Occupied apartments do not make a vacant commercial floor produce rent. In this hypothetical mixed-use acquisition, eight apartments support some operations while the owner delivers and leases a separate commercial space. The buyer must finance the entire transition, including work and carrying cost that occur before the new tenant pays.
The thesis is a lawful, useful commercial floor with supported tenant demand after a defined delivery program. The empty space is an opportunity only if its realistic net cash justifies the cost and delay.
All properties, tenants, leases, prices, costs, rates, and outcomes in this case are hypothetical. They are teaching assumptions, not market comparables, actual lender offers, or Jaken-funded transactions.
Acquisition assumptions and balanced funding
| Initial use | Amount |
|---|---|
| Purchase | $2,300,000 |
| Closing and financing costs | $100,000 |
| Physical work | $300,000 |
| Leasing capital | $250,000 |
| Opening operating liquidity | $200,000 |
| Contingency | $100,000 |
| Total uses | $3,250,000 |
| Initial selected debt | $1,700,000 |
| Required equity | $1,550,000 |
Keep vacant rent outside in-place income
Assume eight apartments at $1,800 monthly scheduled rent generate $172,800 potential annual base rent. A stipulated 5% collection and vacancy allowance leaves $164,160. Another $4,840 income and $79,000 operating expenses produce $90,000 initial NOI while the commercial floor contributes no rent. These are teaching assumptions, not actual Chicago apartment figures.
The model then projects $160,000, $230,000, $260,000, and $270,000 NOI as the commercial and residential plans execute. The terminal illustration assumes $210,000 commercial revenue and $200,000 residential and other revenue, less $140,000 operating expense, yielding $270,000 NOI. This future condition must be supported, not inserted into current income.
Funded capital includes $300,000 physical scope and $250,000 leasing cost, spent over the first three years. Obtain plans, quotes, tenant delivery obligations, concessions, and commission terms. A floor can need access, systems, subdivision, or other work before it is realistically leasable.
Fannie Mae’s income guidance provides a primary example of separately considering commercial income within multifamily underwriting. Eligibility and treatment remain specific to the actual product and property. Fannie Mae valuation and income
Two financing structures
The selected illustration is $1,700,000 at 7.0%, with monthly payments, 25-year amortization and a five-year maturity. Monthly payment is $12,015; annual debt service is $144,183. Modeled principal after 60 payments is $1,549,757. The full commitment is assumed funded at closing; any restricted capital is tracked separately.
The alternative is $2,100,000 at 9.5% interest-only for 2 years, with $199,500 annual interest and $1,150,000 initial equity against the same uses. Principal remains $2,100,000 at its stipulated maturity without paydowns. The closing-cost allowance is held equal only to isolate structure; real proposals need their own fees, reserves, conditions, and approval.
The larger interest-only alternative reduces initial equity by $400,000 but increases the debt burden and requires a two-year takeout when modeled NOI is only $160,000. Using the final $270,000 for that refinance would ignore timing.
The selected five-year structure leaves more equity and amortizes principal. Its availability remains conditional on lender acceptance of vacancy, income mix, scope, and reserves. The opening liquidity is required for the modeled transition, not spare cash that can be distributed at closing.
The OCC handbook provides primary commercial underwriting context. Present the in-place and future cash separately, together with the scope, draw schedule, and exit. OCC CRE handbook
Five-year cash and funding model
| Year | NOI | Debt service | Recurring replacements | Raw operating cash | Opening reserve used | Cash available before owner allocation |
|---|---|---|---|---|---|---|
| 1 | $90,000 | ($144,183) | ($15,000) | ($69,183) | $69,183 | $0 |
| 2 | $160,000 | ($144,183) | ($15,000) | $817 | $0 | $817 |
| 3 | $230,000 | ($144,183) | ($15,000) | $70,817 | $0 | $70,817 |
| 4 | $260,000 | ($144,183) | ($15,000) | $100,817 | $0 | $100,817 |
| 5 | $270,000 | ($144,183) | ($15,000) | $110,817 | $0 | $110,817 |
The annual model uses initial operating and contingency funds to cover negative raw cash. Physical and leasing accounts are already included in acquisition uses, so they are not deducted again. Annual recurring replacement funding is deposited and spent within the same year.
A monthly schedule should identify commercial possession, tenant work, allowances, free rent, permit and inspection dependencies, apartment collections, tax payments, insurance, and lender releases. The buyer may need substantial cash before a signed lease contributes rent.
