How to Spot a 'Dressed-Up' NOI: Five Adjustments That Inflate Deal Numbers

TL;DR

The NOI on the first page of an offering memorandum is often not the NOI you should underwrite to. Five specific places where sellers and listing brokers commonly overstate — inadvertently or otherwise — actual operating economics: pro forma rent projections where the stated rent assumes future market-rent escalations that haven't happened yet; understated operating expenses where the seller's run rate doesn't match realistic landlord costs; capitalized recurring expenses where roof, HVAC, parking, and other near-certain future outlays aren't baked in; vacancy assumptions that use short-run rather than stabilized numbers; and management fees treated inconsistently with how a new owner would actually operate the asset. A buy-side broker who checks all five closes better deals and gets fewer surprise calls three months into escrow.

Why This Matters

An overstated NOI inflates every downstream metric:

• Cap rate looks tighter (more attractive pricing)
• Cash-on-cash return looks higher
• Debt service coverage looks healthier
• Valuation multiple appears more defensible

If the NOI is overstated by 10%, every financial metric is off by a corresponding amount. In today's market that's the difference between a deal that pencils and one that doesn't, and between a cap rate that looks market and one that's priced 50-100 bps tight.

The sellers doing this aren't necessarily dishonest. OM conventions have drifted over time to include pro forma adjustments that accumulate into what the market now calls "stabilized" NOI — a number that's directionally accurate but requires careful unpacking to make sure every assumption is reasonable.

1. Pro Forma Rent vs Actual Rent

The dress-up: the OM shows rent at $X per square foot, but the current tenant is actually paying $Y per square foot. The difference is a "pro forma" assumption that rent will be marked up to market at renewal, expansion, or lease-up.

What to check:

• Actual current rent on the lease — read the lease, don't rely on the OM summary
• Market rent in the same submarket — what are truly comparable spaces leasing for?
• When the assumed mark-up occurs — at next renewal? At lease end? Immediately?
• Tenant renewal likelihood at the assumed higher rent — would they actually pay market?
• Lease-up assumptions for any vacant space — is the assumed lease-up period (60 days? 6 months?) realistic for the market?

Red flags:

• Pro forma rent 15%+ above current rent without specific market evidence
• Lease-up assumptions shorter than local market norms
• "Tenant is expected to renew at market" without confirming with the tenant

Adjustment: underwrite to the more conservative of current actual rent OR verified market rent. If the pro forma adjustment adds more than 5% to NOI, you're probably paying for the seller's optimism.

Example

OM shows $425K annual rent on a 20K SF retail asset ($21.25/SF). Actual current rent per the lease: $350K ($17.50/SF). The OM's pro forma assumes a mark-up to "stabilized market rent" at next renewal, 18 months out.

Conservative underwriting: use $350K NOI with zero mark-up assumed. If the tenant renews at market, that's upside; if they don't, you haven't paid for phantom income.

2. Understated Operating Expenses

The dress-up: the OM shows operating expenses at a level below what a reasonable landlord should expect to pay. This can be innocent (the seller genuinely runs the property at below-market cost due to owner-operator efficiencies) or intentional (they've stripped costs from the P&L for presentation).

What to check:

• Property taxes actual and projected. On a trade, taxes often get reset higher due to transfer-related reassessment. The OM may show the seller's current tax bill; your underwriting needs the post-trade reassessed bill.
• Insurance costs. Have you verified actual current insurance bills? Insurance has been rising rapidly in many markets (particularly Florida, California, Gulf Coast). A lower-than-market insurance number is a flag.
• Utilities. If the property has owner-paid utilities, are those included at realistic amounts? OMs sometimes use prior-year numbers in years where utility costs have materially changed.
• Repairs and maintenance. A "$0 R&M" or suspiciously-low R&M line is nearly always wrong for a property with any age on it.
• Legal and professional fees. Some OMs understate these by excluding owner-level legal (like leasing attorney fees, tenant-negotiation legal work) from property-level P&L.

Red flags:

• R&M under 1% of gross rent for a 10+ year-old property
• Insurance costs flat year-over-year when everyone else in the market has seen increases
• No legal or professional fee line on the OM
• Utilities at numbers that seem inconsistent with tenant use

Adjustment: benchmark expense categories against typical institutional ownership:

• Property taxes: use the assessed value under your target purchase price, apply the current millage rate
• Insurance: get an actual quote from your broker based on the purchase structure
• R&M: 1.5-3% of gross rent as a baseline for institutional ownership; higher for older properties
• Professional fees: typically 0.5-1% of gross rent

If your underwritten OpEx is materially higher than the OM's, that's where the real NOI adjustment is.

3. Capitalized Recurring Costs

The dress-up: an OM shows "NOI" excluding capital expenditures — which is technically correct accounting but omits real economic costs the new owner will face. The roof, HVAC, parking lot, signage, and facade don't replace themselves for free.

