Two deals on the table this week on The Price Regulator. The first is a triple net lease building two minutes from our office in Margate, Florida: 6,250 square feet, a tenant in place with about ten years left, and an asking price of $3.2 million. The second is a smaller project on the west coast that stopped halfway through construction. Jason and Abe run the numbers on both, out loud, before deciding whether to make an offer.
If you are trying to break into CRE and want to see how a deal actually gets analyzed before anyone picks up the phone, this is the episode.
What is a triple net lease
A triple net lease, often written as an NNN lease, is a commercial lease where the tenant pays the three big costs of occupying a building on top of the rent: property taxes, insurance, and maintenance. In practice that usually extends to the utilities as well. On this building that means the taxes, the insurance, the repairs, the water and sewer, and the electric bill all sit with the tenant.
For the owner, that changes what the building is. It stops being an operating business and becomes a stream of income with a roof over it. What you are buying is the lease, and everything about the price follows from that.
What the tenant covers, and what the owner still owns
Triple net does not mean zero responsibility. The tenant pays for everything about the building except the structure. If the roof goes, that is the owner's problem.
So the first question Abe asks on this deal is the age of the roof. It is a 2016 build, which makes the roof about ten years old. Not new, not a concern yet, but the kind of detail that decides whether the income you are buying is as clean as it looks on paper. On a triple net building, the structure is the only place a surprise can come from, so it is the first place to look.
Net operating income is the whole conversation
Net operating income, or NOI, is the money the building makes after operating expenses. On a triple net lease there are no operating expenses on the owner's side, so the rent is the NOI. Here it is $210,000 a year.
Divide that by the asking price and you get the cap. On this building, $210,000 against $3.2 million works out to about a 6.5 cap. In this part of South Florida, on triple net, that is hard to find. Deals here usually start at a five and settle somewhere between six and a half and seven. Starting at six and a half before any negotiation is what made this one worth the time.
Abe's read is that an offer in the $2.93 million range moves it to a seven. Jason agrees. That is the number the rest of the episode is built on.
Why you pay more per square foot for triple net
At $3.2 million on roughly 6,300 square feet, the seller is asking about $500 a square foot. Jason's first reaction is that it is high. His second is that it is what triple net costs.
You are not paying for the building. You are paying for the income, and the income comes with a tenant who handles the maintenance, the taxes, the insurance and everything else that would otherwise be on you. That convenience has a price, and the price shows up as dollars per square foot. It is the same trade we saw on the vacant warehouse that became one of our best deals: the tenant in place is worth more than the walls.
What is the building worth empty
This is the question that keeps the deal honest, and it is the question most people skip when working out how to value commercial property.
Jason's estimate for the building empty is around $350 a square foot. Against the $500 asking, that is a gap of $150 a square foot, or about a million dollars across the building. If the tenant left and the building had to be sold vacant, that million is what the owner would give back.
It is a nice building. It is not, in Jason's words, the most amazing piece of real estate you have ever seen. The numbers say it is worth $500 a foot. The building itself says $350. Knowing both numbers is the whole point of the exercise, and it is why we walk every property before we believe the listing.
A million down, year one and year two
Jason runs the simplest version of the math so the logic is visible.
Say the offer lands at $3 million and a million goes down. The other two million is carried, and the cost of carrying it comes out of the rent before anyone gets paid. On easy numbers, the building brings in $210,000 and $120,000 goes to carrying costs, which leaves $90,000. Ninety thousand on a million is nine percent cash on cash in year one.
The lease has 3.5 percent annual increases built in, which is above the two to three percent that is typical. In year two the rent moves to roughly $217,000, and a little less than ten percent cash on cash. The tenant always wants that number lower. The landlord always wants it higher. Every lease has the same argument built in.
The fees that eat the paper gain
The 3.5 percent bump does something else. If the building were sold at the same seven cap it was bought at, the extra rent adds about $110,000 to the value. Put that with two years of income and the paper number reads $300,000 on the million, or fifteen percent a year.
Then the fees show up. Selling means broker fees, title fees, lawyer fees, and taxes. Exiting early usually means a penalty from the bank, which exists to protect what the bank expected to make over the life of the arrangement. Jason and Abe walk through all of it on camera, and the honest conclusion is that nothing holds equal. The paper math is where you start. It is never where you finish. It is the same discipline we used on the three Fort Myers warehouses we ran numbers on, and the reason one of those was a walk away.
A second deal on the west coast
The second deal is smaller, three hours away in Placida, Florida, near Cape Coral and Fort Myers. It is a project that stopped halfway through construction: the plumbing is in, the structure is on bricks, and the owners ran out of money before finishing.
The useful term here is after repair value, or ARV. It is what a property is worth once the work is done, as opposed to what the land and the half-built shell are worth today. The owners are quoting an ARV of $400,000. Abe checked the neighbors and found a recently built house two doors down that sold for $450,000, which makes the number plausible.
This one is different from what we usually do. We like buildings that are already built, in areas we know, like the Burger King deal we broke down number by number. Placida is a look-a-little-more situation. Whether either deal moves forward, you will see it on the channel, because we show the decision, not just the pitch.