03 / 04 · Assumption check
Underwriting assumptions that can change a deal
A model can calculate perfectly and still tell the wrong story. The result is only as dependable as the assumptions beneath it.
The take
Do not debate the return until you can name the assumptions creating it.
Start with the income that exists today
Keep actual income, market income, and hoped-for income in separate lines. Mixing them makes an upside case look like current performance.
- 01
Current rent
Tie occupied-space rent to the lease, rent roll, concessions, reimbursements, and payment history.
- 02
Market rent
State which spaces, dates, concessions, tenant improvements, and lease terms support the market assumption.
- 03
Other income
Separate recurring income from one-time fees and confirm who pays for parking, utilities, storage, signage, or percentage rent.
Make vacancy and lease-up visible
A single vacancy percentage can hide downtime, free rent, tenant improvements, commissions, bad debt, and renewal risk.
- 01
Physical vacancy
Show how much space is empty today and when vacant space is expected to start paying rent.
- 02
Economic vacancy
Include free rent, collection loss, below-market leases, and space that is occupied but not producing the modeled income.
- 03
Rollover
Map lease expirations and options by month. A stable annual average can hide a difficult quarter.
Rebuild expenses from the property outward
Trailing expenses are evidence, not a complete forecast. Taxes, insurance, utilities, management, repairs, and contracts may reset after a sale.
- 01
Property taxes
Model the likely post-sale assessment and local rules instead of carrying the seller's current tax bill without review.
- 02
Insurance
Use a current indication when possible. Separate premium, deductible exposure, required coverage, and any flood or wind layer.
- 03
Recoveries and gross-ups
Match recoverable expenses to the leases and show any assumed gross-up for partially occupied buildings.
Do not hide capital work below the return
Roof, structure, systems, tenant work, leasing commissions, and code upgrades are part of the investment even when they sit below net operating income.
- 01
Immediate work
List what must happen before occupancy, financing, insurance, or normal operation.
- 02
Recurring reserves
Use asset-specific replacement needs rather than a convenient round number with no schedule behind it.
- 03
Timing
Place each cost in the month or year when cash leaves. The same total can produce a different return when timing changes.
Model the loan you can actually get
Debt service changes with rate, leverage, amortization, interest-only periods, reserves, fees, and lender sizing tests.
- 01
Terms and sizing
Keep the quoted terms, assumed terms, and lender-tested terms separate. Show which constraint sets the final proceeds.
- 02
Closing and carry
Include lender fees, legal and third-party reports, escrows, extension costs, and operating cash needed before stabilization.
- 03
Refinance risk
Test the balance, value, income, and interest rate the refinance depends on instead of assuming the exit loan appears on schedule.
Make the exit earn its place
The exit value often carries more of the return than the early operating years. Small changes deserve a visible downside case.
- 01
Exit income
Show the rent, occupancy, expenses, and lease profile in the year used to calculate value.
- 02
Exit pricing
Explain the capitalization rate or price metric with market evidence and the property's expected age and condition at sale.
- 03
Selling costs and timing
Include the marketing period, transaction costs, loan payoff, taxes, and any capital work needed to reach the sale.
Run one downside that can actually happen
A useful downside changes connected assumptions together. Slower lease-up can also mean more concessions, more carry, and a later exit.
| Question | Base case | Downside case |
|---|---|---|
| When does new rent begin? | Planned lease-up | Later start plus added concessions |
| What resets after sale? | Known operating budget | Higher taxes, insurance, and repairs |
| What loan closes? | Quoted or supported terms | Lower proceeds or higher rate |
| What creates exit value? | Supported exit income and pricing | Slower growth plus softer exit pricing |
Make the assumptions work across the deal in ZOVA
ZOVA keeps the pricing evidence, broker assumptions, sensitivities, recommendation, and final artifact attached to the same property record.
- 01
Start from evidence
Available comps, property facts, market context, and deal documents establish the base case before the broker applies assignment-specific judgment.
- 02
Stress the variables that matter
ZOVA Insider tests the assumptions carrying value or returns and identifies the point where the recommendation moves from pursue to renegotiate or pass.
- 03
Keep the story synchronized
The same assumptions support the analysis, IC memo, BOV, OM, exit thesis, and stress-test output, reducing drift between the model and the client narrative.
This guide is educational. ZOVA is not an appraisal, lender, law firm, engineering firm, tax adviser, insurer, or investment adviser. Confirm material decisions with the appropriate professional and the current source documents.