The $70-a-Foot Flex Trap: Why I Offered $57 a Foot

WELCOME TO THE PATRIOT DEAL ROOM, Issue No. 03

"My team and I look at a lot of deals. This one I walked personally: flew into Dallas, drove the site, talked to tenants working on a Saturday. On paper it is a steal, brand-new metal buildings at $70 a foot, below what it costs to build them. In reality, the price per foot is the bait. The rent roll is the hook." - Jeremiah Boucher

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DEAL SNAPSHOT

Details anonymized, the listing is private.

Asset: Small bay "flex" industrial park

Market: Southern Fort Worth submarket, unincorporated fringe

Size: Just under 50,000 SF | nine metal buildings | about 5 acres | built 2024 to 2025

Occupancy: A little over half leased | 7 tenants, mostly automotive

Asking price: $3.3M (about $70/SF)

Broker NOI: About $189K in-place

Implied cap: About 5.7% at the ask, on in-place income

A cap rate is annual NOI divided by price and price moves inversely to the cap rate. The more you pay for the same income, the lower your yield.

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WHAT I LIKED

The buildings are legitimately good. Solid metal paneling, 14-foot roll-ups with 16 to 18 foot clear height, a man door plus roll-up on every unit, individual electric meters, lighting and fire suppression throughout. The gap here is management and cosmetics, not structure. That is the kind of gap operators get paid to close.

Real demand from real users. Tenants were working on a Saturday when I walked it. Automotive and trade users want this product, and in-place rents around $9/SF gross leave room to move toward $10 all-in.

Priced below replacement cost, with a shrinking buyer pool. At about $70/SF for new construction, you cannot build this today for the ask. And it is a non-institutional size: too small for sophisticated players, too heavy a lift for passive buyers. Less competition is an edge if you are disciplined on price.

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WHAT I DIDN'T LIKE

The location caps the rents. Low-traffic, remote pocket with soft demographics. The tenant base this site attracts can pay about $10/SF gross all-in, full stop. Not $10 NNN plus reimbursements. When you underwrite to what these businesses can actually pay, the upside story shrinks fast.

The capex is real: $500K or more. Nothing is paved. The gravel drives are rough, drainage is a problem across the paving and parking areas, the gate keypad doesn't work, and the “signage” is a wooden leasing sign. That is not deferred maintenance, that is a significant part of the construction budget the seller never spent.

At just over half leased, you're not buying cash flow, you're buying a job. Day one, after real expenses, this asset barely covers itself. Everything above that is a business plan you have to execute: lease-up, tenant curation, capital improvements. You need to get paid for that risk, and at $3.3M you are paying the seller for value you haven't created yet.

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SELLER MOTIVATION CHECK

This is the section where we ask the question every buyer should ask: why is this deal for sale?

The seller is out-of-town, lives in another city, and has no interest in hands-on management of a rough-around-the-edges automotive park. His tougher tenants aren't income to him, they are liability. That is motivation.

Now layer on the market. Debt costs just moved 50 basis points against him, which thins the buyer pool further. Any serious buyer walking this site sees the same things I did: negative-to-flat day-one cash flow after real expenses, a $500K capital plan, and an operational turnaround on a low-credit tenant base. The dream buyer who pays $3.3M sight-unseen gets rarer every month.

"His options are diminishing. Ours aren't. That's why the $2.7M offer stays on the table and we wait." - Jeremiah Boucher

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READ THE P&L LIKE AN OPERATOR

In our first issue, the trap was the tax line. Credit where it is due, this broker actually stepped the taxes up to a sale basis, from $29K to $56K, and doubled the insurance. The trap just moved to a different line. Let's rebuild this one from the ground up, because the gap between the setup sheet and reality shows up in three places: day one, the income line, and the expense load.

Step 1: Day one, what you actually own at closing

The as-is statement shows $189K of NOI on $71.5K of expenses, about $1.52 per square foot. Nobody operates 47,000 square feet of multi-tenant flex for $1.52 a foot. Carry the same in-place income with real day-one costs and it looks very different. Each line below reads: broker as-is, then operator real, then the reason.

In-place revenue (56% leased): $260,592 broker as-is | $260,592 operator real. Same income in both columns.

Management: $10,424 broker as-is | $13,000 operator real. 5% of collections, not 4%.

Property taxes: $28,900 broker as-is | $75,000 operator real. Reassessed to YOUR basis at $3.3M.

Insurance: $11,708 broker as-is | $27,500 operator real. The broker's own Year 1 figure.

Marketing: $0 broker as-is | $6,000 operator real. A half-empty park with no lease-up budget.

Payroll plus R&M: $13,019 broker as-is | $30,000 operator real. Gravel site, drainage, automotive users.

Site (landscape, water, septic): $7,457 broker as-is | $7,500 operator real.

Total expenses: $71,508 broker as-is | $159,000 operator real. $1.52/SF versus a real $3.38/SF.

Day-one NOI: $189,084 broker as-is | about $102,000 operator real. Same building. Real costs.

