50 REPE Interview Questions

Going-in cap rate is Day-1 NOI ÷ purchase price (or total basis including acquisition costs, depending on firm convention). It answers what yield you are buying on in-place cash flow at close. Exit cap rate is forward stabilized NOI at sale ÷ gross sale price — typically capitalizing Year N+1 NOI to reflect buyer underwriting at disposition. The spread between entry and exit cap (expansion or compression) is a primary driver of unlevered returns. In interviews, always state whether NOI is in-place or stabilized and whether the denominator is gross or net of transaction costs.

Tier 1 — Return of Capital: 100% of distributable cash flow to the LP until cumulative contributions are returned. Tier 2 — Preferred Return: LP receives a hurdle IRR or cumulative pref (e.g., 8% compounded) before the GP participates in promote economics. Tier 3 — Promote / Carried Interest: remaining cash flow splits per the promote structure (e.g., 80/20 LP/GP until a second hurdle, then 70/30 or 50/50). A true 3-tier waterfall adds an intermediate split (e.g., 80/20 to a 12% IRR hurdle, then 70/30 to 15%, then 50/50 above). Always clarify whether the waterfall is deal-by-deal or fund-level, and whether the GP catch-up applies after the pref.

Levered IRR can fall below unlevered when debt destroys value — typically negative leverage from borrowing at a cost above the unlevered return on assets, excessive amortization front-loading cash outflows, or a refinancing at worse terms mid-hold. It also occurs when fees, cash traps, or covenant-driven sweeps reduce equity distributions despite positive NOI. In distressed or transitional assets, leverage amplifies losses: if exit value does not cover the loan balance, equity receives nothing while unlevered cash flows may still be positive. Always check: if cost of debt > cap rate / cash yield, leverage drags equity returns.

NOI is revenue less operating expenses — it excludes capital expenditures, leasing costs, and debt service. CFBD starts from NOI and subtracts recurring and non-recurring capital items: tenant improvements, leasing commissions, and often a capital reserves line. CFBD is the cash available to service debt before principal and interest. In value-add underwriting, conflating NOI with CFBD overstates distributable cash and breaks DSCR math. Interview tip: NOI capitalizes value; CFBD feeds the debt schedule.

Buyers underwrite what they will own, not what the seller earned last year. Forward NOI (usually Year N+1 after stabilization) reflects rent bumps, lease-up, and expense normalization at exit. Trailing NOI understates value on a lease-up asset and overstates value if in-place rents are above market. The convention matches how acquisition teams build their own going-in cap at purchase. State the hold period, stabilization timing, and whether you haircut forward NOI for lease-up risk.

Higher LTV reduces initial equity, which mechanically increases MoIC if absolute dollar profit is unchanged — but it also increases debt service, reducing cash flow available for distribution and potentially lowering exit proceeds if the loan balance remains elevated. At modest leverage with positive spread, MoIC rises because the denominator (equity) shrinks faster than the numerator (exit equity). Beyond optimal leverage, cash sweeps and refinancing risk compress equity returns. The relationship is not linear: interviewers want you to articulate both the magnification effect and the cash flow drag.

DSCR = NOI (or CFBD, per loan docs) ÷ total debt service (interest + scheduled principal). Lenders typically require minimum DSCR of 1.20x–1.30x on stabilized assets. A projected breach triggers cash traps, blocked distributions, or mandatory cure reserves — directly impacting levered IRR and promote timing. In transitional deals, lenders may underwrite to a future DSCR with interest reserves. Always specify which NOI definition matches the credit agreement.

Core: in-place NOI is reliable; focus on cap rate, modest rent growth, and long WALT. Minimal TI/LC; leverage is accretive at tight spreads. Value-add: underwrite a business plan — renovation capex, downtime, lease-up timeline, rent premium, and higher exit cap for residual lease risk. Returns depend on execution delta (rent achieved vs. pro forma), not just market beta. Interviewers expect you to identify the 3–5 assumptions that actually move the IRR.

Terminal value = forward NOI ÷ exit cap. Rent growth increases revenue faster than expenses (if expense ratio is stable), expanding NOI and therefore exit proceeds. Expense inflation erodes NOI margins if not passed through via escalations or CPI-linked leases. Net effect: NOI growth rate approximates rent growth minus leakage from vacancy, concessions, and OpEx inflation. Sensitivity tables should show exit value as a function of both exit cap and forward NOI — small cap rate moves dominate at low cap environments.

Tenant Improvements (TI) and Leasing Commissions (LC) are capital costs to re-tenant space — they do not flow through NOI directly but reduce free cash flow and equity returns. Some models present a 'stabilized NOI' line before TI/LC and a 'net cash flow' line after. For office, LC is often quoted as months of rent; TI as $/SF. Amortizing vs. expensing treatment varies by firm. In interviews, explain that heavy TI/LC years signal re-tenanting risk and can break DSCR even when headline NOI looks stable.

A preferred return is typically a simple or cumulative return on contributed capital (e.g., 8% non-compounded) paid before promote splits. An IRR hurdle is a time-weighted return threshold — the promote only shifts after the LP achieves X% IRR, which accounts for timing of distributions. IRR hurdles are harder to achieve early and align GP/LP interests on velocity of capital. A cumulative pref can be met with slow payouts; IRR hurdles reward faster return of capital. Know which metric your waterfall uses before calculating promote.

Exit value = NOI ÷ cap rate. A 50 bp expansion reduces exit proceeds non-linearly — at a 5.0% cap, a 50 bp move to 5.5% cuts value by roughly 9%. Unlevered IRR falls sharply; levered IRR falls more if loan balance is high because equity absorbs 100% of the value loss. This is the primary market-risk sensitivity in REPE models. Always present cap rate expansion alongside base and compression cases in IC memos.

Gross Potential Rent (GPR) = units × market rent × 12, assuming 100% occupancy at market. Effective rent nets concessions, loss-to-lease, and vacancy/credit loss to arrive at Effective Gross Income (EGI). Loss-to-lease captures in-place rents below market on occupied units — critical in value-add where you model mark-to-market over 12–24 months. Concessions (free months) reduce effective rent in year one. Interview mistake: applying vacancy to GPR but forgetting loss-to-lease on a value-add deal.

Unlevered IRR isolates asset-level performance — useful for comparing deals across capital structures and for lenders. Levered IRR is the equity story and what LPs care about for fund returns. Present both: unlevered proves you bought a good asset; levered proves you structured a good deal. If leverage is temporary bridge financing, clarify the refi assumption. Never show levered IRR without stating LTV, rate, amortization, and exit loan balance.

Uses include purchase price, closing costs, immediate capex, financing fees, and reserves. Sources include senior debt, mezzanine (if any), and sponsor equity. The equity plug is the residual: Equity = Total Uses − Debt − Other Sources. It is the last line solved — not an input. If equity plug turns negative, the deal is over-levered or mis-priced. In interviews, walk through uses first (build from the bottom up), size debt at max LTV or DSCR constraint, then plug equity.