Underwrite Methodology: Reviewable CRE engine

Section 01

Deterministic engine, no LLM in the math path

The AI layer is deliberately bounded. It can translate broker material into structured input fields with source quotes. Once those fields are set, the math path is pure TypeScript arithmetic. That means an analyst can review the formulas, rerun the same deal, and see identical output.

Engine contract

inputs + deterministic engine = pro forma, debt, returns, memo

AI parser = extraction aid only

math path = no prompt, no sampling, no hidden model state

Section 02

Pro forma construction

Revenue and expenses are built year by year. Vacancy is applied to gross potential income, property management and reserves scale with EGI, and each line compounds from the Year 1 assumption.

Operating build

residentialGPR(y) = units * monthlyRent * 12 * (1 + rentGrowth)^(y - 1)

retailGPR(y) = retailSF * rentPerSF * (1 + rentGrowth)^(y - 1)

EGI(y) = GPR(y) + otherIncome(y) - vacancy(y)

NOI(y) = EGI(y) - operatingExpenses(y)

Section 03

Sources and uses

Closing costs and origination fees are explicit. Debt is sized against purchase price, while the equity check funds the gap between total uses and loan proceeds.

Closing stack

closingCosts = purchasePrice * closingCostPct

loanAmount = purchasePrice * LTV

originationFee = loanAmount * originationFeePct

equity = purchasePrice + closingCosts + originationFee - loanAmount

Section 04

Debt schedule

The base loan is a fixed-rate amortizing mortgage with a balloon at term. Optional mezzanine and refinance overlays are modeled separately, then rolled into blended DSCR and exit payoff logic.

Annual debt service

PMT = loanAmount * (rate / 12) / (1 - (1 + rate / 12)^(-months))

annualDebtService = PMT * 12

DSCR(y) = NOI(y) / annualDebtService(y)

Section 05

Exit value

Exit value is based on forward NOI, not the trailing sale-year number. That reflects how buyers price the asset: they are underwriting next year's income.

Sale proceeds

grossSale = NOI(hold + 1) / exitCapRate

netSale = grossSale * (1 - sellingCostPct)

exitCash = netSale - loanBalance(hold)

Section 06

Equity waterfall

The waterfall distributes operating cash and exit cash through return of capital, preferred return, catch-up tiers, and promote. Losing deals do not receive phantom preferred return.

Waterfall priority

1. Return LP capital

2. Pay compounded preferred return

3. Split catch-up tiers by hurdle

4. Split residual profit by promote structure

Section 07

IRR computation

Project IRR is solved from the equity cash-flow stream. The solver uses Newton-Raphson with a bracketing fallback so distressed and healthy deals both converge.

IRR identity

sum(CF(t) / (1 + IRR)^t) = 0

initial guess = 15%

fallback bracket = -99% to 500%

Section 08

Returns decomposition

Underwrite separates the return story into yield, appreciation, leverage premium, equity buildup, paydown, and sponsor economics. Two identical IRRs can have very different risk profiles.

Return attribution

operatingYield = average NOI during hold / purchasePrice

appreciation = annualized net sale growth over basis

leveragePremium = equityIRR - unleveredIRR

Section 09

Sensitivity analysis

The sensitivity suite reruns the full engine under changed assumptions: tornado bars, exit-cap and rent-growth heat tables, hold-period curves, vacancy curves, rate curves, DSCR stress, and Monte Carlo.

Sensitivity principle

for each scenario:

nextInputs = applyShock(baseInputs)

nextResults = run(nextInputs)

impact = nextIRR - baseIRR

Section 10

Validation guards

Validation guards cover critical input errors, property-type-aware operating bands, lender thresholds, and cross-field consistency risks such as stacked leverage, refinance dependency, and double-growth bets.

Cross-field example

stackedLeverageRisk fires when:

LTV is high

DSCR cushion is thin

exit cap is below entry cap

Section 11

Verdict and grade

The pursue/pass verdict is intentionally simple: clear the return threshold and maintain minimum lender safety. The grade is broader, scoring returns, MoIC, DSCR, leverage, cap arbitrage, and LP share.

Verdict gate

PURSUE if projectIRR >= 15% and minDSCR >= 1.0x

all-equity deals bypass DSCR because no debt service exists

Section 12

What does and does not leave your browser

The engine runs client-side. Saved deals live in browser local storage. Share links encode deal data into the URL. The parser is the exception: if enabled, pasted source text is sent for extraction, then returned with source quotes.

Confidential Mode disables AI parsing and share flows for sensitive material while keeping manual underwriting fully usable.

Section 13

Model boundaries

Underwrite is explicit about what the current engine does not model. Highly bespoke tax structures, unusual credit agreements, custom partnership terms, and enterprise data feeds still belong in analyst, counsel, or firm-specific review.

Read the model-boundary document

Section 14

Worked example: Cherry Street

Cherry Street is the canonical regression anchor. It is the deal we use to detect engine drift because the numbers are broad enough to exercise operating build, debt service, exit value, waterfall, verdict, and memo output.

Cherry Street anchor

purchase price = $8,500,000

senior debt = 65% LTV at 6.25%

hold = 7 years

exit cap = 6.50%

output = pursue-grade mixed-use acquisition memo

Run Cherry Street in the tool