Most net-lease underwriting fails in the same two places: the assumptions nobody pressure-tested, and the exit. The model itself is arithmetic. The judgment is knowing which inputs decide the deal. Here is the sequence we run on every acquisition.
Start with the rent roll, not the price
Before any return math, reconcile the rent roll to the leases. Confirm in-place base rent, the escalation schedule, expiration dates, and which expenses the tenant actually reimburses. A single mis-keyed expiration or a missed CAM exclusion quietly re-prices the whole deal. This is also where a disciplined lease abstract pays for itself.
Build the ten-year proforma
A net-lease proforma is a ten-year cash-flow with three layers: contractual income (base rent plus escalations), recoveries, and a reversion. Hold the operating assumptions conservative and let the lease structure do the work. The lines that matter most:
- Rollover. Model the actual expiration, not an average. Assume realistic downtime, a market re-lease rate, and tenant-improvement and leasing-commission cost at rollover. A clean 7% cap can become a 5% yield once you fund a real rollover.
- Mark-to-market. Compare in-place rent to market. Above-market rent is a risk, not a feature — it inflates value today and resets down at renewal.
- Credit. Investment-grade tenants justify a tighter cap; unrated or franchisee credit does not. The cap rate is a credit opinion expressed as a number.
Size the debt
Debt sizing is a constraint problem: the lender gives you the lesser of a loan-to-value test, a debt-service-coverage test, and a debt-yield test. Solve all three and take the minimum. Then check that the loan term and the lease term line up — financing a 10-year hold against a tenant that rolls in year 4 is how you manufacture a refinancing crisis.
Run sensitivities, then run the exit
A single base case is a guess. Flex the three inputs that move returns most — exit cap, rollover outcome, and interest rate at refinance — and read the levered IRR across the grid. The exit cap deserves special discipline: assume you sell at a cap at least as wide as you bought, and wider if the remaining lease term is shorter at exit than at entry.
Where the principal review matters
The model produces the first 80% fast. The last 20% is judgment: is the re-lease assumption defensible, is the credit priced correctly, does the exit cap reflect a shorter lease at sale. That review is the difference between a model that looks right and one that holds up in front of an investment committee.
Need this on a live deal? Capistrano produces underwriting, lease abstracts, investment memos, and capital-raise materials — AI-leveraged, principal-reviewed.