# Underwriting Assumptions (House Rules)

> Illustrative teaching case. Northgate Commons is not a real property, this is not a real transaction, and the term sheet is not a real financing quote. Every figure is fabricated for instruction.

These are the assumptions to hold fixed. They exist so that a correct method
produces one answer rather than a range, which is what makes the self-check key
usable. In a live deal most of these would be yours to argue about, and the
build-order guide notes where the judgment actually sits.

## Pricing and closing

| Assumption | Value |
|---|---|
| Underwrite at the guidance price | $17,400,000 ($145,000 per unit) |
| Acquisition costs (diligence, legal, title, transfer) | 1.25% of purchase price, $217,500 |
| Loan origination fee | 1.00% of the loan amount |
| Hold period | 5 years |

## Year-one net operating income

Year-one net operating income is the calendar 2026 trailing twelve months, normalized. No forward rent growth and no loss-to-lease capture are underwritten in year one.

| Assumption | Value |
|---|---|
| Basis period | Calendar 2026, the trailing twelve months in the statement |
| Management fee | 3.0% of effective gross income, underwritten whether or not you self-manage |
| Replacement reserves | $300 per unit per year, included in net operating income |
| Property tax reassessment | Assessed value resets to 92% of the purchase price at a combined rate of 1.350% |
| Capital items | Anything capital in nature comes out of operating expenses |

Note that reserves are inside net operating income here. Lenders that escrow a
reserve generally size coverage after it, and the term sheet in this packet
escrows one, so the loan tests are run on net operating income after reserves.

## Growth and the renovation program

| Assumption | Value |
|---|---|
| Effective gross income growth, year 2 | 6.0% |
| Effective gross income growth, year 3 | 5.5% |
| Effective gross income growth, year 4 | 3.5% |
| Effective gross income growth, year 5 | 3.0% |
| Effective gross income growth, year 6 | 3.0% |
| Operating expense growth (every line except the management fee) | 3.0% per year |
| Management fee in every year | 3.0% of that year's effective gross income |
| Renovation program | 34 units a year for 3 years at $9,500 per unit |
| Renovation capital timing | Spent in years 1 through 3, below net operating income |

The front-loaded growth in years 2 and 3 is the renovation program and the
burn-off of loss to lease showing up in revenue. Years 4 and 5 step down to
something closer to market growth once the program is finished.

## Exit

| Assumption | Value |
|---|---|
| Exit cap rate | 6.25% |
| Exit value | Year 6 net operating income divided by the exit cap |
| Costs of sale | 1.75% of gross sale price |
| Loan payoff | Outstanding balance at the end of year 5 |

Capitalizing the forward year rather than the trailing year is the convention
here, on the reasoning that a buyer at the end of year five is pricing the year
ahead of them. Using the trailing year is a defensible convention too, and it
produces a different answer, which is why the assumption is stated rather than
left to preference.

The exit cap sits about 1 basis point inside the going-in cap on
the underwritten net operating income, so the exit assumption carries no cushion
for the asset being five years older at sale.

## Cash flow conventions

- Annual periods. Year 0 is closing, years 1 through 5 are operations.
- Unlevered cash flow: net operating income less renovation capital, with net
  sale proceeds added in year 5. Year 0 is purchase price plus
  acquisition costs.
- Levered cash flow: net operating income less debt service less renovation
  capital, with net sale proceeds less loan payoff added in year 5.
  Year 0 is the sponsor equity check.
- Sponsor equity at closing is purchase price plus acquisition costs plus the
  origination fee, less loan proceeds.
- Debt service follows the term sheet: interest only for
  24 months, then the fully amortizing payment.

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*Illustrative teaching case. Northgate Commons, the market, the broker, the lender, the comparables, and every figure in this packet are fabricated for instruction. Nothing here is a real property, a real transaction, or a real financing quote.*