Levered IRR is the annualized return that makes the equity cash flows add up to zero when you discount them over time. MOIC, or equity multiple, is simpler: total cash back divided by total cash in. Those two numbers, plus a handful of supporting metrics, are what an investment committee actually uses to approve, decline, or re-trade a real estate private equity deal.
An IC memo exists for one job: make a decision defensible under time pressure. It is not a marketing deck, and it is not a data dump. Think of it as a control document that ties underwriting to legal structure, financing terms, and the downside outcomes the IC can enforce.
ICs tend to converge on a small set of metrics for a practical reason. Those metrics answer three questions that never go away: What return are we getting paid for taking this risk? What can go wrong, and how far does it go? And if things drift, what levers do we actually have to fix it?
Why these seven IC metrics keep showing up
These metrics show up in most approvals, most re-trades, and most post-mortems because they translate a messy operating business into decision-grade numbers. They also force consistency across deals so the IC can compare options instead of debating formatting.
Below are seven metrics that show up in most approvals, most re-trades, and most post-mortems. If you put them on one page with clean definitions, the memo becomes easier to argue and harder to fool yourself with.
1) Levered IRR: explain what actually drives it
Levered IRR matters, but only when the memo explains where it comes from. A headline IRR with a vague exit and placeholder debt is a forecast. ICs underwrite a chain of cash flows, not a single percentage.
Show IRR at the right levels
ICs will ask for project-level levered IRR (often before promote and sometimes before asset management fees), investor net IRR after all fees and carry, and tranche IRRs if the capital stack includes preferred equity, mezz, or multiple equity classes. When someone says “market case,” the memo should also show “underwritten,” meaning the inputs you would defend when the market stops cooperating.
Make the mechanics auditable
The mechanics are not optional. Include a quarterly cash flow table that ties back to sources and uses at close and to a sale or refinance at exit. Spell out timing for leasing costs, capex, reserves, interest-only periods, amortization, and financing fees. If there is a waterfall, show who gets paid, when, and from which pocket.
Call out timing bets early
Then do the work the IC will do anyway. If IRR relies on leverage plus a quick sale with limited operating improvement, call it what it is: a timing bet. ICs will push on what happens if the exit slips by one year, or if the exit cap rate widens. If the return falls apart under modest pressure, the “base case” was never the base case.
2) MOIC: show the cash-on-cash path, not just the endpoint
MOIC doesn’t reward speed, which makes it a useful anchor when timelines are uncertain. A good MOIC, however, can still be a poor fit for a fund that needs current distributions or for a strategy that can’t afford long periods of trapped cash.
ICs will ask for gross MOIC and net MOIC after fees and carry. They will also want the cash-on-cash profile by year, including the break-even point when cumulative distributions exceed invested equity. If paydown is a major driver, show a paydown-adjusted equity yield so the committee can see how much of the “return” is amortization doing the lifting.
Don’t hide the path. A table that shows annual distributions is more useful than a single total at exit. Identify what is distributable versus what sits behind lender covenants, reserves, or lease-up requirements. Cash that can’t come out is not a distribution; it’s a number in the model.
ICs test for path dependency. If most of the MOIC comes from terminal value, the downside concentrates at the exit. That may still be acceptable, but then the deal needs either a price that reflects it or an operating plan that throws off steady cash flow along the way.
Another common failure is assuming distributions the loan documents would block. Lockboxes, cash sweeps, DSCR triggers, and debt yield tests can trap cash quickly. If the memo assumes interim distributions without showing covenant mechanics, the MOIC is not actionable.
3) Exit valuation: defend the cap rate or multiple with a bridge
In many deals, the exit cap rate is the most sensitive input. That’s not because cap rates are magical; it’s because the exit value often dominates the equity outcome.
The memo needs more than a generic “market cap rate” from a report. ICs want a bridge that starts with observable comps and then adjusts for the asset you are actually buying: lease term, tenant concentration, property condition, remaining capex, and buyer depth in that market. Liquidity is a real variable, and it changes when credit tightens.
For operating real estate businesses such as hospitality, senior housing, and self-storage platforms, ICs may focus on an EBITDA multiple. The same principle applies: show the comp set, show the adjustments, and show what happens under pressure.
