Yield on cost 6.4 against a 7.25 exit. Then the steel requote landed.

Before you touch the land price, make the GC show you the alternate. On a 34,000 sf shell a pre-engineered metal building against tilt-up concrete can swing $12 to $18/sf depending on how far you have to truck panels and how tall your clear height needs to be. If you are at 28 feet clear for a 3PL you are probably stuck with steel joists either way, but a hybrid with concrete walls and a steel roof takes tons out of the frame.

Other thing, ask about early mill buyout. On the jobs I've been on the mill order gets placed on a deposit and the price locks at order, not at delivery. That means you can lock the steel number before you close the loan if you are willing to put deposit money at risk on a deal that might not fund. Whether that risk is smaller than another $9/sf is your call. Get the escalation and price validity language on the quote in writing, they are usually 15 or 30 days now.

Dumb question maybe. If you plan to hold this, why is the exit cap the test at all? Or is it doing double duty as the appraisal proxy for the takeout loan?

Following on from kestrel, I want to understand the free rent piece. If the 3PL gets 6 months free, does an appraiser value the building off the face rent of $12.75 or does the free rent knock the value down? I've read both and I can't tell which one actually shows up on a valuation for a stabilized industrial shell.

$780k for 3.1 acres is $252k an acre, call it $5.78 a square foot of dirt. That is a rent-of-$15 land price and you are underwriting $13.50 falling to $12.75. Everything downstream of that is arithmetic. I've done the version of this deal where I talked myself into a tenant at a lower rent to make the loan close, and what I actually did was lock in a bad basis for 15 years.

Seller holding firm twice does not mean firm. It means firm at the price you offered while you were still willing to close. Go back with the steel requote attached and ask for a $90k reduction or a seller carry on part of the land through completion. Worst case he says no and you are exactly where you are today.

Is a GC breaking out the tariff cost as its own line normal now, or did you ask for that? I've only seen aggregate hard cost numbers and I would not know how to ask for it.

What does demise mean in this context, splitting the building into two units?

I looked at something shaped like this last year and walked. What killed it for me was that every rent comp I could find above $13 was in a park with truck court depth over 130 feet and multiple dock positions per bay. Shells on constrained pads were trading a dollar under. What is your truck court and how many docks per 17,000 sf? If you are at 100 feet and two docks you are competing at $12.25, not $13.50, and the 3PL already knows that, which is why they are at $12.75.

flint, do you have three signed comps or three asking rents? I made that mistake once and it cost me a year.

The spread is the problem. Every developer I've listened to describes wanting 150 to 200 basis points of yield on cost above the exit cap to make the risk worth it. You are 85 basis points below the exit cap. Which means at the numbers you posted, the completed building is worth less than it cost to make. keystone is right that the land is the biggest single lever, but the second lever is that $290k reserve tally flagged, because if that goes over you are further underwater with no way back.

$35/sf TI on a 3PL fit-out is where I would spend my attention. Ask what is actually in their program. If they want office build-out, mezzanine, extra power for chargers, in-rack sprinkler changes, $35 will not cover it and you will be negotiating the overage in month 8 with a signed lease and no leverage. In-rack sprinkler alone can eat $6 to $9/sf and it is triggered by how they rack, which they will not commit to until they are moving in.

Write the allowance as a fixed dollar amount against a defined scope with anything outside that scope at tenant cost, and put the unused portion back in your pocket rather than as free rent. Half the developers I've worked for gave that back without noticing.

I disagree with keystone on one point. Cutting the land $90k moves your yield on cost about 8 basis points. It is worth asking for, and it does not save this.

The thing that will actually decide this deal is the appraisal at loan closing. If the bank sizes to the lesser of 60% of cost and something like 65% of as-stabilized value, and the appraiser lands at 7.5% on a $432k NOI, that is $5.76M of value against $6.77M of cost. Your loan sizes off the value test, you get $3.75M instead of $4.06M, and you are filling a $300k hole with equity you have not raised. Ask your lender today which test controls and get it in writing, because the answer changes whether you are choosing between three options or one.

And kestrel is on to something. If you genuinely hold this ten years the exit cap matters less than the debt yield on the takeout, which the bank will also tell you if you ask.