WinIndustrial / Warehouse (Passive Hold)

A three phase power request nearly killed my flex condo a week out

First one done. 7,200 sf end unit in a 1990s light industrial condo park, 16 foot clear, one dock and one grade door, small office up front. $520,000, so $72/sf, in a park where the last two units traded at $78 and $84.

Sitting tenant is a cabinet shop, three years in, paying $9.75/sf on a modified gross lease where they cover their own utilities and interior maintenance. Gross $70,200. Condo dues $6,840, taxes $8,200, insurance $2,150, and I reserve $1,800, so NOI came out near $51,200. Seller carried 80 percent, $416,000, 6.75 percent, 20 year amortization, five year balloon. Payment $3,163 a month, $37,956 a year, DSCR about 1.35. My cash in was $104,000 plus $9,400 of closing and legal.

What nearly broke it: eight days before closing the tenant told me, cheerfully, that they'd been asking the seller for two years to bring in three phase power for a new CNC and were assuming the new owner would do it. Unit has 200 amp single phase. The utility quoted $28,000 for the transformer and secondary run, plus $11,000 for the panel and interior work. That's 37 percent of my down payment.

Seller wouldn't cut price. What we landed on: a $20,000 credit at closing, and a lease amendment where the tenant takes their rent from $9.75 to $10.50 for the remaining three years to cover the rest, plus a new five year term starting at $10.50 with 3 percent bumps. Tenant signed because the machine pays for itself in eight months for them. So I ended up with a longer lease and a better rent than I bought, out of a problem I didn't see coming.

What I'd keep: asking the tenant directly what they want from the building. I only did that because the walkthrough ran long and we ended up talking.

What I nearly got wrong: I had no idea a condo association could have a say in where a transformer pad goes.

Answer

2ryanmck27SC2C

The sequence you got lucky on is worth spelling out for anyone reading this later, because power is the single most common surprise in small industrial and it's the one that's cheapest to check up front.

Do it in this order. Call the utility's new business or engineering desk with the account number and the meter number, and ask three separate questions: what service is at the meter today, what capacity is available at the nearest transformer, and what the current cost allocation policy is for a service upgrade. That last one matters because utilities differ on how much they contribute based on projected load, and the policy is a tariff document you can ask them to send you. Get all of it in writing, not a phone estimate, because the phone number and the letter number are frequently not the same number.

Then the estoppel. It should say what the tenant pays, what term remains, what the landlord has promised verbally, and specifically that there are no outstanding landlord obligations. Yours would have caught the two years of asking. The tenant would have written it down.

Then the condo declaration and any board minutes for the last two years. Minutes are where you find the roof discussion, the pending assessment, and whether another owner already tried to upgrade service and got refused.

One more thing on your deal. You now own the panel and possibly the transformer pad, and your insurance and your reserve should reflect that. Tell your carrier in writing what changed. And when you get to year five and refinance out of the seller note, the appraiser will value the three phase, so keep the invoices and the utility letter. That's a documented capital improvement rather than a repair.

5 replies

1aliyah_bAU2APRO6

Working out first deal costs is my whole current project, so I'm going to poke at yours. Your $9,400 of closing and legal on a $520,000 purchase seems light for something with a lease amendment and a condo review. Did the seller's attorney draft the amendment? And what did the three phase work actually cost when the invoices came in versus the $39,000 quote? Utility quotes in my area have come in 15 to 20 percent over on anything involving a transformer, and if that happened here your $20,000 credit plus the rent bump stops covering it.

2wendy_park48CapitalPRO7

The document question nobody asked. What does the condo declaration say about limited common elements, and is the exterior wall where that transformer lands one of them? In most industrial condo declarations I've read, the slab and interior are yours, the roof and exterior walls are common, and any alteration to a common element needs board approval, sometimes a supermajority of owners. If you got verbal approval from a board member you have nothing. Get the written consent recorded or at minimum kept with your closing file, because your buyer in five years will ask, and recording practice for that kind of consent varies by state. Also check whether the declaration allows the association to special assess for the electrical infrastructure upgrade you just triggered.

3Rena Expert

The mechanism worth understanding here is why the tenant paid. Electrical service capacity is one of the hard constraints in small industrial right now, and a tenant with a machine purchase waiting on a panel has a shorter time horizon than the landlord does. That asymmetry is what let a $39,000 problem turn into a rent increase and a longer term.

On the underwriting, your DSCR of 1.35 is calculated on a modified gross lease, which means expense growth lands on you rather than the tenant. Condo dues and insurance are the two lines that have moved fastest in most markets, and dues are voted by owners who may not share your reserve philosophy. Run your coverage with dues 30 percent higher and insurance 25 percent higher and see where it lands, because that's closer to a five year view than the current bill is.

The balloon is the real date on this deal. Five years out you need either a refinance or a sale, and the value will rest on the new lease you just signed and on where small bay pricing sits then. Sector conditions are constructive there. Construction has fallen sharply since 2022, vacancy is expected to peak around mid-2026 and then tighten, and absorption forecasts for 2026 point substantially higher on reshoring and data center adjacent demand. Small infill space with adequate power is the part of the market that tends to hold up.

Start the refinance conversation at year three rather than year four and a half, and confirm terms and any seasoning or condo-specific requirements in writing with your lender, since those change.

2nataliehsuSO1BPRO7

The part I find genuinely useful is that your best outcome came from a long conversation with a tenant. I keep hearing that industrial is passive and net leased and hands off, and then every actual story in this room has an owner in a building talking to somebody about a panel or a dock leveler. Maybe passive means fewer conversations rather than none.