Include sale costs, including broker fees, transfer taxes, and legal, and address whether the buyer will underwrite future capex. “Stabilized” does not mean “capex-free,” and buyers know the difference.
Rates matter because they shape buyer yield requirements. The Federal Reserve held the federal funds target range at 5.25% to 5.50% as of Jan-2024, and those levels stayed restrictive through 2024. ICs use that backdrop to challenge casual assumptions about cap rate compression. If your exit assumes a tighter cap rate than the going-in cap rate, the memo needs a specific reason: improved credit, longer lease term, stronger tenant mix, or reduced capex risk. “Better market” isn’t an argument.
The stop signs are familiar. Compression without a credible operational basis draws a re-trade. An exit value that depends on a refinance that lenders won’t size under realistic DSCR and rates is a financing bet dressed up as a sale.
4) NOI: reconcile in-place to stabilized with a credible bridge
NOI is revenue minus operating expenses before debt service, capex, and certain taxes depending on the asset and jurisdiction. IC members care less about labels and more about reconciliation: how does “today” become “stabilized,” and what does it cost?
The memo should show in-place NOI based on actual collections and current leases. Then show underwritten NOI with conservative assumptions on lease-up, downtime, and market rents. Stabilized NOI comes last, after the plan executes. If you want comparability across deals, also show NOI after replacement reserves.
The bridge is where credibility lives. Isolate contractual rent steps and expiries, vacancy and absorption, concessions and free rent, expense inflation, and the split between controllable and uncontrollable lines. Call out property tax reassessment risk, insurance terms, and catastrophe coverage. Then put recurring capex, TI, and leasing commissions where they belong: in the plan, on the timeline, with real dollars.
Separate capex into buckets the IC can think about. Life-safety and code items are non-discretionary. Deferred maintenance is usually real, even when the seller calls it “cosmetic.” Value-add capex should tie to a rent premium you can defend with comps. Tenant-driven capex (TI/LC) should match the leasing plan, not the most optimistic broker story.
ICs will pressure-test the expense line because that’s where many pro formas break. Insurance and property taxes are common culprits. If the memo uses broker estimates, say so. If it uses quotes or historicals, even better. “We believe expenses are conservative” is not evidence; a line-item bridge is.
Another recurring issue is capex leakage. A deal can show NOI growth while ignoring the capex required to produce it. A disciplined IC will reframe returns as yield on cost after capex. That is not academic; it is the check that prevents you from buying growth that you have to pay for twice.
5) Leverage: underwrite DSCR, debt yield, and refinanceability together
Leverage is not one ratio. ICs usually require LTV, DSCR, and debt yield because each fails in a different way.
LTV is debt divided by value, and value depends on the same exit assumptions under debate. DSCR is NOI divided by debt service, which captures payment ability under a specific rate and amortization schedule. Debt yield is NOI divided by the loan amount, which avoids interest-rate noise and shows how much NOI supports principal.
A single leverage number at closing is not enough. The memo should summarize the term sheet: index, spread, floors, fixed versus floating, hedging requirements and cost, amortization and interest-only, reserves, covenants, lockbox and sweep mechanics, transfer restrictions, lender consent rights, and recourse carveouts.
Higher-for-longer rates changed floating-rate value-add math. The Fed’s 5.25% to 5.50% target range as of Jan-2024 is a reasonable anchor for stress cases, even if your forecast includes cuts. ICs underwrite to the risk that cuts arrive late and spreads widen when liquidity tightens. That’s not cynicism; it’s memory.
ICs also focus on refinanceability. Show refi proceeds at a conservative takeout rate and underwriting DSCR. If the plan requires a refinance before stabilization, say it plainly: the deal depends on capital markets cooperation.
Stop signs tend to show up as thin covenant headroom. A small NOI miss can trigger cash trapping, and cash trapping can turn a good plan into an unforced error. If the deal can’t survive a modest rate shock without tripping covenants or running out of liquidity, it isn’t robust.
6) Downside: quantify breakevens, sensitivities, and loss economics
“Downside” only counts when it is quantified. ICs care about the point where equity gets impaired and how large the impairment can become. A narrative risk list without numbers is a comfort blanket.
Start with breakevens. Show breakeven occupancy that covers operating expenses plus debt service. Then show a second breakeven that covers the full capex plan and required reserves. Add a liquidity runway: minimum cash balance and the month it gets tightest. Timing risk often does more damage than total economics.
