Is "full service gross" good or bad for the person buying the building?

Full service gross means the tenant pays one rent number and you, the owner, pay the building's operating costs out of it. Janitorial, utilities, property taxes, insurance, repairs, all of it comes from your side of the ledger. Triple net is the opposite arrangement: the tenant pays a lower base rent plus their share of taxes, insurance and maintenance on top, so those costs flow through to them instead of eating your rent. Most office in the US, especially multi-tenant office in downtown buildings, is full service gross or modified gross rather than true triple net. Single tenant freestanding office is where you more often see net leases, which is probably where the thing you read came from.

On the 8.2 percent: a cap rate is supposed to be net operating income divided by price, and net operating income is after operating expenses. So if the broker calculated it correctly, expenses are already out. Ask for the trailing twelve months of actual expenses and the current rent roll rather than a proforma, because "market" expense assumptions on office run light surprisingly often.

The cost that catches new office buyers isn't janitorial, though. It's what you spend when a tenant leaves. Re-leasing office space typically means tenant improvement dollars to reconfigure the space and a leasing commission, and in office those numbers per square foot are large enough that one rollover can wipe out a couple of years of income. That's why lease expiration dates matter more than the cap rate on the sheet.

The part that stopped me cold when I looked at one of these: with a house you screen a person, with office you're screening a business. Four tenants means four sets of financials you should be asking for, and small firms often won't have anything audited. What did the broker give you on tenant credit, marlow?

Ask what the base year is on each of those full service leases. Gross doesn't always mean you eat every increase forever. A lot of them set a base year of expenses and the tenant pays their share of anything above it, which changes your exposure quite a bit. If none of the four have that, you own all future tax and insurance increases.

And if they do have expense stops, someone has to actually do the reconciliation every year, prorate it by square footage, send the bills and then argue about them. I do that on a much simpler scale with utility billbacks on eight units and it still eats a weekend. At 19,000 square feet and four tenants you're either doing that yourself or paying a commercial manager 4 to 6 percent of collections to do it, which comes straight off your 8.2.

Honestly if what you want is office income with nothing to manage, the version of this that works is buying an office REIT in a brokerage account and reading the quarterly letters. You get the sector without the janitor contract.

verity's route is cleaner but it's a different bet. A REIT hands you a share of a national portfolio and a share of a national problem, and office as a whole is still working off a very bad stretch. Buying one building means you're making a call on that one building, its floor plate, its parking, whether the space is what a tenant actually wants now. Those two can go in opposite directions for years.

Run the numbers before you decide how passive it is. 19,000 square feet, say it's 85 percent leased at $22 gross, that's roughly $355k collected. Full service opex on a small downtown two story runs $8 to $11 a foot including taxes, so call it $180k on the occupied and vacant space combined. You're at about $175k of NOI before you reserve anything. Now put in $2.50 a foot a year for tenant improvements and leasing commissions on a blended basis, so roughly $47k, plus management. You're near $115k. If the price implies 8.2 on $175k it's around $2.1M, and $115k on $2.1M is 5.4 percent.

I'm making up the rent and the expense load, so replace them with the trailing twelve and the actual rent roll. But the shape holds. The gap between a broker's office cap and a reserved office cap is wider than in any other property type I've looked at, and it's almost entirely the re-tenanting cost.

What is a tenant improvement allowance actually paying for? Like paint?

Way past paint, rigging. Demolishing walls, new walls where the next tenant wants them, ceiling grid, carpet, sometimes rerouting HVAC and adding electrical for a conference room. That's why it gets quoted per square foot and why the number is scary. In my duplexes a turn is paint, a fridge and a cleaner. Office turns are construction projects with permits.

So the lease structure barely matters compared to when the leases end? I've been treating gross versus net as the main question and it sounds like the expiration schedule is the thing to look at first.

I lease about 2,800 feet for my business and mine is a modified gross with a base year. I got a reconciliation invoice for a bit over $4,000 one year because the building's insurance jumped, and I had no warning it was coming. So yes, those clauses do transfer real cost to tenants, and they also make tenants angry in a way that affects whether they renew. Worth knowing if you're buying leases that already have them.

Nobody's asked what the building is. Two story downtown, 19,000 feet, that profile is exactly the older commodity stock that's been struggling, and the exit for a lot of those buildings isn't another office buyer. Before you underwrite the rent roll I'd pull the zoning and see what residential conversion would even require there, because if the answer is nothing works, then your only buyer someday is somebody with the same problem you have. Floor plate depth and window line decide whether apartments are physically possible, and most 1980s office fails on that.

Full service gross versus triple net seemed like the whole question when I started reading, and now I've got a list with base years, expense reconciliations, TI per square foot, expiration schedule and whether the floor plate could ever be apartments. I'm less sure than when I started, which I think is probably correct.