Start with a real scenario: you see a $315K Kansas City flex building listed at $74/sq ft and you’re told $26/sq ft of improvements will make it market-ready. That lands an all-in cost of $100/sq ft. Under the simple flex industrial underwriting check I use, if you can get to a 12% cap at your target triple-net rent, you keep digging. If not, you walk. Plain and brutal — and it saves wasted time.
The core idea — one-line math first
Flex industrial underwriting starts with a back-of-napkin check. Combine purchase price plus rehab into an all-in $/sq ft. Ask the broker or LOI what the market triple-net rent looks like. If the all-in cost yields a 12% cap at that rent, the deal is worth a full underwrite. If it doesn’t, stop. That’s the rule I learned from running deals and it’s the filter that keeps our pipeline tight.
This isn’t theoretical. In the Kansas City example on tylercauble.com, $74/sq ft + $26/sq ft improvements = $100/sq ft all-in; renting at $12/sq ft triple net confirms the 12% return. Use that same quick check before you build a 50-tab spreadsheet. Practical guide to commercial real estate underwriting.
1) Cap-rate hygiene: don’t pretend higher rents will save a bad buy
Common mistake: you assume you can extract higher rents after you renovate, then underwrite to that optimistic number. That’s wishful thinking. Underwrite to a realistic triple-net rent you can sign today or to a credible comp, not to a rent the property might achieve after you spend a bunch of capital and market cycles change.
Do the quick all-in $/sq ft check first. If you need a 15% rent bump to hit 12% cap, that’s usually a deal-killer. Walk. There’s no value in building spreadsheets for deals that fail the one-line test. Save underwriting time for the deals that pass it. When to use cap rate vs cash-on-cash vs IRR.
2) Debt and vacancy: underwrite conservatively, then push lenders to improve terms
Another quirk: operators model aggressive loan terms into their returns and then act surprised when lenders quote something different. Underwrite to conservative bank-ready terms until you have an executed term sheet.
In practice, use conservative loan assumptions: 25% down, 7% interest, and a 20-year amortization unless you’ve got firm lender commitments in writing. Those are the numbers we include on first-round models so investors and partners see a worst-case finance scenario.
Also, always include vacancy. Even long-term NNN leases can go dark. We model a 5% vacancy factor as a baseline — it keeps stress cases honest and prevents overstating cashflow to potential equity partners.
Types of commercial real estate loans and when each fits is a useful reference when you’re testing different debt structures during your conservative underwriting pass.
3) Lease structure and expirations: stagger or suffer
Flex buildings are a patchwork of small- to mid-sized tenants. If you cluster expirations, you risk a cascade of downtime. The underwriting quirk many skip: you must model lease staggering, not identical expirations.
Use mixed term lengths in your pro forma. Think practical: a suite mix of 24, 36, 60, and 63 months keeps the building from turning into a single vacancy event. Tenants churn in flex more than in big-box industrial. Guard against it by planning for staggered renewals and budgeting for modest TI (tenant improvements) and downtime between leases.
4) Location and improvements: size your rehab to market depth, not ego
Another common failure is over-improvement. You can’t flip a suburban flex unit into a premium creative office with better finishes and hope the tenant pool appears. Match improvements to the market and tenant demand, not to what you wish the neighborhood would become.
Use the all-in $/sq ft metric to limit rehab spend. If $26/sq ft gets you to market rent and a 12% cap in your underwriting — like the Kansas City example — don’t double that just because you think it looks better. Worse: don’t let vendor quotes balloon scope without re-checking the cap math.
Mini-case: the $315K Kansas City deal (what to check in 10 minutes)
Walk through the actual quick check we use. You have a small flex building listed at $315K. The listing says $74/sq ft. Broker suggests $26/sq ft will get it market-ready. All-in cost = $100/sq ft. The market triple-net rent you can sign today is $12/sq ft.
That equals the 12% cap-line we use as the gate. Because it meets the gate, we then:
- Call lenders to test interest and amortization assumptions before spending underwriting hours.
- Pull comps for actual executed NNN rents within a 15–20 minute drive of the property. How to read a rent roll like an underwriter.
- Map lease expirations and propose a staggered leasing plan in the LOI so the seller knows you’ve thought through re-leasing risk.
- Make a contamination and roof inspection contingent — these bite small deals if ignored.
If the quick check had missed the 12% gate, we would have moved on immediately. No LOI, no dollar-down diligence, no wasted partner hours.
What lenders actually care about — and what they don’t
Lenders care about cashflow stability, borrower experience, and collateral quality. They don’t care about your vision for upgrading the space unless that vision is backed by a signed lease or a firm pre-leasing commitment. So underwrite to cashflow today, then layer upside scenarios separately.
Don’t hide financing gaps in sponsor equity lines or ambiguous JV language. If your model needs flexible sponsor capital to hit bank covenants, call that out plainly. Transparency gets you better term sheets faster. See how to spot & fix CRE underwriting mistakes that commonly derail transparency between sponsors and lenders.
How to prioritize your underwriting time
We triage opportunities so we don’t waste time. Use this sequence:
- One-line cap gate using all-in $/sq ft (purchase + rehab) vs. target triple-net rent.
- Basic lender check: get verbal interest and confirm bankable terms match your conservative template.
- Comp rents and physical red flags (roof, HVAC, environmental) — these are cheap to rule out early.
- If the above pass, start full financials, rent-roll mapping, and deeper due diligence.
Do those in that order. It keeps the team focused on the deals that actually pencil.
Where a CRE-specific tool helps
If you want to avoid stale spreadsheets and lost assumptions, use a tool that keeps underwriting inputs in one place. CREflow’s Underwriting tab stores assumptions, recalculates metrics in real time as you edit, and can generate a shareable underwriting report so partners see the same numbers. That avoids overwriting someone’s model and makes sharing a bank-ready summary faster. Try running and sharing underwriting reports in CREflow: run and share underwriting reports in CREflow.
Key takeaways
- Use a one-line all-in $/sq ft vs. target triple-net rent to gate deals; aim for a 12% cap as your initial filter.
- Underwrite conservatively: 25% down, 7% interest, 20-year amortization, and a 5% vacancy baseline unless you have firm lender terms.
- Stagger lease expirations — model mixed terms to avoid simultaneous vacancies.
- Match rehab scope to market demand; don’t over-improve and blow your cap math.
FAQ
How strict should I be with the 12% cap rule?
Be strict. Treat it as a filter, not a goal to be engineered. If the all-in cost doesn’t meet 12% at realistic triple-net rents, don’t waste time. Use exceptions only when you have contractually committed rents or other hard upside.
Can I use higher leverage in models to make deals work?
Don’t. Model conservative bank-ready debt first. If a lender offers better terms later, you can layer an upside case. Starting with optimistic leverage hides execution risk and creates partner misalignment.
What’s a reasonable vacancy assumption for flex?
Start with 5% vacancy. Flex turns faster than big industrial but still experiences downtime. Use 5% as your baseline unless you have long-term signed NNN leases that change the risk profile.
How do I prevent over-improving a property?
Always re-check your cap math after any scope additions. If an added scope pushes all-in $/sq ft higher and removes your 12% gate, scale back or rethink the plan. Market demand should dictate finishes, not your taste.
Before You Underwrite This, Check This:
- Have you run the all-in $/sq ft vs. market triple-net rent gate? (If no, stop.)
- Did you model conservative loan terms: 25% down, 7% interest, 20-year amortization?
- Is a 5% vacancy built into your base case?
- Are lease expirations mapped and staggered in your plan?
- Have you confirmed any large rehab scopes won’t kill the cap math?