The model assumes year-end release of positive cash for its return calculation. Actual borrower and ownership restrictions can require retention. It returns only remaining initial liquidity at exit, preventing the reserve consumed during vacancy from being counted again.
Additional operating downside
A separate stress assumes $50,000 NOI and $200,000 additional unbudgeted capital in one stressed year. Cash after selected debt, recurring replacements, and that extra capital is ($309,183). Against the full opening operating/contingency balance of $300,000, the model uses $300,000 and requires $9,183 additional equity. This is a separate stress, not a claim that the same reserve remains intact after base-case draws.
The separate stress assumes $50,000 NOI and another $200,000 of capital beyond the base program. That can represent a longer commercial vacancy and a more expensive delivery requirement under this hypothetical scenario. It is not a prediction of construction cost or local approval duration.
Review the intended commercial use, access, egress, building systems, shared utilities, noise, service routes, and residential interaction with qualified advisers. The City of Chicago’s construction-code information is an official starting point for a city address; other municipalities require their own review. Chicago construction-code information
Do not assume a use change is permitted or a residential conversion is available merely because it could fill space. Each alternative needs its own legal, physical, cost, schedule, and financing analysis.
Concrete five-year exit and returns
Assume end-of-year-five sale with forward NOI of $270,000 and 2.0% selling costs. The scheduled-maturity model assumes no additional prepayment charge; actual payoff, taxes, and fees need confirmation.
| Exit calculation | Base cap | Higher-cap sensitivity |
|---|---|---|
| Exit cap | 7.5% | 8.5% |
| Gross price | $3,600,000 | $3,176,471 |
| Selling costs | $72,000 | $63,529 |
| Loan balloon | $1,549,757 | $1,549,757 |
| Net equity sale proceeds before reserve return | $1,978,243 | $1,563,185 |
| Remaining reserve returned | $230,817 | $230,817 |
| Total positive equity cash over hold | $2,492,329 | $2,077,270 |
| Total contributed equity | $1,550,000 | $1,550,000 |
| Equity multiple | 1.608× | 1.340× |
| Annual model IRR | 10.19% | 6.19% |
The five-year sale assumes the commercial lease has commenced, collections are supported, and the funded program is complete. The higher-cap sensitivity changes only price. A still-vacant floor requires a different income forecast and remaining-work deduction.
Returns use total equity for the acquisition, work, fees, and reserves, including additional modeled contributions if required. They are before income taxes, investor-specific fees, and actual member allocation. An apartment-supported first year does not eliminate the cost of reaching the commercial income.
Compare price and total basis with a supported mixed-use buyer market. Do not value all income as residential or assume a future lender accepts the same mix on the same terms. The exit should reflect the asset the investor actually creates.
Diligence and investment decision
Before closing, establish the commercial floor’s addressable tenants and their delivery needs. Review competing premises, asking and signed lease evidence where available, concessions, total occupancy costs, and realistic commitment timing. A vacant-space asking rent is not current cash.
Verify documented residential unit count, actual leases, collections, deposits, shared costs, taxes, insurance, building condition, and lawful use. The apartment stream and commercial stream need separate diligence before consolidation.
Obtain a scope with exclusions and contingency, then connect it to financing releases and tenant payments. A landlord allowance can exclude systems needed before the tenant can start. Identify those costs rather than hide them in a general square-foot budget.
Approve only if the work, tenant demand, monthly liquidity, actual loan conditions, and return support the price. Set a maximum additional contribution and a decision checkpoint if leasing is behind plan. A different capital structure or lower price can improve resilience; using stabilized rent as in-place income cannot.
After acquisition, report delivery progress, qualified prospects, signed terms, rent commencement, capital commitments, reserve burn, and refinance readiness. The investor needs evidence that the vacant floor is becoming an income-producing asset on time and within a fundable plan.
A milestone that changes the decision
Set a leasing checkpoint before spending the remaining delivery allowance. For example, a prospect requesting a different electrical configuration and six additional months of free rent changes both the capital requirement and first collection date. Compare that proposal with continued vacancy and other qualified prospects using the same monthly cash model. A signed lease can be less valuable than expected if its conditions postpone enforceable commencement. Obtain a precise delivery definition and funding schedule before counting its income in a refinance application. This checkpoint connects commercial leasing evidence with an actionable capital decision instead of treating every signed proposal as stabilization.