A restaurant tenant’s proposed rent is only part of the investment. The landlord may need to deliver building systems, fund an allowance, carry the property through approvals, and depend on the operator’s ability to open. This hypothetical Chicago property has an attractive stabilized income but a deliberately weak first year while delivery work occurs.
The thesis is a building that can be lawfully adapted for the intended tenant at a supported all-in basis. The investor owns the real estate, not the restaurant business. The analysis separates property cash from the tenant’s equipment, payroll, inventory, and operating capital.
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 | $1,800,000 |
| Closing and financing costs | $60,000 |
| Physical work | $300,000 |
| Leasing capital | $100,000 |
| Opening operating liquidity | $150,000 |
| Contingency | $100,000 |
| Total uses | $2,510,000 |
| Initial selected debt | $1,200,000 |
| Required equity | $1,310,000 |
Price the landlord’s work before accepting the rent
The $300,000 physical budget covers the stipulated landlord building-system and condition work. The $100,000 leasing account covers the agreed allowance, commissions, and related delivery costs. Those accounts are funded at acquisition and spent during year one; they are not charged a second time to operating cash.
The model assumes first-year NOI is negative $20,000 because the property incurs costs before the new tenant pays meaningful rent. It then assumes $180,000, $195,000, $205,000, and $215,000 annual NOI. At the final year’s illustrative level, $270,000 property revenue less $55,000 operating expense produces $215,000 NOI. These are hypothetical contracted and operating assumptions requiring actual evidence in a real deal.
A lease work letter should identify delivery condition, eligible allowance items, payment evidence, completion, and any unused amount. The SEC-filed work letter is a primary example of those categories, although it is not this fictional restaurant’s agreement or a Chicago form. SEC lease work-letter example
Verify that the tenant has committed capital for its own obligations. A landlord-funded shell does not pay the operator’s staff or guarantee opening. Assess actual obligor, guarantee, business plan, experience, funding, and realistic sales economics without inventing financial strength from a recognizable restaurant name.
Two financing structures
The selected illustration is $1,200,000 at 7.0%, with monthly payments, 25-year amortization and a five-year maturity. Monthly payment is $8,481; annual debt service is $101,776. Modeled principal after 60 payments is $1,093,946. The full commitment is assumed funded at closing; any restricted capital is tracked separately.
The alternative is $1,500,000 at 9.5% interest-only for 2 years, with $142,500 annual interest and $1,010,000 initial equity against the same uses. Principal remains $1,500,000 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 alternative supplies $300,000 more debt, reducing initial equity but increasing cash interest while the property is not operating normally. Its two-year maturity comes soon after the modeled opening. The investor needs a supported permanent exit and enough cash for a later start.
The selected structure uses lower principal and a five-year term. It still requires substantial funded opening liquidity because year one cannot cover debt. Actual availability depends on the lender accepting the delivery plan, lease, sponsor, scope, and reserves; this teaching model is not an approval.
The OCC handbook provides construction and commercial repayment context. The financing request should show contractor scope, monthly burn, draw conditions, tenant delivery, and the permanent exit together. 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 | ($20,000) | ($101,776) | ($10,000) | ($131,776) | $131,776 | $0 |
| 2 | $180,000 | ($101,776) | ($10,000) | $68,224 | $0 | $68,224 |
| 3 | $195,000 | ($101,776) | ($10,000) | $83,224 | $0 | $83,224 |
| 4 | $205,000 | ($101,776) | ($10,000) | $93,224 | $0 | $93,224 |
| 5 | $215,000 | ($101,776) | ($10,000) | $103,224 | $0 | $103,224 |
The annual reserve movement makes the first-year deficit visible. It is covered first from the opening operating and contingency accounts, reducing what can return at sale. The annual recurring replacement amount is assumed deposited and spent in the same year, so it does not accumulate as another terminal asset.
