Offered 8 percent of a half empty building with 14 months to maturity

First thing I'd do is walk the roof and the mechanical. A 1985 building has either original package units that someone has been nursing, or a replacement round from the mid 2000s that's now 20 years old. Either way you're looking at replacement in your hold period. Rooftop units for a building that size, depending on tonnage and how many, quoted anywhere from $12k to $25k a unit installed near me, and there could be six or eight of them. Same story for the elevator controller.

That's not a reason to say no. It's a reason to ask who writes those checks, because at 8 percent you'd owe 8 percent of them.

His $8.75/sf gross expense on 31,000 sf is $271k, and he collects $186k. That means he says he doesn't spend the full amount because the floors are dark. Fine, cleaning and after hours HVAC drop. But taxes, insurance, the elevator contract, the parking lot, landscaping, and the fire alarm monitoring don't drop at all when a floor empties, and those are most of it in an older building. I'd want the actual last two years of statements against the tax bill and the insurance declaration before believing the $56k.

Two things from the construction side on a mid 80s building at 46 percent. The vacant floors are probably still demised for whoever left in 2011, so any new tenant means demolition and new demising walls before you even get to finishes. And the accessibility path matters. If you do substantial alterations, code requirements for the accessible route and restrooms can get triggered, and how much gets pulled in depends on your local adopted code and the building official, so that's a question for a licensed design professional on that specific building. I've seen that turn a $30/sf fit out into $60.

Whatever number he gives you for fitting out the vacant space, it will grow once the walls open. On an 80s building I'd expect asbestos containing floor tile or mastic somewhere, and abatement is its own line with its own schedule. Get the phase one and whether anyone has ever done an asbestos survey.

Taking equity instead of an invoice is a different question from investing. You'd be converting a receivable you can collect into a position that might be worth nothing, and doing it because collection feels awkward. I've been offered that twice and said no both times. If he can't pay the invoice, that tells you something about the building's cash position that his NOI number doesn't.

cobalt makes the point better than I did. plumb, is the $40k money you'd otherwise have in your pocket, or is it work you already did? Those aren't the same risk at all.

sable's cap rate math is the whole thread. A 2.7 cap on secondary office isn't a valuation, it's an aspiration. plumb, ask him one question: what was the last comparable building in your submarket that traded, and at what per foot? If he doesn't know, he isn't valuing the building, he's remembering what it used to be worth. Some states don't make sale prices public at all, so you may need a broker to pull comps rather than the assessor site.

Nothing about this is passive and nothing about it is boring. It's a workout with 14 months on the clock and a minority position with no control. Say no and stay friendly. If he does resolve the maturity and leases two floors, he'll need money again and you'll be looking at a much clearer set of facts.

The 14,300 sf that is leased, who are they and how long do they have? If half of that rolls before the maturity, the $56k isn't $56k when the refinance conversation happens. I'd want the rent roll with expiration dates before anything else on this list.