Add-backs are one-time non-recurring expenses (legal, casualty losses, owner-related costs). An add-back increases NOI by removing the item from expenses. Haircuts are revenue items that lenders discount (concession-burdened rents, tenant-improvement amortizations, expired tenant credit). Together they typically move sponsor pro-forma NOI by 5 to 15 percent.
What add-backs are routinely accepted?
Owner-related travel and entertainment, one-time legal costs (LLC formation, sponsor-level expenses), casualty losses and insurance proceeds timing differences, and prior-year property-tax true-ups. Documented and verifiable add-backs typically pass lender review.
What haircuts surprise sponsors?
Concession amortization (free rent spread over lease term), market-rate management fee even where owner-managed, full property-tax accrual at post-acquisition reassessment, full insurance accrual at quoted renewal rates, and reserves for replacement at standard per-unit or per-square-foot rates. These are routine and not negotiable.
Sources
- Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations · Mortgage Bankers Association · 2026-Q1