Rents 28% under market on 14,000 sf, then the appraisal came in $70k light
First deal after a long stretch of research and no purchases, so I'll skip the part where I explain why it took so long.
Two tenant shallow bay, 14,000 square feet, built 1996, 22 foot clear, four dock positions, in an infill submarket with no vacant industrial land inside three miles. Price $1,190,000, so $85 a foot. In-place rents averaged $6.80/sf on a rent roll where the seller had never pushed anyone. Comparable space in the same pocket was leasing at $9.25 to $9.75.
The structure I cared about: tenant A had 7 months left, tenant B had 3.5 years. I bought on in-place income, which was $95,200 gross, roughly $79,000 NOI after taxes, insurance and a $0.25 reserve. That's a 6.6 on the price, which is not exciting. The whole point was tenant A's roll.
What happened: tenant A wanted to stay. I offered a 5 year at $9.25 with 3 percent bumps, they countered at $8.75, we landed at $9.10 with two months free and a new dock leveler I paid $6,400 for. Painted the office, that's it. Blended NOI is now about $103,000, so an 8.6 on my price, and I never had the building dark.
The part that nearly broke it: the appraisal came back at $1,120,000, $70,000 under contract, and my lender sized to the lower value. That was an extra $49,000 of cash I hadn't planned on nine days before closing. I had it, barely, because I'd been sitting on dry powder for two years doing nothing. If I'd been fully committed elsewhere I'd have had to ask for an extension and probably renegotiated or lost the deposit. Terms are per lender and mine were in writing, so confirm your own.
What I'd keep: buying at in-place income where in-place is obviously stale, in a submarket where nobody can build the competition. That's a much easier bet than a rent forecast.