'm trying to buy buildings that don't need more than a coat of paint and some carpet (still way more expensive then they used to be). Doesn't make any sense any more to buy "projects".
5- How much time and effort will it need? Is it a mult-tenant shopping center in Vegas with a tattoo parlor and liquor store as tenants? Or is it a medical office condo in Scottsdale? Two polar opposite situations.
My point? Every single thing that you mentioned in your original post is a valid concern, but it's like looking at the brand of tires, maintenance, gas mileage of a particular car. My point is that the true underwriting is the car itself - figuring out which is the best one to buy to start with, which is nearly impossible to do with a spreadsheet. The underwriting process that you detailed above is necessary to figure out how much it will cost to run, but the true process involves more intangibles like I mentioned above.
The guy on YouTube, Ben Mallah goes over this often in his videos - I agree with about 90% of the stuff he says and I recommend people watch his "common sense" approach. He has a few videos on buying $50M apartment buildings, and also a few on $200K houses. All tackle this "common sense" approach as the starting basis, and then he verifies that the numbers "may" work (I say "may", as everything is a gamble based upon odds - the goal would be to shift the odds as much in your favor).
Hope this Sunday morning ramble helps...
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u/Rishi-AI-Tools 8d ago
The order matters more than people expect. Abstract the leases first, then normalise the financials against them — not the other way round.
Reason: the rent roll and the leases disagree more often than you'd think, and you only find it by comparing them. Tenant shown as occupied whose lease actually expired. Rent that doesn't match the operative amendment. If you build the pro forma off the rent roll alone, you've inherited the seller's version of the truth.
On assumptions — management fee to the greater of actual or market, taxes marked to the reassessed basis if the jurisdiction reassesses on transfer, insurance to a current quote rather than the in-place policy, and reserves regardless of what the seller shows. Strip anything non-recurring out of other income, termination fees especially.
The one that catches people on NN/STNL is that the whole deal is the lease. Read it yourself, don't work from the broker's abstract.
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u/External_Charge_3868 9d ago
Honestly as a history teacher with a Fortnite habit, the closest I've gotten to underwriting is deciding whether to drop at Tilted Towers based on storm circle and loot probability. But the question is well structured, and I think most people underestimate how much of the assumptions game comes down to knowing what your own firm's actual historical costs were, not generic market benchmarks. The exit cap rate is the one that always feels like voodoo to me, you're basically betting on what some future buyer will pay for a stream of income you haven't even proven yet.
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u/Rich_Dog8804 9d ago
Exit cap rate depends on the hold and future rate curves.Cap rates go up over the hold because building systems get older. 50bps or 100bps. Depending on the term. Of you are doing a values add and replacing building systems there is logic in keeping it flat with the curve.
Most investors are too generous with this assumption to make the deal look good. That is not reality. If you are realistic at the worst you will make what you thought you would make. If cap rates compress then you look like a hero.
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u/irepresentprespa 9d ago
The exit cap I’m not so worried about I’m more concerned with the going in underwriting, do you rebuild the noi with free rent commissions etc ? What’s that process like
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u/irepresentprespa 9d ago
Thank you v much I dk the fortnight reference but thank you for sharing!! I agree, I just want to make sure that I’m approaching shopping centers and NN appropriately
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u/Minervian_AI 1h ago
My two cents from having worked at PE:
Asset management: weekly/monthly reviews often look into these:
Aggressive/conservative: you have to be balanced, not underwrite the absolute worst case. If there is no risk at all, it would’ve traded like a risk free asset.
Feel free to DM for more tips on underwriting/modelling.