A monthly schedule must go further. Contractor deposits, utility work, inspection, tenant completion, allowance reimbursement, and first paid rent can fall in different months. A year-end balance may remain positive while a particular early payment needs temporary equity. Confirm account control and permitted uses before relying on lender-held money.
Cash available in the table is assumed released for the model return; actual loan and ownership restrictions can require retention. The operator’s business profits are not added to property NOI, and an intercompany payment is not being used here to create cash.
Additional operating downside
A separate stress assumes ($60,000) NOI and $150,000 additional unbudgeted capital in one stressed year. Cash after selected debt, recurring replacements, and that extra capital is ($321,776). Against the full opening operating/contingency balance of $250,000, the model uses $250,000 and requires $71,776 additional equity. This is a separate stress, not a claim that the same reserve remains intact after base-case draws.
The separate stress combines a longer vacancy, higher carrying cost, and $150,000 work beyond the initial physical and leasing scope. It does not simply reuse the original $400,000 funded program as an extra expense. The calculation identifies the additional equity after using full opening liquidity for that isolated event.
Before closing, obtain qualified mechanical, plumbing, electrical, fire, accessibility, and building review for the intended design. Do not infer that a former restaurant’s equipment or prior occupancy establishes approval for the proposed operation. Existing conditions and the new use must be checked.
The City of Chicago’s construction-code page distinguishes the code framework and zoning administration. It is an official starting point for the subject Chicago address, while actual project requirements and approvals need specific review. Rules for another municipality should be researched separately. Chicago construction-code information
Concrete five-year exit and returns
Assume end-of-year-five sale with forward NOI of $215,000 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 | $2,866,667 | $2,529,412 |
| Selling costs | $57,333 | $50,588 |
| Loan balloon | $1,093,946 | $1,093,946 |
| Net equity sale proceeds before reserve return | $1,715,388 | $1,384,878 |
| Remaining reserve returned | $118,224 | $118,224 |
| Total positive equity cash over hold | $2,181,506 | $1,850,997 |
| Total contributed equity | $1,310,000 | $1,310,000 |
| Equity multiple | 1.665× | 1.413× |
| Annual model IRR | 11.30% | 7.58% |
The five-year value assumes a performing tenant and supported forward income after the delivery program. A restaurant that never opens or defaults does not deserve the same stabilized valuation merely because improvements were installed. Model reuse cost and vacancy separately if that event occurs.
The higher-cap sensitivity changes only pricing, leaving the operating schedule intact. It therefore does not represent the complete tenant-failure downside. The return includes all initial equity, the reserve consumed in year one, and remaining liquidity returned at sale. It is before taxes, actual investor fees, and negotiated member allocation.
The scheduled-maturity payoff assumes no additional prepayment charge. Confirm actual loan terms, tenant obligations, security deposits, and closing adjustments before treating modeled sale proceeds as distributable money.
Diligence and investment decision
Require a detailed responsibility matrix before signing an unconditional acquisition. Assign each system, permit, design, allowance, equipment item, inspection, and completion condition to landlord or tenant. Record cost, timing, and evidence. A vague turnkey promise can expose the landlord to work the acquisition budget never priced.
Compare a smaller allowance or lower-rent renewal alternative where feasible with the proposed high-rent lease. The highest face rent can have the weakest net economics if it needs excessive capital and a fragile operator. Use dated cash flows and the space’s ability to serve another tenant.
The buyer should approve only with a fundable monthly delivery schedule, verified lawful-use path, priced scope, credible operator capital, and committed support for the stress. If any material system remains unpriced or the tenant’s funding is speculative, change price and conditions or decline. A lender deposit is not a substitute for resolving those issues.
After closing, track scope, change orders, tenant funding, milestones, allowance requests, approvals, opening readiness, actual rent, and remaining liquidity. Preserve the original forecast so a later positive NOI does not conceal a larger-than-planned capital contribution. The investment is successful only when the tenant can operate and the property earns enough after the full cost of delivery and financing.