What to check:

• Roof age and condition. Roofs typically last 15-25 years. A 20-year-old roof at the time of acquisition is a near-certain replacement cost in the early hold period.
• HVAC condition and age. Commercial HVAC typically lasts 15-20 years. An older HVAC system will require replacement mid-hold.
• Parking lot condition. Resurfacing typically required every 7-10 years; full replacement less frequently but more expensive.
• Facade, signage, and exterior. Rebranding, refresh, or restoration costs vary widely by property type.
• Tenant improvement reserves at renewal. Landlord TI at lease renewals is a significant recurring cost on most commercial properties — often not included in the OM's expense calculation.

Adjustment: build a capital reserve into your underwriting. Typical institutional practice:

• Retail NNN freestanding: $0.25-$1.00 per SF per year, depending on property age and condition
• Multi-tenant retail: $0.50-$1.50 per SF per year (higher TI at turnover)
• Office / medical office: $1.00-$2.50 per SF per year
• Industrial: $0.15-$0.50 per SF per year

This reserve deducts from NOI for cash-flow and valuation purposes. On a 20K SF retail deal, $1.00/SF per year = $20K annual capital reserve, which reduces underwritable NOI by the same amount.

4. Vacancy and Collection Loss Assumptions

The dress-up: the OM shows the current lease fully occupied, with a "stabilized" vacancy assumption below realistic long-term expectations.

What to check:

• Single-tenant net lease: if the current tenant is the only one, vacancy is either 0% (they stay) or 100% (they don't). The blended long-term expectation depends on renewal probability.
• Multi-tenant vacancy: use the higher of current vacancy OR submarket vacancy. An 80% occupied center in a 15% vacancy market shouldn't be underwritten at 5% vacancy just because that's the current rate — that's the current number in a market where vacancy typically runs higher.
• Collection loss: separately from vacancy, how much actual rent billed goes uncollected? Tenant defaults, bad debt, concessions. For stabilized retail, 1-3% of gross rent is a reasonable reserve.

Red flags:

• Multi-tenant vacancy assumption below current actual or below market
• "Stabilized vacancy" used without supporting data on market comparable vacancy rates
• Collection loss shown as $0 in the expense stack

Adjustment: use realistic submarket vacancy (based on actual vacancy data from brokerage research on the specific market) and a collection loss reserve of 1-2% minimum for stabilized multi-tenant properties.

5. Management Fees Handled Inconsistently

The dress-up: management fees in the OM may be:

• Excluded entirely (the seller was a direct owner-operator, no management fee charged to themselves)
• Charged at below-market rates
• Included "elsewhere" in a way that's hard to track

A new owner who isn't a direct operator will pay 3-5% of gross rent to a property manager. That's real cost that needs to be in the underwriting.

What to check:

• Is there a property management fee line? If not, add one.
• What's the percentage? Market rates vary by property type, but 3-5% of gross rent is typical for institutional ownership of retail and office. Industrial is often lower (1-2%).
• Is the seller's self-management reflected realistically? Owner-operators often don't charge themselves management fees; a new owner using an outside manager will.
• Is on-site management separately stated for larger properties? Multi-tenant centers often have on-site managers or janitorial that's separate from the property management fee.

Adjustment: add a management fee (3-5% of gross rent for most property types) to the OpEx stack if it isn't already there. This often shifts NOI down by 2-4% of gross rent — a non-trivial adjustment.

The Underwriting Result

After all five adjustments, your underwritten NOI is often 5-15% below the OM's stated NOI. On a 6.5% cap rate deal, a 10% NOI reduction is a $1.5M price adjustment on a $10M deal — or a 65 bps cap rate move.

This is not "finding flaws" in the OM — it's doing the work to get to stabilized numbers you can actually underwrite to. A well-trained listing broker expects this adjustment; the seller may not love it, but the price discussion should happen on realistic numbers, not OM numbers.

The Checklist

Before quoting a cap rate on any deal:

1. Pro forma rent reviewed against actual current rent and market rent
2. OpEx benchmarked against institutional-ownership realistic costs (taxes, insurance, R&M, utilities, professional)
3. Capital reserve built in based on property age and condition
4. Vacancy assumption reasonable given submarket conditions
5. Management fee included at realistic market rate

The Bottom Line

The difference between a broker who routinely closes clean deals and one who gets repeated renegotiations three weeks into escrow is often this checklist. Taking the OM at face value is tempting — the numbers are already formatted, the story is already told — but the adjustments matter, and both sides ultimately benefit from getting to honest numbers early.

For a seller's broker, running your own version of this checklist before issuing the OM is worth the time. For a buyer's broker, running it on every deal before quoting pricing is simply the job.

Editorial disclaimer. This article is published by Trestle Research for informational purposes only. It is not investment, tax, or legal advice. Market conditions, expense ratios, and underwriting conventions vary; specific transactions require full professional review. Always consult qualified counsel, accountants, and appraisers on specific deals.

Run your net lease deal through Trestle. Our underwriting engine applies these adjustments automatically — tax reassessment, realistic OpEx, capital reserve, vacancy, and management — so you see stabilized NOI, not dressed-up NOI. First deal is free. [Start underwriting →](/sign-up/broker)