What I Liked

• Absolute net leases with real escalators. Every tenant reimburses every operating expense except advertising. Taxes, insurance, snow, trash, landscaping, water — all recoverable. On top of that, contractual bumps of 3.0% to 3.5% every year. Read the last issue of this newsletter and you'll know exactly why that matters: I passed on a Connecticut park because the income was frozen and the expenses weren't. This is the mirror image.
• Half the park is renting under market, and it rolls inside my hold. The 14,400 SF fulfillment tenant is at $7.92. The 10,900 SF flooring contractor is at $6.73. Blended, that's $7.41 across half the building in a market that's closer to $11.00. We underwrote the roll at $9.50 and $10.00 anyway — below market on purpose — and those two leases still add about $65,600 a year of NOI, roughly $937,000 of value at a 7% cap rate, on a $5.25M purchase.
• Basis and a clean rent roll. $105 a foot, $121 all-in, in a township where the median household income runs near $155,000. Zero delinquency in every aging bucket — the only entry on the report is a tenant who paid ahead. Occupancy has been 100% every month we can see.

What I Didn't Like

• Six tenants, and two of them are half the building. The largest is 28.8% of the square footage. The top two are 50.6%. This deal is underwritten at 100% occupancy, because that's what it is today — which means there is no cushion. On our usual twenty-tenant park a departure is a rounding error. Here, one tenant leaving puts a quarter of the building on the street at once.
• Four of six are youth sports and fitness businesses. A travel lacrosse and field hockey turf facility, a competitive fastpitch softball program, a dance academy, and a boutique gym. That is not diversification. That's one consumer spending category wearing four different jerseys, and it's discretionary income at that.
• The capital plan is real and the septic system is not a rounding error. $420,350 of budgeted capital — $8.41 a foot on a $105 basis. Roof work is the biggest single line at $143,900. Then there's $62,500 of septic repair and $45,000 of water treatment on a site with three wells, five underground tanks and a pump station.

Seller Motivation Check

The tell here isn't in the marketing package. It's in the transaction history.

This seller already sold one of the buildings out of the association, to a separate buyer, about a year before we went under contract. That's not a landlord who woke up one morning and decided to trade an asset. That's a landlord who started unwinding a position piecemeal and then decided to finish the job in one move. The first sale was the signal; the rest of the park coming to market was the follow-through.

Two things follow from that, and both of them are worth money to a buyer.

First, the books are a mess. Not because anybody is hiding anything — it's what happens when a property changes hands partway through the reporting year. But it means every buyer who looked at this deal had to decide whether to rebuild the financials from the source documents or just take the pro forma at face value. Most take the pro forma.

Second, look at what a seller in wind-down mode doesn't do: he doesn't push rents. The flooring contractor has been in that suite since 2020 at $6.73 in an $11.00 market. Nobody was fighting for the last dollar at renewal, because the plan wasn't to own it long enough for the last dollar to matter. The below-market rent roll and the messy books trace back to the same decision.

Lesson One: Don't Count Tenants. Ask What It Would Take for One to Leave.

We screen for tenant count because it's easy to measure and it's usually right. Twenty tenants means no single conversation can hurt you. Six tenants means one can — and at 100% occupancy with no cushion, one departure takes a quarter of the building dark.

So the honest question isn't how many tenants there are. It's how hard it would be for any one of them to actually walk. And on that question, this rent roll grades better than most twenty-tenant parks I've owned.

Start with tenure. Three of the six have been in this park between five and eight years. The dance academy first signed in 2018 and has now renewed twice — and in the middle of that, agreed to convert its lease from modified gross to full triple net. Tenants who are looking for the exit don't take on more expense obligation to stay.

Then look at what's physically in the space. The lacrosse tenant built an indoor turf performance center. The softball program built cages. The dance academy has sprung floors and mirrored walls. That capital is in the slab, and it does not move. A distribution tenant with racking can relocate for fifty cents a foot. A youth sports operator with a turf field and a schedule of registered families cannot relocate at any price without losing a season.

That's also the honest answer to the concentration complaint. Yes, four tenants are in one consumer category. But that category is youth sports in a township with a median household income near $155,000 — which is about the most durable discretionary spend there is. Parents cut their own gym membership before they cut their kid's travel team.

