The seller's expense number on six gross leases has no vacancy in it

Rebuild it. Always rebuild it, and here's the shape I'd use.

Start from rentable square feet and gross potential rent at 14,000 sf, not at 10,200. So 14,000 times, say, $17 is $238k of gross potential. Then subtract actual vacancy, which is 3,800 sf, about $65k. That gets you near the $178k you were shown, and now vacancy is a visible line instead of hidden in the rent roll.

On expenses, take the $72k and grow it to a stabilized occupancy. Cleaning is per occupied foot, utilities partly per occupied foot, management is a percentage of collections. On a 1991 suburban building I'd expect stabilized operating expenses of $7.50 to $9.50/sf gross in most markets before reserves, so $105k to $133k on 14,000 sf. That alone breaks the $72k.

Then add the two lines the statement never has. Reserves at $0.25 to $0.40/sf for roof and HVAC on a building this age. And a rollover line: TI plus commissions averaged over the rent roll's weighted lease term. Small suite office renewals often run $10 to $20/sf of TI, new tenants $25 to $45, commissions 4 to 6 percent of gross lease value. Amortized, that's frequently $1.50 to $3.00/sf per year on a building like this.

Run that and your $106k NOI is probably $55k to $70k. At $1.05M that's a 5 to 6.7 cap on a multi tenant 1991 asset with two rolls inside 18 months. That's the conversation to have with the broker.

sextant's rollover amortization is the line that changed how I look at small office. On a 2,000 sf suite you're writing a $50k check to keep somebody who pays you $34k a year. The math only works if they stay a long time.

keystone, ask for the last three years of the tenant ledger, not the rent roll. Rent roll is what the leases say. The ledger is what people actually paid and when.

After hours HVAC will eat you alive if the leases don't have a charge for it. One accounting tenant working April weekends on a rooftop unit from 1991 and your electric line does something you didn't budget.

What does the entry cost look like beyond price? On a commercial building I'd expect a phase one environmental, an ALTA survey, a property condition assessment, lender legal, and the appraisal. On a $1.05M deal that stack has run $12k to $20k for people I've talked to, and it's spent before you know if you're closing. Worth having that number in front of you before you write an LOI.

Read all four leases before you touch the model, and specifically look for an expense stop or a base year clause. Some "gross" office leases are actually full service with a base year, meaning the tenant pays their share of increases over the expenses in the first year of the term. If those exist, your exposure to rising taxes is much smaller than you think, and your NOI is higher than sextant's version. If they don't exist, you own every increase.

Also check whether the load factor is stated in the lease. If the lease says premises of 2,150 rentable sf and the plan shows 1,850 usable, the tenant already agreed to a 16 percent load and it's fine. If the lease says nothing and the rent roll invented the number, your gross potential at 14,000 rentable is not collectible.

And look for who has a termination right, an expansion right, or a right of first offer on adjacent space. Those clauses show up in small buildings more often than people expect and they constrain what you can do with the vacancy.

Numbers I'd want, in order: three years of real operating statements with the tax bills and insurance declarations attached, the current tax assessment plus what a sale at $1.05M does to reassessment, and the utility bills for the last 24 months. Reassessment after sale varies a lot by state, some reassess on transfer and some don't, so check how your state and county handle it before you assume taxes stay flat.

On your $72k: 14,000 sf at even $6/sf of hard operating cost is $84k. So $72k on a building that's 73 percent occupied is either missing a category or the owner does the management and cleaning himself for free.

What is a load factor exactly? I get that corridors and bathrooms are shared, but who decides the percentage?

rigging, the owner's architect measures usable, then the shared area gets spread across tenants as a percentage, and the number ends up wherever the market tolerates. Single tenant floors are lower, multi tenant floors higher.

keystone, the part I'd sit with is whether this is a passive hold at all. Six suites, leases rolling constantly, gross structure means you own every operating surprise. You'd be doing small tenant leasing continuously. That's a job with a building attached. Whether that's fine depends on if you want the work.

If a lender is involved, they'll size to a stressed NOI, not the broker's. Expect them to underwrite market vacancy, a management fee whether or not you self manage, and a reserve. When their number comes back at $60k of NOI, the loan proceeds drop and your equity requirement jumps. Ask a lender for an indicative sizing before you spend money on third party reports, and get the terms in writing since quotes move.

Who pays for the elevator inspection and the parking lot? A 1991 two story with an elevator has an annual inspection, a service contract, and eventually a modernization that I've heard quoted well into six figures. Is that in anyone's $72k? And has the lot been sealed and striped in the last five years, because a full lot replacement on a 14,000 sf building can be $80k to $150k depending on square footage of pavement.

My service business rented a 2,400 sf suite in a building like this for six years. What kept us there was the rate and free parking. What nearly moved us was the landlord taking three weeks on a heat problem in February. Small suite tenants in older buildings are sticky if you answer the phone, and they leave over exactly one bad experience. So your renewal probability is partly a management question, and if you're buying this to be passive you should price the third party manager into the model at 4 to 6 percent of collections.

Reading this whole thread was more useful than anything I've read on office all month. The thing that landed: the seller isn't hiding anything, the format of the statement just doesn't have rows for the two biggest costs of owning small office. keystone, if you do rebuild it and offer, I'd like to know what number you land on.