---
id: "framework-deal-evaluation-triad"
type: "framework"
source_timestamps: ["00:35:00", "00:39:00"]
tags: ["underwriting", "investment-criteria"]
related: ["concept-replacement-cost-margin", "action-buy-below-replacement", "claim-class-c-too-risky", "framework-distressed-acquisition"]
sources: ["mcelroy"]
sourceVaultSlug: "mcelroy-multifamily-distress-playbook-2026Jun25"
originDay: 9
---
# The Deal Evaluation Triad

## Overview

In the current volatile market, [[entity-ken-mcelroy]] uses a strict three-part criteria to evaluate any new acquisition. **If a deal does not meet all three of these requirements, he passes** — regardless of the narrative or projected future appreciation. This is the screen feeding into [[framework-distressed-acquisition]].

## The Three Tests

1. **Below Replacement Cost** — The purchase price must be significantly below the replacement cost of building a comparable new asset. See [[concept-replacement-cost-margin]] and the operational mandate in [[action-buy-below-replacement]].
2. **Day-One Cash Flow** — The property must generate positive cash flow from day one, covering all expenses and debt service **without relying on future rent growth**. This is a direct response to the pro-forma magical thinking that drove the [[concept-syndicator-wipeout]].
3. **Long-Term Fixed-Rate Debt** — Secure long-term, fixed-rate debt that makes sense in the current interest rate environment. **Avoid floating-rate bridge loans** — the exact debt instrument now blowing up across the industry per [[claim-debt-maturity-crisis]].

## Strategic Implication

This triad explains why McElroy has abandoned older value-add product (see [[claim-class-c-too-risky]]) — those deals usually require future rent growth assumptions and shorter-term debt to pencil.

## How to Apply It

When evaluating any opportunity, ask three binary questions:

- Is the price-per-door clearly below current new-construction cost in this submarket?
- Does the trailing-12-month operating statement, *with current market rents*, support positive cash flow after debt service?
- Can I lock in long-term fixed-rate financing at terms I'm comfortable holding through a full cycle?

If any answer is *no*, walk away.