Watched my cap rate jump 1.2 points after one small lease tweak

I had a 12-unit building in Omaha that sat at a 6.8% cap rate for two years, then I switched all leases from gross to triple-net and renegotiated the CAM charges. Within 10 months the value jumped to an 8% cap rate on paper, same rent roll just cleaner expense structure. Anyone else see a weird valuation swing from a paperwork change like that?

2 comments

2 Comments

abbyd361d ago

Wait, but did the market actually acknowledge that cap rate change or was it just your internal pro forma? Because a 1.2 point swing from a lease structure change sounds great on paper, but if you tried to sell that property tomorrow, the buyer's appraiser is going to look at the actual cash flow history, not your theoretical projections. The real question is whether those new triple-net leases actually got signed with real tenants that will renew, or did you just shift the same expenses onto a tenant who's going to push back come renewal time? I've seen guys pull this move and then get stuck with vacant units when the existing tenants realize they're now paying property tax and insurance. The cap rate on paper means nothing if the market doesn't price it in at the closing table.

sarah_brown1h ago

Changed my mind on this one, @abbyd36. I used to think a lease restructure was basically free value, like magic on a pro forma, but you're right about the market not caring until it's proven. I had a buddy in Des Moines do the same gross to NNN switch, and when he listed the building, the buyer's broker straight up said the comps didn't support his new cap rate because none of the tenants had renewed under the new terms yet. He ended up dropping the price 3% just to get an offer. Those paper gains only hold if you've got signed leases with actual payment history, not just a cleaner expense sheet.