Cap rate at the $3.3M ask: 5.7% broker as-is | 3.1% operator real. The number your lender and LPs live with.

Day-one NOI is about $102K, a 3.1% cap rate at the ask, not the 5.7% on the setup sheet. Debt at today's rates costs more than that, so from the day you close, this deal eats cash every month until the business plan works. That is not a criticism. That is just what value-add is. But you had better price it that way.

Step 2: The income line, the same $10 counted twice

The broker's pro forma grows reimbursements from $33K in Year 1 to $142K by Year 5, a “95% NNN conversion.” Here is the mechanic every investor should burn in: a tenant has exactly one number they can pay, their total occupancy cost. The lease structure just decides how that number gets sliced. Gross or triple-net, different paperwork, same wallet.

The wallet in this pocket holds about $10 per square foot, all-in. The Year 5 math needs tenants to pay $10.33 in base rent plus roughly $3 in reimbursements, an effective cost over $13. That is a 33% raise on mom-and-pop auto shops in a low-traffic corridor. It will not happen. Converting leases to NNN, which is fine and we do it, just changes who writes which check. It does not create new money. Strip that $142K line out and the Year 5 story collapses.

Step 3: The expense lines that quietly vanished

Small lines tell you how a pro forma was built. Management shaved to 4% instead of 5%. Marketing at zero, in every year, on a lease-up deal. Payroll plus R&M at $15K with no payroll line at all, on a gravel site full of automotive users where the real number is $35K. That single line hides about $20K of NOI, roughly $250K of price at a 7.75% cap. And vacancy at 5% on month-to-month, low-credit tenants where 8% is honest.

Step 4: Put it back together, and reprice the deal

Rebuilt honestly, stabilized NOI is roughly $269K, not the $473K on the pro forma. The $204K gap is the whole story: $142K of phantom reimbursements, rent growth beyond what the pocket pays, and $40K to $50K of expenses that don't appear on paper but absolutely appear in your bank account.

Stabilized lines, broker Year 5 versus operator real:

Base / gross rent: $485,527 broker | $470,000 operator. $10 all-in, gross.

NNN reimbursements: $142,161 broker | $0 operator. The same $10 counted twice.

Vacancy plus credit loss: ($24,276) broker | ($37,600) operator. 8%, not 5%, on month-to-month low-credit tenants.

Effective gross revenue: $603,412 broker | $432,400 operator.

Total expenses: $130,399 broker | $163,100 operator. A 38% ratio, what gross-lease flex costs.

Stabilized NOI: $473,013 broker | $269,300 operator. A $204K gap, mostly phantom income.

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And here is what that rebuilt NOI does to the price:

Purchase price: $3.3M ($70/SF) at the ask |$2.7M ($57/SF) at our offer.

Plus capex: $500K either way.

All-in basis: $3.8M at the ask | $3.2M at our offer.

Stabilized NOI: About $269K either way.

Yield on cost: 7.1% at the ask | 8.4% at our offer.

Exit cap (market): 7.5% to 8% either way.‍

What you built: At the ask, spend $3.8M for about $3.5M. At our offer, a real spread, paid for risk.

At the ask plus capex, you spend $3.8M and two years of work to build something worth about $3.5M. At $57 a foot, you get 60-plus basis points of spread over the exit cap. That spread is the entire compensation for the risk. No spread, no deal.

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WHY I MADE THE CALL

PASS AT $70. STANDINGOFFER AT $57.

Protect capital first. At the ask, the downside case, slow lease-up, a couple of tenant blowups, capex overruns on the drainage, puts you underwater with no exit. The seller’s price already banks all the value the buyer is supposed to create.

Get paid for the risk you take. This is a value-add deal wearing a cash-flow costume. Half-leased, $500K of capex, low-credit tenants, remote location. That risk profile demands a real spread between yield on cost and exit cap. $2.7M delivers it. $3.3M doesn't.

The buildings are good. The demand is real. The price is wrong. So we wait. Motivated sellers get more motivated.

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THE LESSON

PRICE PER FOOT SELLS.YIELD ON COST BUYS.

Any time a pro forma shows income growing faster than what tenants can physically pay, find the line doing the work.

In our first issue it was taxes. Last week it was collapsing storage rates. This week it is NNN reimbursements. There is always a line.

Your job is to find it before you wire the money.

A broker's pro forma is a sales document. Your rebuild is a survival document. Never confuse the two.

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The Patriot Deal Room breaks down real deals we underwrite at Patriot Holdings, the ones we buy, the ones we pass, and the ones we reprice. New issues publish every Wednesday.

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DISCLOSURE

This content is for educational and informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security, nor investment, legal, or tax advice. The deal described has been anonymized and is not owned by Patriot Holdings or its affiliates. Figures are drawn from a third-party offering memorandum and our own underwriting, are estimates, are not audited, and are presented to illustrate analytical process rather than any actual or projected result. Any reference to a Patriot Holdings fund is not an offer; any offering is made only to verified accredited investors through the applicable offering documents, which govern in all respects. Past performance is not indicative of future results. All investments involve risk, including the possible loss of principal.