Sensitivity needs to be honest. A grid that flexes exit cap rate and stabilized NOI should show IRR and MOIC across the matrix. Add a time-to-stabilize stress so the IC can see carry cost and covenant pressure if leasing takes longer.
Downside cases should link stresses that move together in real markets: slower leasing and lower rents, higher capex, wider exit cap rates, worse refinancing terms, and higher-for-longer rates on floating debt. When NOI weakens, cap rates often widen. Treating them as independent can make a fragile deal look sturdy.
Finally, spell out control levers. If leasing misses, can you shift tenant mix to faster-to-lease uses? Can you defer discretionary capex without harming competitiveness? What waivers would you seek from the lender, and what would they cost in fees or reserves? If rescue capital is part of the plan, define governance and economics upfront. Hope is not a lever.
Fresh angle: a one-page “Model-to-Docs” test
A simple way to make downside analysis more decision-useful is to add a one-page “Model-to-Docs” test. The idea is to list the two or three model assumptions that create the most value (for example, interim distributions, a refinance at month 30, or capex timing), and then cite the exact loan or JV provisions that could block them (for example, a cash sweep trigger, a maturity test, or an approval right). This forces the memo to connect underwriting to enforceability, which is usually where surprises come from.
7) Alignment and governance: translate legal terms into cash outcomes
Alignment isn’t a slogan; it’s economics and enforceability. ICs translate legal terms into cash outcomes: who gets paid first, who controls decisions under stress, and what information rights exist to keep the plan on track.
Show sponsor co-invest as a percentage of total equity, and confirm it is cash at close. Lay out the fee stack with timing and payer: acquisition, development or construction management, asset management, property management and leasing, disposition, and financing fees. Then show the promote structure, pref, catch-up, tiers, and whether promote depends on realized returns or can crystallize early. If needed, link the promote discussion back to waterfall mechanics so the committee can see how the split behaves in stress.
ICs want major decision rights stated, not implied. Budgets, financings, sales, related-party contracts, and material litigation should have clear approval thresholds. Deadlock provisions should be workable. Removal rights, key person terms, reporting cadence, and audit rights should match the risk the investor is taking.
Regulatory and reporting details can turn into timeline and optics issues. SEC rules adopted in Aug-2023 increased expectations around fee and expense transparency for private fund advisers, even as litigation and implementation questions persisted. In practice, ICs assume disclosure. Fee practices should survive investor scrutiny and an examination, not merely fit inside a narrow reading of what might be allowed.
On reporting, valuation policy matters. Under U.S. GAAP, ASC 820 governs fair value; under IFRS, IFRS 13 does. If a deal’s reported performance depends on aggressive Level 3 marks to show compliance or to smooth reporting, that is a governance risk, not an accounting detail.
What “good” looks like when these metrics sit together
A solid IC memo doesn’t show seven disconnected outputs. It shows how they fit, or where they clash.
Exit value and debt sizing belong on the same page. If refinanceability is tight, exit cap rate is not just valuation; it is solvency. NOI growth and capex timing must match leasing timing and downtime, or the model is internally inconsistent. Cash-on-cash must be tested against lockbox and sweep mechanics, or distributions are imaginary. And the worse the loss profile under stress, the more governance needs to tighten.
The minimum exhibits that usually carry the day are straightforward:
- Sources and uses: Show fee line items, reserves, and a tie-out to the close.
- NOI bridge: Reconcile in-place to underwritten to stabilized, with supporting assumptions.
- Capex and TI/LC: Present a separate schedule with timing, buckets, and contingency.
- Financing summary: Include DSCR, debt yield, maturity, hedging, covenants, and cash management terms.
- Returns gross to net: Reconcile gross and net IRR/MOIC with distribution timing.
- Sensitivity grid: Flex NOI and exit cap rate, plus time-to-stabilize stress.
- Alignment term sheet: Summarize fees, promote, co-invest, and key control rights in one page.
Conclusion
Investment committees aren’t trying to predict the future perfectly. They’re trying to avoid being surprised in ways that cost money, time, reputation, or control. These seven metrics, presented plainly and tied to enforceable terms, are how you make an IC memo decision-ready.