How is percentage rent modeled in a retail underwriting model?

Percentage rent only accrues once a tenant's sales exceed its lease-defined breakpoint, calculated as (sales − breakpoint) × the contractual rate. It should be modeled off tenant-certified sales reports, not broker estimates, since the certified figure determines whether the breakpoint is actually crossed.

Why isn't CAM recovery modeled at 100% in a retail pro forma?

Individual leases frequently cap the tenant's admin fee contribution or exclude certain line items, especially for anchors. The model needs an actual recovery ratio built from the lease abstracts, assuming full reimbursement of the CAM pool overstates income by the capped or excluded amount.

What is a co-tenancy clause and why does it matter for underwriting?

Co-tenancy clauses let inline tenants reduce rent or terminate their lease if an anchor tenant goes dark or occupancy falls below a threshold. Because this can affect multiple tenants simultaneously, retail models need an explicit downside scenario quantifying the exposure, it doesn't exist in single-tenant asset classes.

Why is the retail exit cap usually set wider than the entry cap?

Retail carries anchor-rollover and co-tenancy tail risk that tends to increase over a hold rather than resolve. Setting the exit cap 25–50 bps above entry prices that risk into the terminal value instead of assuming it disappears by the time the asset trades again.

What is a real estate underwriting model?

A structured spreadsheet that projects a property's cash flow, financing, and returns under explicit assumptions — the basis for every institutional acquisition decision.

Retail · Underwriting Model

Retail Underwriting Model

How to build a retail underwriting model: base rent plus percentage rent, CAM recovery ratios, co-tenancy risk, and exit cap discipline. Free template.

Get the Excel template Automate it with Moraine

Why the underwriting model looks different for retail

Retail revenue is built tenant-by-tenant with three separate lines (base rent, CAM/tax/insurance reimbursement, and percentage rent over a breakpoint) rather than a single blended rent figure. Percentage rent only shows up in the model at all once a tenant's sales exceed its lease-defined breakpoint, so the model has to carry tenant sales data most other property types never touch.

Admin fee caps, exclusions, and anchor CAM caps written into individual leases keep CAM recovery below 100%, so the model computes an actual recovery ratio from the lease abstracts instead of assuming full reimbursement of the CAM pool.

Co-tenancy clauses create a revenue cliff that other asset classes don't have: if an anchor goes dark, inline tenants can invoke rent reductions or termination rights. The model has to carry a co-tenancy downside case, because the anchor's health drives inline economics directly.

The retail-specific checklist

1

Build the rent roll

Verify: unit- or tenant-level detail with rent, term, recoveries
2

Project market rent growth

Verify: submarket-specific; avoid flat nationals assumption
3

Model recoveries explicitly

Verify: CAM, tax, insurance broken out, not blended
4

Run sensitivity on exit cap

Verify: ±75 bps and stress the downside
5

Build debt sizing

Verify: LTV and DSCR constraints both checked
6

Compute leveraged IRR and equity multiple

Verify: cash flow to equity, not enterprise
7

Build a tenant-by-tenant rent roll with base, recovery, and percentage rent lines

Verify: each tenant's percentage rent trigger checked against its actual lease breakpoint, not a blanket assumption
8

Compute the CAM pool recovery ratio from lease abstracts

Verify: recovery ratio reflects admin fee caps and anchor exclusions, not a flat 100%
9

Model percentage rent off tenant-certified sales reports

Verify: sales figures sourced from tenant reporting, not broker estimates
10

Layer a co-tenancy downside scenario into the model

Verify: quantified inline rent reduction or termination exposure if the anchor goes dark
11

Reserve for non-reimbursable capex and backfill TI separately from CAM

Verify: reserve sized off the deferred maintenance report and comparable backfill TI packages, not a blanket $/SF
12

Set the exit cap wider than the entry cap to price rollover and anchor risk

Verify: spread justified against comparable-vintage exit cap surveys for grocery-anchored or power-center product

Metrics that matter for retail

Metric	Target	Calculation
Occupancy cost ratio	<13%	(base rent + CAM + tax) / tenant sales
CAM recovery ratio	>85%	CAM reimbursement collected / total CAM pool expense
Debt yield	>9%	Year 1 NOI / loan amount
Occupancy cost ratio	8–12% for anchors, 10–15% for in-line	total occupancy cost / tenant sales
Sales PSF	varies by category	reported tenant sales / leased SF
Recovery ratio	>90%	recovered expenses / recoverable expenses

Red flags unique to retail

Model assumes 100% CAM recovery with no admin-fee cap or exclusion language checked

anchor leases routinely cap or exclude admin fees, assuming full recovery overstates reimbursement income by the uncapped amount
Percentage rent modeled off broker-provided sales estimates, not tenant-certified reports

broker sales figures are frequently rounded up; the gap between estimated and certified sales changes whether the breakpoint is even crossed
Co-tenancy vacancy scenario omitted from the downside case

an anchor dark period can trigger inline rent reductions across the center simultaneously, a risk that doesn't exist in single-tenant asset classes
Co-tenancy trigger above 70% occupancy

common anchor departure clause that can cascade into reduced rent across the center
CAM cap below 3% annual

suppresses expense recovery and flows inflation directly to NOI
Exclusive-use clauses blocking lease-up

limits the pool of replacement tenants even before the space goes vacant
Radius restrictions under 3 miles

constrains the operator's ability to relocate or expand nearby

Example — retail underwriting model walkthrough

Build the model around a 145,000 SF grocery-anchored center in suburban Atlanta priced at $51.0M, $352/SF. The anchor, a 62,000 SF grocer, pays $14.50/SF NNN ($899,000/year); 83,000 SF of inline space is blended at $28/SF ($2,324,000/year). Base rent totals $3,223,000. The anchor's percentage rent clause triggers at $8.5M in annual sales at a 1.5% rate; trailing sales of $9.2M produce $10,500 of percentage rent, a modest but real line the model carries. The 1.5% rate and the $8.5M breakpoint both come straight from the anchor's lease exhibit, and the line gets recomputed as sales move rather than held flat.

Reimbursement income comes next, and it isn't a flat pass-through. CAM, tax, and insurance recoveries at $5.10/SF generate $739,500 against the full pool, but the anchor's lease caps its admin fee contribution, and two inline tenants carry CAM exclusions from a prior renewal. Building the recovery ratio from the actual lease abstracts rather than assuming 100% prevents overstating this line. The anchor's admin-fee cap and the two inline exclusions are each carried tenant-by-tenant in the recovery schedule. After a 5% vacancy/credit loss, effective gross income lands at $3,774,350.

Non-reimbursable expenses (a 3% management fee, a $0.20/SF capex reserve, and roughly 8% CAM pool leakage from the admin-fee caps) total $201,391, leaving Year 1 NOI of $3,572,959. On the $51.0M basis, that's a 7.01% going-in cap rate. Debt sizes at 60% LTV to $30.6M; the 1.30x DSCR test (retail's higher floor, reflecting tenant concentration risk) implies $45.1M of proceeds, so LTV binds.

The exit case carries the co-tenancy risk. Modeling a 7-year hold with 2% blended NOI growth carries Year 1 NOI to $4,104,700 by Year 8. Because a co-tenancy-triggered anchor vacancy remains a live tail risk through the hold, the exit cap is set 35 bps above entry, at 7.35% rather than flat, producing a terminal value of roughly $55.8M. A model that ignored the co-tenancy exposure and held the exit cap flat would overstate terminal value by nearly $2M.