Analyzing Mixed-Use Property

When you’re underwriting a mixed-use property, it is good practice to break out each income stream and evaluate it on its own. Not all revenue is created equal, and it shouldn’t be valued that way.

Take a property with apartments, retail, and a parking garage. Instead of blending everything together, underwrite each component separately and assign risk accordingly.

Let’s analyze a hypothetical property and business plan.

• Apartments: The units have not been upgraded in 20 years. There’s a significant value-add opportunity. You want to take these units to the top of the market. That creates upside, but also execution risk. We will classify this as High Risk.

  
  

• Retail: The property is 100% occupied with three tenants who have been at the property for 10 years. They have just extended their leases for another 3 years. Their rents are slightly below market. While lease terms could be longer, the tenants are established at this location. If they were to leave, you should be able to re-lease at least at current rents. Medium Risk.

  
  

• Parking Garage: Income comes from a diversified group of nearby companies leasing spaces, along with public parking. The revenue has been stable for the past 3 years. Let’s call this Low Risk.

If your business plan plays out, you might project that in 5 years 60% of the property’s value comes from the apartments, 30% from retail, and 10% from the garage. But those income streams don’t carry the same probability of success.

By separating and valuing each revenue source independently, you can stress test them based on their specific risk profiles. That gives you a clearer picture of how realistic your projections are — and how likely the investment is to achieve its target returns.