And here's the structural detail that closed it for me: not one lease has a renewal option. That sounds minor and it isn't. On the parks I pass on, tenants hold options at fixed rates and I have no say at expiration. Here, every single expiration is a negotiation I control — with a tenant whose business is bolted to my floor.

One thing I'll own, because this newsletter doesn't work if I only show you the good side: we have not yet seen tenant financials. We've requested them and they're outstanding. Everything I just wrote about stickiness is an argument from tenure, sunk capital and payment history — which is strong evidence, but it is not a balance sheet. If those statements come back weak on the sports tenants, the concentration argument changes and we'll say so in a follow-up.

Lesson Two: The Squeeze

This is the part nobody wants to do, and it's the part that made the deal.

Because this park is a condominium, the operating costs are split across two entities. Landscaping, snow removal, trash, water and septic, the master insurance policy and the tax assessment all sit at the association level — billed across all the buildings, then pushed back to each owner as a share. Base rent, CAM reimbursements, building insurance, building repairs and management sit at the property level.

So there is no single document anywhere that shows what it costs to run the four buildings I'm buying. There are two documents. One describes an entity I'm only buying 73% of. The other still carries several months of expenses for a building that had already been sold, plus a large distribution out of that sale sitting in the same set of books.

Building the real P&L meant scaling every association line down to our share, backing the sold building out of both sides of the ledger, and then going bill by bill — utility statements, trash invoices, tax bills, vendor contracts — to figure out which charges belonged to the association and which belonged to the four buildings. It is the least glamorous work in this business.

Here's what came out the other side.

Expenses went up, hard. Taxes from $68,690 to $101,293. Site labor from $6,689 to $24,000, because thirteen cents a foot isn't a payroll number, it's a favor that ends at closing. Well and septic from $3,251 to $16,460. Marketing and G&A off zero. Total operating expenses go from $183,564 to $240,960 and the expense ratio from 31% to 35% — which is where a park like this actually runs. But the income went up more. Reimbursements were understated by $71,200, and marking the rent roll to the actual leases added another $28,700.

NOI rises from $410,510 to $453,042. Cap rate is NOI divided by price, so a higher cap rate means less money paid per dollar of income. The seller's statement implied 7.8% at our price. Our rebuild says 8.6%. Same money, more income — found by reading utility bills. The squeeze wasn't the cost of the deal. The squeeze was the deal.

Why I Made the Call

We're buying. Both reasons are downside arguments, not upside ones.

The lease structure protects the capital. On a gross-lease park, expense inflation comes out of my equity for the whole hold with no way to recover it. Here every suite reimburses. Taxes go up 47% and the tenants carry it. Add 3–3.5% bumps and my income grows while my exposure stays capped by contract.

And I'm getting paid for the risk. Concentration and complexity are real. So is an 8.6% going-in yield, $937,000 of contractual mark-to-market, and $121 a foot all-in. A twenty-tenant fee-simple park with clean books gets bid to a 6.5% cap by four groups who never had to open a utility bill. The discount and the difficulty are the same thing.

Five-year base case, not a flip. Year three stabilizes at $484,126 — an 8.0% yield on about $6.03M of total cost, 1.53x coverage. Year four we model occupancy dropping to 91%, because two leases expire and pretending they hand back clean is how people lose money. Exit at a 7.0% cap gets to roughly $7.7M, a 17.6% IRR and a 2.0x multiple.

Every screen we run is a shortcut for a real question. “Twenty tenants” stands in for how much does one departure hurt me. “Clean books” stands in for can I trust this income. When a deal fails the shortcut, go ask the real question — don't reflexively pass, and don't wave the rule away because you like the story.

Ask “is the juice worth the squeeze” and you'll usually get the wrong answer, because it frames the work as a cost. It isn't. Everybody has the same CoStar subscription and the same cost of capital. Willingness to open the boxes nobody else opens is one of the few edges left. Complexity isn't risk. Unpriced complexity is risk.

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Every issue of The Patriot Deal Room is a real deal we underwrote, with the real numbers — the ones we buy and the ones we walk away from. Subscribe on LinkedIn and by email to get a working education in how small bay flex industrial actually gets bought. And if you'd rather own a piece of these deals than just read about them, that's exactly the conversation this newsletter is meant to start.