But the rate is the smaller half of the story. Look at what it took to get those signatures. Several of those tenants got a month of free rent. And not one of them carries an annual escalator — flat for the full term.

That's the tell. A landlord with pricing power signs a lease at a number and puts a 3% bump in it. This landlord was handing over the first month and promising not to raise the rent for 3 years — and still only got $15.09/SF. He wasn't negotiating. He was begging for a signature.

You will never see that in a comp grid. A comp grid gives you a rate. It doesn't tell you the rate came with free rent and a frozen term, which means the effective number is lower than it looks and the building has no leverage over its own tenants. The only way to find it is to open the leases.

Lesson Two: Check Every Lease for Duration and Bumpers

Quick note on terminology, because "bumpers" is shorthand and not everybody uses it. A bumper is a rent escalator — a clause written into the lease that raises the rent by a set amount every year, usually around 3%. Rent escalator, rent increase, annual bump: same thing. If a lease doesn't have one, the rent you sign is the rent you get for the entire term.

When you buy an occupied building, you inherit somebody else's paper. The rent is only ever worth what those contracts allow it to become — and whatever they say, you're bound by it. You can't un-sign them.

So go lease by lease. Not the rent roll summary the broker sends — the actual documents. Two questions on each one: how long am I locked in, and does the rent step up while I'm locked in?

Here, 21 of 23 leases had no escalator at all. The other 2 had bumps. Everybody else sits flat until they roll.

Then look at weighted average lease term. This one is 26 months. That's the number I want every operator to internalize, because it tells you precisely how long you're stuck. For roughly 2 years, across the whole rent roll, the rent does not move. Not with inflation. Not because insurance renewed higher. Not because you put capital into the building. It sits.

Get locked into 3, 4, 5 year leases with no bumpers and you have capped your own upside on the day you close. There's no lever left to pull. You can be the best operator in the business and the contracts still say no.

Usually a short WALT is the escape hatch — the leases roll, you reprice, the flat terms stop mattering. That's what made this one so ugly. The leases do roll, and fast. But Lesson One already told us what they roll to: $15.09/SF, no bumps, a month free. You're not locked up for 2 years and then rescued. You're locked up for 2 years and then handed the same deal again. Which is why our model could only grow base rent about 1% a year across a 5-year hold. That wasn't us being conservative. That's what the contracts and the leasing history mathematically permit.

Lesson Three: Gross Leases Put the Landlord at Risk

A gross lease means the tenant pays rent and you pay everything else. You absorb every single expense increase, for the entire hold, with no mechanism to pass any of it on. On a triple net lease the tenant carries those costs. That's the whole difference, and over 5 years it is enormous.

Every lease in this building was gross except one. And diligence handed us a live example of exactly what that costs. We pulled the utility bills and found trash service had gone up 7.4% in a single year. Not a projection — an invoice. So we carried it forward at that rate, because that's what actually happened. One line item, $18,441 today, becomes $25,898 by Year 5. A 40% increase on the trash bill, absorbed 100% by the owner, recovered from nobody.

Now do that honestly across the whole stack — insurance, water and sewer, snow, repairs — and total operating expenses go from $7.47/SF to $8.54/SF over the hold. Growing about 3.4% a year, against rent growing about 1%.

Expenses compounding 3x faster than income, with the tenants contractually insulated from all of it. Year 1 net operating income is $394,982. Year 5 is $403,317. 5 full years of ownership, capital spent, tenants re-leased — and NOI moves 2%. It goes backwards in 2 of those 5 years.

And that's before the tax bill. The building currently pays about $95,000 a year on a stale assessment. Reassessed at what we'd be paying, the assessor's own math comes out around $265,000 — and the revaluation date falls inside our hold. Our model carries a tax consultant's estimate well below that on the expectation of a successful appeal, which means there's real money sitting on one line hedged by nothing but an argument. Under gross leases, whichever way it lands, we absorb every dollar.

Notice how ordinary all of that is. No tenant defaults. No recession. No vacancy spike. Expenses just go up the way we already watched them go up, and the assessor does his job on schedule. That's the whole downside case. When the bad scenario requires no bad luck, you are not being paid for the risk you're taking.

Why I Made the Call

Stack the three lessons and you get a single sentence: the income is capped and the expenses aren't.

Either half of that is survivable on its own. Flat leases on triple net paper are fine — the margin is protected even if it can't grow. Gross leases with real annual escalators are fine — the bumps pay for the inflation you're absorbing. It's the combination that's fatal, and it's why the model comes back showing NOI going nowhere across a 5-year hold. When we ran the full return, it didn't clear our bar. It didn't come close.

And I'll be honest about how badly I wanted this one. A dense infill location. Very limited competing product in the submarket. Unit sizes right in our wheelhouse. 90% occupancy with a tenant base that mostly renews. Every instinct I have says buy that building.

But Patriot buys where operational skill moves NOI. That's the entire edge. We take a building, push rents to market, put escalators in leases, tighten the expense load, and create value we control. This asset offered none of those levers — rents already at market, income frozen by contract, every expense increase landing on us. It's outside our buy box, and on the risk we'd be taking for the return on offer, we deemed it too risky. So we walked — because we decide on the numbers, not on how much we like the deal. Saying no to a building you want is most of the job.

And I'll own the part that stings: we were under contract before we knew any of this. The basis looked right and we moved. Diligence is where we found the leases, the leasing history, and the expense structure. It cost us time and third-party fees to learn it. That's the cheap version of this mistake. The expensive version is closing.

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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, including the ones we walk away from after we've already spent money. 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.