The Income Was Never Real
Nearly a third of CRE loans were underwritten on numbers that didn't add up. Here's how to make sure yours isn't one of them.
Every commercial real estate deal starts with a story. The offering memorandum tells it, the rent roll backs it up, the T-12 puts numbers to it. And by the time it lands on your desk, that story has been polished, packaged, and priced to look like a sure thing.
Here's the uncomfortable part: a lot of those stories aren't true.
The numbers behind the numbers
A landmark study out of the University of Texas, researchers reviewed roughly 40,000 commercial real estate loans worth about $650 billion, found something that should make every buyer and lender uneasy. On 28% of loans, the actual net operating income came in at least 5% below the income the property was underwritten at. Nearly a third. And with some originators, it was worse. More than 40% of loans from certain Wall Street banks carried income overstatements above 5%.
Read that again. Almost one in three loans was sold on income the building never actually earned.
This wasn't a rounding error or one bad year. The overstatement was consistent, predictable, and baked in because the people originating the loans had every incentive to make the income look as good as possible before passing the risk to someone else.
How income gets inflated
You don't need outright fraud to make a building look better than it is. You just need to be… generous:
- Count one-time or seasonal revenue spikes as if they're permanent.
- Lean on "market" rents the property has never actually achieved.
- Quietly understate expenses, defer the maintenance, lowball the management fee, forget the real cost of turnover.
- Bury concessions and free rent so the rent roll looks fuller than the bank account.
- Underwrite to projections instead of trailing actuals, and call it "upside."
Each move is small. Stack them together and you've got a property that looks 5, 10, 15% more profitable on paper than it is in real life.
Why this matters right now
For years, rising values covered a lot of sins. If a building was underwritten a little rich, appreciation bailed everyone out. That cushion is gone. With values flat-to-falling and a wall of debt coming due over the next 18 months, the gap between underwritten income and real income is about to get exposed, loan by loan. When it's time to refinance and the numbers don't support it, the story finally meets reality. Reality wins.
Why your spreadsheet can't catch it
A model believes whatever you feed it. Plug in inflated income and it'll hand you a beautiful return. The math will be flawless.
The conclusion will be wrong.
A spreadsheet can't walk the property. It can't tell you the "fully occupied" building has three tenants who haven't paid in four months. It can't see the deferred maintenance that's about to become a capital event, or check that the rent roll actually matches the leases, and that the leases match reality.
How you actually protect yourself
You verify it on the ground. That means tying the rent roll to signed leases and actual deposits, not a summary tab. Walking every unit, not a sample. Pressure-testing the expense load against what it really costs to run the building, not what makes the deal pencil. Treating the seller's numbers as a hypothesis to be proven, not a fact to be accepted.
It's slower. It's less glamorous. And it's the single highest-ROI thing you can do before you wire the money.
The bottom line
Nearly a third of CRE loans were built on income that didn't hold up, and the market is about to find out which ones the hard way. So before your next deal, ask the only question that matters: do you actually know what this building earns or do you just know what the paper says it earns?
Because paper will tell you anything. The building tells the truth.
As we say in VisionRE, math never lies, excel does.
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