My first commercial tie-up died on a rollover schedule I never asked for

14,000 sf flex building, four tenants, seller's rent roll showed $118k NOI. He wanted $1.35M, call it an 8.7 going in. I got it at $1.31M with a 20 day inspection and $5k that went hard on day 15. Figured I'd assign around $1.40M and make my first fee.

The first buyer who actually looked pulled the leases (I'd only had the rent roll, which was a spreadsheet the seller's bookkeeper made). Two of the four tenants were month to month. The biggest one, 5,200 sf, expires in seven months at $11.50/sf while the broker's own comps in that submarket were $8 to $9. No TI or leasing commission reserve anywhere in the numbers.

He re-ran it at market rent, $6/sf of TI on the rollover space, four months of downtime, and got to about $94k of NOI. At the 9.25 he wanted he was at roughly $1.02M. Everyone else after him landed in the same zip code. Seller wouldn't move off $1.31M because he'd been told 8.7 by a broker who used the same spreadsheet.

Cost me the $5k plus about $900 in legal review and two trips. Six weeks.

Next time I don't let earnest money go hard until I've read every lease and amendment myself, and I underwrite market rent first with in-place as the upside case.

Answer

3marcus_hale41CG4A

The 15 day hard date is the part I'd stare at. Twenty day inspection with money going hard on day 15 means you'd committed before you could finish reading, which is backwards on anything with leases in it. On the deals I've been passive in, the sponsor's estoppel requests go out in week one and nothing goes non-refundable until they're back signed, because the rent roll is the seller's opinion and the estoppel is the tenant's. Your $11.50 tenant might also have had a renewal option at a set rate buried in an amendment, which would have changed the story again in either direction.

One question, did you ever see the seller's actual bank deposits or just the spreadsheet? A rent roll that doesn't tie to twelve months of deposits is a starting point for questions. $5k and six weeks is a cheap version of this lesson honestly, I've watched a syndicator eat six figures of dead deal cost on the same shape of miss at 200 units.

My first commercial tie-up died on a rollover schedule I never asked for

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