Underwriting for the Buyer

Why the buyer underwrites

The seller's net operating income (NOI) is a claim, not a fact. It comes from the seller's books, insurance policy and tax bill. Your client buys the next owner's numbers. If you do not rebuild NOI before the offer, the lender will rebuild it after, and you get a retrade or a walk.

Course 22, Lesson 4 is the seller side: normalize NOI to defend a price. The buyer runs it from the other chair: normalize NOI to find the price to pay, then size debt, cash to close and a walk-away price.

In-place NOI is what the seller's trailing twelve months (T-12) shows. Normalized NOI, called buyer NOI in Lesson 3, is what a buyer or lender underwrites from the same facts. The walk-away price is the number, set in writing before you go under contract, above which the deal fails your client's rules. All numbers below are illustrative, not market data and not MaxLife results.

You are not a lender, tax adviser or attorney. Send financing to the lender, tax and 1031 questions to the CPA, lease and contract questions to a Florida attorney, and closing costs to the title agent.

The metrics in one table

DSCR is debt service coverage ratio, LTV is loan to value, and IRR is internal rate of return. Lender ranges vary. For depth, see Course 02, Course 04 and Course 05.

Normalizing the seller's NOI

Course 10, Lesson 5 covers the document audit. Know which lines move.

CAM is common area maintenance, the operating costs tenants reimburse.

Taxes. Under F.S. 193.1555, a commercial property's 10% annual assessment cap resets to just value on January 1 after a change of ownership or control, including a cumulative transfer of more than 50% of the owning entity. The cap excludes school levies. Model tax at price times millage as a conservative case, then ask the property appraiser, since just value may not equal price. A mill is $1 per $1,000, so 17.5 mills is 1.75%.

Florida sales tax on rent. For rental periods beginning on or after Oct 1, 2025, HB 7031 repealed the state sales tax on commercial rent (F.S. 212.031) and the county surtax. Tenants paid it, so it was never NOI: do not add it, and do not subtract its disappearance. Drop rent-tax lines from older pro formas. Tenant cost falls: 2% of the NNN example's $17,500 monthly rent is $350, and 2% of the industrial example's $40,000 is $800, before surtax. Ask the attorney about the seller's filings for earlier periods.

NNN underwriting: the lease is the underwrite

On single-tenant NNN the building matters little until the tenant leaves. Use the NNN lease review checklist and Course 13.

For dated cap rate context, use the sourced evidence table in Lesson 2 and the Q2 2026 Florida NNN report. Those are national asking rates, not Central Florida closed trades, so pull closed comps.

A worked NNN example (fictional tenant, invented numbers)

Assumptions: A franchisee operating company leases a 5,000 SF pad in Seminole County. Base rent is $210,000, absolute NNN except that the landlord keeps roof and structure. Ask $3,500,000. Twelve years remain, with 10% bumps every five years. Tenant sales are $3,000,000. Buyer N wants a 1.25x DSCR. This is a separate teaching deal, not Palmetto Ridge's pad from Lessons 2, 5 and 7.

Cap at ask is $206,650 ÷ $3,500,000 = 5.90%, not 6.00%. The tax reset hits the tenant. At an assumed 17.5 mills, tax on $3,500,000 is $61,250, against $33,250 on the seller's $1,900,000 assessment. Occupancy cost is rent $210,000 + tax $61,250 + insurance $12,000 + CAM $8,000 = $291,250. Rent to sales is $210,000 ÷ $3,000,000 = 7.0%, and total occupancy to sales is $291,250 ÷ $3,000,000 = 9.7%, against 8.8% on the seller's tax. Landlord NOI did not change, but renewal math did.

Dark stress (invented inputs). Twelve months with no rent, $81,250 of tax, insurance and CAM carried, and $75 per SF to re-tenant total $666,250, or 44% of the equity below.

Cash to close on the DSCR-sized loan of $1,993,984 (below): equity $3,500,000 - $1,993,984 = $1,506,016, plus mortgage stamps of $1,993,984 ÷ 100 x $0.35 = $6,979 and intangible tax of $1,993,984 x 0.002 = $3,988, so $1,516,983 before title, survey, Phase I, legal and lender fees. Lesson 7 has the closing cost rates and who customarily pays them.

