Start with a property whose assumptions are fully visible
This original exercise gives you the inputs rather than asking you to locate a real investment. Annual potential rent is $1,000,000. Assume 8% vacancy and credit loss against that rent, $80,000 of other operating income, and $400,000 of operating expenses. There is no further revenue or cost detail hidden elsewhere.
| Input | Assumption |
|---|---|
| Potential annual rent | $1,000,000 |
| Vacancy and credit loss | 8% of potential rent |
| Other annual operating income | $80,000 |
| Annual operating expenses | $400,000 |
| Illustrative capitalization rate | 6% |
| Illustrative loan-to-value | 60% |
| Annual debt service | $420,000 |
| Acquisition costs | $200,000 |
| Immediate capital spending | $300,000 |
CBRE’s Financial Consulting Group describes modeling work as part of its undergraduate internship. The case here is independent preparation, not a CBRE assessment or a recommendation about a real property. The goal is to produce a small underwriting model another person can audit.
Label every input as annual or one-time. Define vacancy and credit loss consistently and do not subtract actual collection losses again after already including them in the 8% assumption. Those definition checks should precede the valuation formula.
Sources[1]
Reconcile income before applying a capitalization rate
Potential rent less the $80,000 vacancy and credit-loss allowance produces $920,000. Adding $80,000 other operating income gives $1,000,000 effective gross income. Subtracting $400,000 operating expenses gives $600,000 NOI under this exercise’s definition.
NOI is not cash available to the equity investor. The model excludes financing costs, investor taxes and capital spending from this operating measure. If you decide to use a different convention, state it and recalculate every related metric consistently rather than moving expenses between lines to improve the answer.
A useful check is to bridge back to the input schedule: $1,000,000 − $80,000 + $80,000 − $400,000 = $600,000. Make that reconciliation visible. A reviewer should not need to reverse-engineer which source cell drives the total.
Use a sensitivity table instead of a single confident value
Using the illustrative direct-capitalization formula, $600,000 divided by 6% gives $10,000,000. Holding NOI fixed at $600,000, a 5.5% rate gives approximately $10.91 million and a 6.5% rate gives approximately $9.23 million. Neither rate is asserted to represent current market pricing.
| Annual NOI | 5.5% rate | 6.0% rate | 6.5% rate |
|---|---|---|---|
| $520,000 | $9.45m | $8.67m | $8.00m |
| $600,000 | $10.91m | $10.00m | $9.23m |
Now test a downside: vacancy and credit loss rise to 12%, other income remains $80,000 and operating expenses rise to $440,000. Effective gross income becomes $960,000 and NOI $520,000. At a 6.5% rate, indicated value is $8 million.
The downside moves both operating performance and the capitalization assumption. Show the separate effects as well: $520,000 at 6% is approximately $8.67 million; $600,000 at 6.5% is approximately $9.23 million. This prevents a two-variable scenario from being misdescribed as only an occupancy problem.
Include the cash required beyond the purchase price
Assume the illustrative loan is 60% of the $10 million purchase price, or $6 million. Add $200,000 acquisition costs and $300,000 immediate capital spending. The opening equity requirement is $10 million + $200,000 + $300,000 − $6 million = $4.5 million, not $4 million.
At $600,000 NOI and $420,000 annual debt service, the simplified cash flow after debt service is $180,000 before other reserves, capital needs and investor-level items. Dividing $180,000 by $4.5 million gives 4%. Label the scope rather than presenting it as a complete investment return.
The illustrative NOI-to-debt-service ratio is approximately 1.43 times; under the $520,000 NOI downside it is about 1.24 times, with debt service held fixed. Actual lending agreements may define the numerator differently. No universal lending approval threshold is supplied by this exercise.
Do not assume the original financing survives a lower valuation
At an $8 million stressed value, a 60% value-based loan amount would be $4.8 million rather than $6 million. If the purchase price remains $10 million and the same costs remain, the equity requirement becomes $5.7 million. This is a financing sensitivity, not a claim that a lender must change the loan this way.
The $420,000 debt-service input would also need reconsideration if loan size, interest rate, amortization or maturity changes. Do not carry it into a new financing structure without stating that it is being held constant for a specific comparison.
A lower price, different funding structure or revised business plan might address the gap, but the model cannot choose among them without additional terms. Make the unresolved financing condition a diligence question instead of forcing the spreadsheet to balance with an unexplained plug.
Finish with a decision memo and a reproducible file
Deliver an assumptions sheet, income build, valuation matrix, financing schedule and one-page memo. The memo should identify the most sensitive inputs, the cash requirement and the evidence you would request before an actual investment decision. Use formulas and separate input formatting so changes can be traced.
Before sharing, change one input at a time and verify that dependent outputs update. Inspect percentage versus decimal entries, annual versus monthly units, rounding and signs. A 6 entered where 0.06 belongs is not a minor formatting issue.
In an interview, explain the $4.5 million equity requirement and the difference between the base operating case and the financing downside. That demonstrates more understanding than memorizing the initial $10 million value. The download contains the fictional assumptions and computed scenario answers for independent checking.