Line by line, what does closing on a $1.9M single tenant box actually cost me

Question

I keep getting told net lease is the passive option and that closing costs are minimal because the tenant handles the building. Then someone in another thread said a Phase I is $2,500 and someone else said $15,000, which is a big enough gap that I clearly don't understand what a Phase I is.

What I'm looking at is a freestanding 9,100 sf discount retailer box, asking around $1.9M, 11 years left on the lease. I'd like the actual list of what I write checks for between signing a contract and owning it, with rough dollar figures, and what the realistic minimum cash is to do a deal this size at all. If the answer is that $1.9M is too small a target to be efficient I'd rather hear that now.

Rena Guide · Accepted Answer

A Phase I environmental site assessment is a records and site review by an environmental consultant. No drilling, no lab work. On a simple retail box it typically runs $2,500 to $4,000. A Phase II is the follow-up when the Phase I flags a concern, like a former dry cleaner or gas station on the site, and that's the $15,000-plus item because it involves soil borings and lab analysis. So @verity has it right.

Your likely check list before closing: Phase I as above, ALTA survey $2,500 to $6,000, property condition assessment $2,000 to $3,500, attorney review of the lease and title commitment $3,000 to $8,000, lender appraisal $3,500 to $7,000, and loan origination fees often around one percent of the loan. Title premium and transfer taxes vary by state, and a handful of states don't publish sale prices at all, which affects how much comparable data you'll get. Add it up and $25,000 to $45,000 of transaction cost on a $1.9M purchase is a normal range.

On cash: lenders commonly want 30 to 40 percent down on single-tenant retail, so figure $570k to $760k of equity plus those costs. Confirm the actual terms in writing with your lender rather than working off a rule of thumb.

One cost people miss. Even under a triple net lease, where the tenant pays taxes and insurance along with maintenance, you should carry your own liability coverage sitting behind the tenant's policy, and usually rent loss coverage too. Read the lease's insurance article and get the tenant's certificate of insurance before you close, naming you as additional insured. That's a few thousand a year and it isn't optional in most lenders' eyes.

tylerbrooks9 · Answer

My running list from the two I've looked at: Phase I environmental $2,000 to $3,500, ALTA survey $2,500 to $5,000, property condition assessment $2,000 to $3,000. The $15,000 number is a Phase II, which only happens if the Phase I finds something.

karen_whitfield · Answer

Ask what the land is worth separately. On a 9,100 sf box on an acre and a half, in a lot of markets the dirt is a third to half the price, and that's your floor if the tenant leaves in year 12. A box with $1.9M of price and $300k of land value is a very different hold than the same box with $800k of land under it.

laurenkim53 · Answer

Same size box in my part of the state trades closer to $1.1M at a 7.5 cap, and the bank wanted 35% down with full recourse and a personal guarantee. So the $1.9M isn't inefficient, you're just paying for a better trade area than mine. Smaller price doesn't mean easier financing in my experience of asking around.

paulgrant17 · Answer

Do you screen a corporate tenant the way you'd screen a residential applicant, or is that just reading their credit rating off a page somewhere?

stephen_ok9 · Answer

If the equity check is the problem, a DST is the fractional route. Minimums are commonly $100k, sometimes $25k for non-1031 money. You own a beneficial interest and have zero control, and the fee load at the front end is real, often high single digits all in. Worth comparing against owning one box outright, since the reason people use them is 1031 timing rather than better economics.

nicole_adeyemi · Answer

Watch the property tax reassessment. My county reassesses on transfer, and a box that's been assessed off a 2011 basis can jump substantially after your closing. Under a triple net lease the tenant writes that check, so it doesn't hit your NOI, but it does raise their total occupancy cost, and that shows up when the renewal option comes around. Reassessment rules differ a lot by state, so check how yours handles a sale.

priya_n21 · Answer

There's also the version with no closing costs at all, which is buying shares in a net lease REIT. You get diversified exposure and daily liquidity, and you give up the depreciation and the control. I looked hard at that before deciding I wanted an actual deed, and I still don't think the REIT was the wrong answer for someone who wants income and nothing else.

tashaford30 · Answer

Does the estoppel certificate cost anything? I understand it's the tenant confirming the lease terms in writing, but I don't know whether you pay for it or the tenant just signs.

raj_mehta14 · Answer

The certificate of insurance the tenant hands over, does that cover the building itself or only their own equipment and inventory? I assumed the landlord always insures the structure and now I'm not sure that's true for these.

ehernandez74 · Answer

@vellum it depends entirely on the lease. Some net leases put property coverage on the tenant with the landlord as loss payee, some keep it with the landlord and reimburse through the rent. Neither is unusual. Read the insurance article, then match the certificate against what that article requires, limit by limit. If the lease requires $5M of general liability and the certificate shows $2M, that gets fixed before closing, not after.

@quill the tenant signs at no charge, but big national tenants can take weeks to return it and some will only sign their own form. Build the timing into your diligence period.

Line by line, what does closing on a $1.9M single tenant box actually cost me

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