Industrial underwriting: the building and the rollover

Industrial value rides on what happens when leases end.

See Course 17, Lesson 5 and Lesson 6.

A worked industrial example (invented numbers)

Assumptions: A 40,000 SF small-bay flex center in Osceola County, eight 5,000 SF bays. Ask $6,800,000 ($170 per SF). Base rent $12.00 per SF, or $480,000. Seller expenses are $130,000 (tax $70,000, insurance $28,000, CAM $32,000), shown as fully recovered, so seller NOI is $480,000, a 7.06% cap. Market rent is $13.00. One of eight bays is modified gross, so the landlord absorbs 12.5% of expenses. This is a separate investor deal, not Bayside's building.

Buyer NOI is 14.1% under the seller's ($67,809 ÷ $480,000), so the cap at ask is $412,191 ÷ $6,800,000 = 6.06%, not 7.06%. Expenses rise from $3.25 to $5.31 per SF ($212,200 ÷ 40,000), squeezing tenants at renewal.

Rollover cost schedule. Assume 60% renewal odds, renewal TI of $2.00 per SF plus a 3% commission on five years at $13.00, and new-tenant TI of $8.00 plus a 6% commission. Renewal: $2.00 + (0.03 x $13.00 x 5 = $1.95) = $3.95. New tenant: $8.00 + (0.06 x $13.00 x 5 = $3.90) = $11.90. Expected: (0.6 x $3.95) + (0.4 x $11.90) = $7.13 per SF.

The five years total $285,200, or $57,040 a year. Yield after that reserve: ($412,191 - $57,040) ÷ $6,800,000 = 5.22%.

Checks. Enter the same inputs in the industrial deal analyzer, which models downtime, TI and commissions and has a landlord-paid expense input. Then compare the industrial property value tool, whose small-bay range is 6.75% to 7.75%. That is an estimate, not closed comps, but a 6.06% cap sits below it, so the ask has to come down.

Leverage, negative leverage, and what a lender will support

Debt helps only when the cap rate beats the loan constant. Assume 6.75% and 25-year amortization, a constant of 8.29% (0.082909). The NNN deal at $3,500,000 with buyer NOI of $206,650:

Check: $2,275,000 x 0.082909 = $188,619, and $206,650 ÷ $188,619 = 1.10x. The DSCR loan is $206,650 ÷ 1.25 = $165,320 of debt service, ÷ 0.082909 = $1,993,984, with cash-on-cash of ($206,650 - $165,320) ÷ $1,506,016 = 2.74%. Leverage turns positive only if the constant falls under the 5.90% cap, so get a real quote before promising interest-only debt.

Amortizing debt at an 8.29% constant against a 5.90% cap is negative leverage: borrowing pushes the return below all cash. The industrial deal has the same problem. At 65% LTV, $4,420,000 x 0.082909 = $366,459 of debt service and a DSCR of $412,191 ÷ $366,459 = 1.12x. That loan meets 1.25x only at a price of about $6,119,000 ($412,191 ÷ (1.25 x 0.65 x 0.082909)).

Lenders size to the lowest of three tests. At the $6,800,000 industrial ask, assume 1.25x DSCR, a 9% minimum debt yield and 65% LTV (assumptions, since lenders vary):

• DSCR: $412,191 ÷ 1.25 = $329,753, ÷ 0.082909 = about $3,977,000
• Debt yield: $412,191 ÷ 0.09 = about $4,580,000
• LTV: 0.65 x $6,800,000 = $4,420,000
• Result: DSCR binds. Equity is $6,800,000 - $3,977,268 = $2,822,732, not the $2,380,000 that 65% LTV suggests

A 1.25x loan at this constant has a 10.36% debt yield, so a lender demanding 10.5% would make debt yield bind instead. The loan caps what a buyer can pay without more equity, so run the tests before calling a price financeable.

On a 1031 exchange, the buyer may need to replace debt or add cash to avoid boot, meaning cash or debt relief that triggers tax, which can force leverage. The qualified intermediary and the CPA own that math. See Course 11, Course 21 and Course 08, Lesson 3.

