The 7-Point Commercial Deal Screen

1

Cap rate vs. submarketPriced right, or priced like a fantasy?

–

Net operating income (annual)

$

Asking price

$

Submarket avg cap · optional

%

Cap rate–

Green: At or above the submarket average, roughly 5.5%+ on a stabilized deal in a normal market.

Yellow: 4%–5.5%. Tight. The price leans on future growth, not today's income.

Red: Below the comp set with no story why. You're overpaying for someone else's optimism.

Why it matters: Cap rate is the deal's price tag in plain English. Well below the submarket means you're paying a premium the income doesn't justify, and you'll feel it the day you sell.

2

Debt-service coverage (DSCR)Will the building pay its own mortgage?

–

Net operating income (annual)

$

↔ synced with check 1

Annual debt service (P&I)

$

DSCR–

Green: 1.25x+. $1.25 of income for every $1.00 of debt, real breathing room.

Yellow: 1.15x–1.25x. Most lenders won't fund below ~1.15x, so you're at the floor with no cushion.

Red: Below 1.15x. The deal doesn't cover its own debt. You'd feed it out of pocket from day one.

Why it matters: This is the whole game. In commercial, the bank evaluates the asset, not you, and DSCR is how it does it. Clear 1.25x and the deal qualifies on its own income, whatever your credit score says.

3

T-12 actuals vs. proformaBuying reality, or a brochure?

–

T-12 actual NOI

$

Proforma NOI (the pitch)

$

Proforma over actual–

Green: Proforma within ~10% of T-12 actuals, every increase backed by a named reason.

Yellow: A 10–20% jump with only vague "upside" to explain it.

Red: Proforma far above actuals (>20%). That's a pitch, not a deal.

Why it matters: Brokers sell the proforma (the dream). You're buying the T-12 (the real version). The gap between them is exactly where investors overpay, so underwrite the actuals.

4

Rent-to-market gapReal upside, or already maxed out?

–

In-place rent (per unit / mo)

$

Market rent (per unit / mo)

$

In-place below market–

Green: In-place 5–15% below market. Believable upside you capture as leases roll.

Yellow: At market (0–5% below), or a bigger 15–25% lift you'd have to earn.

Red: Rents above market, or the deal needs a 25%+ jump on day one. That's a prayer.

Why it matters: The safest money in commercial is closing a believable rent gap. A small, provable gap is the cleanest forced value. A gap you have to invent is how good-looking deals quietly lose money.

5

Expense-ratio sanityDo the operating costs even make sense?

–

Operating expenses (annual)

$

Gross income (annual)

$

Expense ratio–

Green: Roughly 40–60% of gross income (varies by asset type & who pays utilities).

Yellow: 60–75%. Expense-heavy asset, or run lean. Pressure-test it.

Red: Under ~40% (real costs missing: taxes, mgmt, reserves) or over 75% (barely profitable).

Why it matters: A suspiciously low expense ratio is the most common way a proforma lies. Understate expenses → overstate NOI → the cap rate looks better than it is → you overpay.

6

Exit / refi assumptionDoes the plan survive a higher cap rate?

–

Going-in cap rate

%

Assumed exit cap rate

%

Exit vs. entry spread–

Green: Exit cap set 0.5%+ higher than going-in, and the deal still works.

Yellow: Exit ≈ entry (0 to +0.5). Optimistic, leaning on the market staying perfect.

Red: Exit cap lower than entry. You're betting you sell richer than you bought.

Why it matters: Most of the return in a lot of deals hides in the exit assumption. Shave the optimism and you find out fast whether you're buying cashflow or a bet. Cap-rate expansion is what wipes out investors who only modeled the upside.

7

Break-even occupancyHow much can go wrong before you bleed?

–

Break-even occupancy

%

Stabilized occupancy

%

Downside buffer–

Green: Break-even 15+ points below your stabilized occupancy (stabilized 92, break even 75).

Yellow: 8–15 point buffer. Thin. A soft year and you're at the line.

Red: Under an 8-point buffer, or break-even above ~90%. One bad quarter and it goes negative.

Why it matters: Everything else tells you what the deal does when it goes right. This tells you what happens when it goes wrong, and deals are won or lost on the downside. A fat buffer is what lets you sleep at night.