Single tenant office at a 7.9 cap with 3.5 years left, what should the rollover reserve look like
Consider a broker offering of a 22,000 sf single-tenant suburban office. Regional bank operations back office, tenant in place 11 years, 3.5 years remaining on the lease, 2 percent annual bumps, absolute net. Asking $4.1m, a 7.9 percent cap on in-place NOI of about $324k. The cap looks generous for a credit-ish tenant, and that's exactly what should raise a flag. The rollover math to work through: If the tenant leaves at expiry, market TI for a new office user in that submarket runs $60 to $70/sf on a seven-year deal. Call it $65 on 22,000 sf, or $1.43m. Commissions at 5 percent of a seven-year term on $16 net rent add roughly $123k. Downtime of 12 to 18 months costs the NOI plus about $7/sf of carry on empty space, another $500k to $650k all in. That's $2m to $2.2m against a $4.1m purchase price, meaning half the price is a contingent liability that shows up in year four. So how should that get priced. One approach underwrites a renewal probability and blends the outcome. Another takes the full downside case and re-derives what can be paid. A third simply passes on anything under six years of term. If the tenant does renew, realistic renewal TI in a market where the landlord has no real alternative tends to land toward the higher end of the $15 to $25/sf range often quoted for a sitting tenant, though that number should be tested against the specific submarket rather than assumed.