Owner-user analysis in brief

An owner-user buys to occupy. Count only costs that differ, because a NNN lease pays taxes, insurance and CAM either way. Compare base rent and bumps against debt service, cash invested, closing costs, reserves and the tax reset, then judge how long the business stays.

Use the industrial lease vs buy calculator and Course 07. On the tool's defaults, break-even lands in year 3 at 3% value growth and about year 8 at 0%, so the benefit rides on appreciation. SBA loans carry owner-occupancy rules, so get the lender's terms in writing.

Sensitivity and the walk-away price

NNN. NOI is $206,650 for five years, then $227,440 after the 10% rent bump (rent $231,000 less the reserve and 1% administration). Sale in year 10 at year-10 NOI ÷ exit cap, less 2% costs, with the $1,993,984 loan. Ten-year IRR is unlevered / levered, before closing costs and taxes.

The model assumes a year-10 buyer pays these caps with only two lease years left, which is generous, so test a wider exit too. Say Buyer N requires at least 6.5% unlevered at a 6.75% exit cap. Only the $3,306,400 row passes ($206,650 ÷ 0.0625), so that is the walk-away price. Offer near a 6.5% cap: $206,650 ÷ 0.065 = $3,179,231. At the ask with a weaker exit, levered IRR falls below unlevered: negative leverage in the returns.

Industrial. Price supported by buyer NOI at each cap rate:

If Buyer I needs at least 6.75% on buyer NOI, the walk-away is $6,106,533. Offer $5,888,443, the 7.00% row. The yield after the rollover reserve is $355,151 ÷ $5,888,443 = 6.03%. At that price a 65% LTV loan of $3,827,488 governs, with debt service of $317,335 (DSCR 1.30x). Cash flow is $94,856, or $37,816 after the reserve, on equity of $2,060,955, 1.83% cash-on-cash. Buyer I is paying for upside and must say so.

Write the walk-away down before the letter of intent (LOI) goes out, with the facts that would move it: a longer term, a stronger guaranty, a roof credit, clean estoppels, a clean Phase I. Change it for new facts, never for competition.

(a) The ask is above your client's walk-away.

"[Name], at the ask the deal is a 6.06% cap on our normalized NOI, and your rule is 6.75%. That supports up to $6,106,533. I recommend we offer $5,888,443 and show the seller the bridge line by line. If they will not move toward that range, we pass and keep looking. I would rather lose this deal than fund a return you told me you would not accept."

(b) You need the seller's documents before offering.

"[Name], we are preparing an offer on [property]. Please send the leases, the T-12 and two prior years, the last two CAM reconciliations, tax bills and insurance declarations by [date]. Our client underwrites from source documents, so a full package means fewer conditions."

"[Agent name] | MaxLife Commercial, a division of MaxLife Realty LLC | [phone] | [email]"

Give the client one page: NOI bridge, cap at ask, debt and cash to close, the sensitivity grid, and the walk-away with its conditions, labeled an estimate. Retail and medical office use the same method, plus anchors, CAM caps and specialized build-out. Land has no NOI, so underwrite entitlement and carrying costs with the land deal analyzer.

Using the site tools

• /deal-analyzer: first-pass returns, but no rollover, TI or commissions
• /industrial-deal-analyzer: rollover and downtime over a hold
• /cap-rate-calculator and /dscr-calculator: price and maximum loan, only as good as your NOI
• /pdf-analyzer: triages an offering memorandum, never the underwrite
• /cap-rates and /cap-rates/comps: benchmarks, not closed comps

All outputs are estimates, not appraisals or advice.

Key takeaways

• The seller's NOI is a claim. Rebuild it with market management, reserves, reassessed taxes, a current insurance quote and a vacancy floor.
• Compare the cap rate to the loan constant, not the interest rate. At an 8.29% constant against a 5.90% cap, debt lowers the return.
• On NNN, the lease is the underwrite. On industrial, price the rollover and check height, doors, power and zoning.
• Lenders size to the lowest of DSCR, debt yield and LTV, and that sets the client's equity.
• Set offer and walk-away prices in writing before the LOI, and move them only for new facts.

Next: Lesson 5 turns the underwrite into tours, offers, and the LOI.