Commercial Real Estate 101: Cap Rates, NNN, and Tenant Mix

Commercial real estate looks complex until you anchor on three ideas: cap rates, lease structure, and tenant mix. Once you see those levers, underwriting gets repeatable.

Cap Rates (Definition + Use)

• Definition: NOI / Purchase Price.
• Use: A shorthand for yield; also a risk proxy by market/asset quality.
• Move: Grow NOI or buy at a better multiple; small NOI changes swing value.

Lease Structures

• Gross: landlord pays expenses; simpler, more risk on owner.
• NNN: tenant reimburses taxes/insurance/CAM; steadier NOI but watch CAM caps.
• Modified Gross: splits the difference; read the expense stops carefully.

Tenant Mix (Risk and Resilience)

• Diversify cashflow: limit exposure to any one tenant unless credit is stellar.
• Complementary uses: co-tenants that drive traffic to each other reduce vacancy risk.
• Lease rollover map: avoid multiple big expirations in the same year.

Vacancy and Rollover Risk

Value swings with downtime. Underwrite realistic downtime and TI/LC (tenant improvement + leasing commissions) by tenant type.

Developer’s Angle

• Model unit-level leases with expirations and option terms; visualize rollover by year.
• Track NNN recovery vs actuals; CAM caps can hide leakage.
• Scenario test: one anchor dark, two in-line vacants; does DSCR hold?

Utah/Regional Nuance

Tech-heavy corridors (Lehi/Draper) can have higher rent PSF but also more exposure to sector swings. Balance with service/medical tenants that are sticky.

Takeaway

CRE is three dials: cap rate, lease structure, and tenant mix. Map rollover, stress downtime, and mind CAM language. Everything else is detail.