Feedback on a build to suit Net lease deal in Connecticut
I want some feedback on a net lease deal
350k purchase
50k purchase expense (Phase II and monitoring wells)
175k tenant fitout 
Total 575k

Lease at 5,100 per month Net. I am responsible for roof, structure and replacement of HVAC.

Publicly traded company. 5 year term and 6 5 year options. 

I don’t see them moving but cannot get them to commit to longer. They will give a 12 month notice on options.

I think it is worth a 7.5 cap.

Cost 575k
Value 816k at 7.5 cap.
I risk about 25k if it doesn’t work out (Phase II - I think it is clean based on review of some reports but transfer act requires the Phase II.)

I plan to hold, not sure if it changes anyone’s analysis. I have been offered a 6.5 cap with the same tenant and similar lease but think that a 7.5 is fair given the term.

Bank commitment at 75 LTC. 3.85 5 year fixed 20 year amortization no balloon.
[{"id": "hkte07e", "text": "Net lease is a credit spread game between the tenants bonds of a similar maturity to get to your cap rate. The building sounds really small and the lease structure is super tenant friendly. Having the lease term expire at the same time as the loan is bad news bears. Connecticut is also a super volatile state with bad fundamentals and a stupid high transfer tax. Deal sounds really small.\n\nHonestly I wouldn\u2019t invest in it, put your money into something else upside doesn\u2019t sound like it\u2019s worth the risk. If they give you 12 months notice you need to retenant and find a lender cool with monitoring wells in a state with historically low absorption.\n\nIn my experience Connecticut is where money goes to die. The structured lease with 30 years of options blows in an inflationary environment. I don\u2019t see how you create value on the deal, other than thorough loan ammo (and if that\u2019s your game there\u2019s cheaper stuff you can buy than ammo on a 3.85) you\u2019ll be in a constant cycle of basis creep and lease renegotiation if they stay and won\u2019t have good exit options. I\u2019d be a hard pass on it personally. You\u2019ll do better buying an index fund. \n\nGood luck!", "replies": [], "depth": 1}, {"id": "hktg92h", "text": "Given you\u2019re still responsible for structure roof and HVAC, you should factor in replacement reserves to NOI and therefore value. \n\nCan\u2019t say what cap is fair in that market but if you\u2019re confident in fit out costs and/or have a hard cap on your exposure in the lease / LOI then I\u2019d do the deal but as soon as rent kicks, turn around and sell the property.", "replies": [], "depth": 1}, {"id": "hkufvx7", "text": "Financing terms aside, with interest, your looking at a 3 year payback on the tenant specific capital (the $175k) leaving you only 2 years of fixed term to get any benefit.   That\u2019s putting too much risk on the landlord in my opinion.", "replies": [], "depth": 1}]