10% cap is pretty good, right?

[Andy M]

Hey guys,

So I just found a rather large property (for me anyway). The asking price is ~14.5M and the current NNN lease backed by a AA company gives a NOI of 1.45M/yr. The occupying company's lease has another 2 years on it at this rate, and then they have 4 options to extend for 5 years at fair market value.

Now, I'm thinking that 10% cap on a Class A building (built in 2000) is damn strong. The PSF is at 97$, seemingly well below replacement. The main problem seems to be that we could lose the tenant in 2 years. So I was thinking that I should call up the tenant, and ask them if they would be willing to go ahead and accept the first option at least (for 5 years more) in return for a somewhat lowered rent than fair market value would likely be in two years. I might even ask if they want to go for 10 years, again at a somewhat reduced rate.

Locking the rent in at a rate somewhat below market could somewhat lower the value of the building in the coming years (since the rates could be below market), but if we could maintain even a 9% cap rate (i.e. let them rent at 10% less than they are paying now) I can't imagine having trouble securing financing.

I mean 9% cap on a AA secured property for 7 yrs gauranteed would be amazing. Whatcha think?