Real Estate, Commercial

How to Underwrite Life Science and Lab Space

Underwrite life science lab space by focusing on tenant credit and building infrastructure. Analyze each tenant's cash runway and funding, lab TI costs, power, HVAC and floor-to-floor heights, plus location within an established cluster. Key metrics are tenant cash runway, WALT, TI per square foot, percentage of credit tenants and debt yield.

What makes life science lab underwriting different

Life science buildings house research labs requiring specialized infrastructure: high floor-to-floor heights, heavy floor loads, extensive HVAC with high air changes, backup power, fume hoods and vivarium space. These features make lab buildings expensive to build or convert, and the TI packages to fit out a lab can be several times those for office. Tenants range from large pharmaceutical companies to early-stage biotech firms funded by venture capital, which may have limited revenue and depend on continued funding. Demand concentrates in a handful of established clusters near universities, research hospitals and talent.

Lenders scrutinize tenant credit closely because many biotech tenants have no earnings. They often analyze cash runway relative to lease obligations, require letters of credit or security deposits and size loans conservatively. Equity investors underwrite the cluster's long-term demand, rent premiums over office and the value of hard-to-replicate infrastructure. They also weigh supply risk from new lab construction and office-to-lab conversions. When biotech venture funding tightens across the sector, demand can soften quickly, so both lenders and investors stress test leasing assumptions.

Key metrics

Tenant Cash Runway

Venture-backed biotech tenants may have no revenue. Cash on hand relative to burn rate shows how long they can pay rent.

Underwriters often want tenant runway extending well beyond the next lease obligations, commonly at least a couple of years.

Credit Tenant Percentage

Share of rent from large, profitable companies indicates downside protection.

WALT

Longer leases reduce exposure to funding cycles.

Lab TI per Square Foot

Lab buildouts are costly, and re-leasing may require new investment.

Lab TI typically runs well above office TI.

Debt Yield

Protects lenders from aggressive valuation assumptions.

Lab-to-Office Ratio

Shows how much space is true lab versus office and how flexible it is for future tenants.

How to underwrite it, step by step

Abstract leases for term, rent, security deposits, letters of credit and restoration obligations.
Analyze each tenant's funding, cash runway, burn rate and pipeline.
Inspect building infrastructure: floor-to-floor height, floor loading, HVAC capacity, power and backup systems.
Evaluate location within the life science cluster and proximity to institutions and talent.
Assess lab supply, including new construction and conversions in the submarket.
Model rollover with lab-specific TI, downtime and rent assumptions.
Stress test a tenant default scenario and funding market downturn.
Size debt and set reserves and letters of credit requirements.

Due diligence checklist

Leases and amendments
Tenant financial statements and funding history
Letters of credit and security deposit documentation
Tenant estoppel certificates
Building infrastructure specifications
Hazardous materials and environmental permits
TI budgets and as-built plans
T12 and expense reconciliations
Market study on lab supply and demand
Property condition report
Phase I environmental site assessment
Appraisal

Key risks and mitigants

Venture-backed tenant runs out of funding and defaults.

Analyze cash runway, require letters of credit or larger deposits and diversify tenant mix.

Oversupply from new lab construction and conversions.

Review submarket pipeline and stress lease-up and rents.

Lab improvements require costly reconfiguration for new tenants.

Underwrite higher TI and downtime and favor flexible lab designs.

Hazardous materials contamination.

Review permits, require decommissioning obligations and environmental surveys.

Office-to-lab conversion fails to meet infrastructure needs.

Commission engineering review of structure, HVAC and power before underwriting.

Typical financing and deal structure

Life science properties are financed with bank loans, life company loans, CMBS and debt funds. Stabilized buildings with credit tenants on long leases access favorable terms, while buildings with early-stage tenants or vacancy rely on bridge financing with future funding for TI and leasing. Lenders commonly require letters of credit from tenants, TI/LC reserves and cash sweeps tied to tenant events. Development and conversions are typically funded with construction loans at lower loan-to-cost and substantial sponsor equity, often in joint ventures with institutional investors. Covenants may include tenant concentration limits and leasing approval rights.

Red flags

Major tenant with less than a year of cash runway.
Building lacks floor-to-floor height or HVAC capacity for lab use.
Significant new lab supply delivering nearby.
Tenant lease lacks decommissioning or restoration obligations.
Rents underwritten at peak market levels.

Frequently asked questions

How do you evaluate biotech tenant credit?

For biotech tenants without earnings, underwriters analyze cash on hand, burn rate, funding history, investor quality and clinical pipeline. The key measure is cash runway relative to lease obligations. Lenders often require letters of credit or larger security deposits from early-stage tenants to mitigate default risk.

Why are lab TI costs so high?

Labs require specialized infrastructure including high-capacity HVAC with frequent air changes, plumbing for sinks and gases, fume hoods, reinforced floors, backup power and casework. These systems cost far more than standard office finishes, so lab TI packages are typically much larger and affect both leasing economics and re-tenanting risk.

Can office buildings be converted to lab space?

Some can, but conversions require adequate floor-to-floor heights, structural capacity for floor loads and vibration, space for mechanical systems and sufficient power. Many office buildings do not meet these requirements without major structural and mechanical investment. Underwriters commission engineering studies before assuming a conversion is feasible.

Where is life science demand concentrated?

Life science demand concentrates in clusters near research universities, academic medical centers and venture capital, where companies can access talent and partnerships. Buildings within established clusters generally lease faster and at higher rents than isolated buildings. Underwriters evaluate location within the cluster as a core risk factor.

Underwrite a life science lab deal in minutes

Drop a deck or data room. Underridge returns a verdict, investment memo, term sheet and a live model, with every headline figure traced to a page, a formula or a labeled assumption. Ten underwrites free.

Try Underridge free

Educational content, not investment, credit, legal or tax advice. Benchmarks are common practitioner rules of thumb and vary by lender, market and cycle.