Office property, interest and cap rate spreads on triple net property
Hi, I'm looking at an office property, I have some idea of cap rate and what I should be looking for, but the cap rate of the property at asking is 4% and the bank suggested 4% for loan interest. Before I go any further, what would you want to see in terms of movement to make this deal make sense. Would 1% each by the bank and seller make it a good deal to you, giving a 2% spread?
[{"id": "hi5ob1s", "text": "Depends on location, tenant's credit, length of lease, rental rate (above or below market), and overall likelihood of lease renewal.", "replies": [], "depth": 1}, {"id": "hi6iy8g", "text": "That's a pretty aggressive CAP but, yea, in my experience the bending would have to be done by the property more-so than the bank, which are commonly pretty rigid.", "replies": [], "depth": 1}, {"id": "hi70j37", "text": "Why would you buy an office at a 4 cap in this market?", "replies": [{"id": "hib99ij", "text": "Because each $1 increase in NOI is worth $25.  In a 10 cap market it only gets you $10.", "replies": [{"id": "hibrlzl", "text": "Are you well below market rate in your rent? A 4% cash yield going in on an office is terrible unless there is significant value add to be done in terms of either adding occupancy or marking rents to market, and doubtful the market cap rate for a  stabilized property at market rent is 4.00%. Not to mention all the capital you have to put in over time for leasing costs.", "replies": [{"id": "hic3fiq", "text": "A cap rate is just calculated on the NOW..  Of course if rents are above or below market and are expiring in a short time frame they will affect the purchase price.  A 4% cap rate just just tells you that there is high demand.", "replies": [{"id": "higi277", "text": "I understand how cap rates work - but trophy office cap rates in primary markets are like 5%, which makes 4% seem like a bad buy in general. You could get better product at a higher return, why buy in on this asset in particular at a 4% cap rate?", "replies": [{"id": "higjj76", "text": "Of course if NOI is selling for $20 then there would have to be a good reason to pay $25.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "hijxxkz", "text": "New five year lease signed, at market rate, 10 years of previous occupancy by the tenant which is a large banks brokerage division. That is just FYI, I don't know if that makes it all good.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hijb7p1", "text": "What do you think this 2% \"spread\" means?  If a seller thinks he can sell ar a 4% cap rate why would he discount it to you for 25%?  Nothing wrong with shopping around for mortgage rates but why are you trying to mark it to the sales price?", "replies": [], "depth": 1}]