NOI is positive. Why does the property still need cash?
The property earns $800,000 of year 2 NOI. Tenant work and leasing costs still leave an equity call.
The question
Willow Industrial is an invented 100,000-square-foot U.S. warehouse. All amounts are in U.S. dollars. The hold lasts five years. No rent growth, tax, depreciation, promote or refinancing is modeled.
| Assumption | |
|---|---|
| NOI | $800,000 |
| Tenant improvements | $10 per sq ft on 40,000 sq ft |
| Leasing commission | 5% of five years of new base rent |
| New annual base rent | $560,000 |
| Interest-only debt | $9.6m at 6% |
Pay tenant work and the full commission in year 2. Exclude them from NOI. Pay a separate $300,000 roof cost in year 1.
“Bridge year 2 NOI to cash available to equity. Then raise tenant improvements to $15 per square foot.”
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A strong answer, step by step
Open each step in turn. This is one strong answer, not the only one.
Step 1: Separate operating income from capital
What would you do here? Open the move you’d make.
Deduct capital costs from NOI and again from cash.
Tempting, but it misses something. That counts the payment twice.
Show capital costs below NOI.
The strong move. Their cash effect still appears in the equity bridge.
See how a strong candidate says it
“NOI stays $800,000. Tenant improvements and leasing commissions sit below NOI in this model.”
Why it works: Keep the stated NOI convention consistent so the cap-rate calculation uses the same measure.
Step 2: Calculate the cost of the lease
What would you do here? Open the move you’d make.
Charge 5% of one year of collected rent.
Tempting, but it misses something. That uses the wrong contractual basis.
Use five years of contracted base rent.
The strong move. That is the commission basis in the packet.
See how a strong candidate says it
“Tenant work is $400,000. The commission is $140,000: $560,000 times five years times 5%.”
Why it works: A commission on the full contracted rent is larger than 5% of the first year’s rent.
Step 3: Pay the lender
What would you do here? Open the move you’d make.
Distribute $224,000 to equity.
Tempting, but it misses something. That subtracts interest but omits leasing capital.
Call $316,000 of equity.
The strong move. The property needs cash after capital work and interest.
See how a strong candidate says it
“Annual interest is $576,000. Equity cash is $800,000 less $540,000 less $576,000, or minus $316,000.”
Why it works: Positive NOI alone does not fund all cash claims.
Step 4: Price the changed scope
What would you do here? Open the move you’d make.
Increase NOI by the cost of the work.
Tempting, but it misses something. Spending is not rental income.
Increase the call by $200,000.
The strong move. There is no offsetting rent or debt change.
See how a strong candidate says it
“At $15 per square foot, tenant work costs $600,000 and the call grows to $516,000.”
Why it works: The $200,000 increase is a dollar-for-dollar cash need in year 2.
The answer, in short
- Decision
- Reserve for a $316,000 year 2 equity call.
- Because
- NOI covers interest, but it does not also cover the full lease cost.
- What would change it
- A firm tenant-work bid of $15 per square foot raises the call to $516,000.
The tenant offers to fund half its improvements for a rent credit. What evidence do you need before changing the model?
Common traps
- Treating NOI as distributable cash.
- Using only the first year of rent as the commission basis.
Check your answer
- I kept NOI and capital costs separate.
- I calculated the full lease commission.
- I included annual interest.
- I identified the timing and size of the equity call.
Last reviewed Nov 10, 2026