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Now let's get to business:

This year I learned there's no such thing as "too expensive per square foot" in value-add commercial real estate.

I’m talking about a 3X higher acquisition price per foot, 10X higher insurance costs, a market at an all-time high, rents that seem unsustainably high, and a purchase price right at replacement cost.

All of this, made buying way outside of my comfort zone. And yet — it's one of the best deals of ALL TIME.

NOW HANG ON - I'll wrap up my takeaways at the end and let’s dive in.

We bought a small-bay industrial facility at 16260 Old US 41, Fort Myers, Florida (click here for areal video) last August 2023. This 30,000 sq ft building sat on a 2.15-acre lot with 12 tenants, and had 22’ clear height.

The average income within 5 miles was $92,000, and the population was 119,000.

We found this deal through a broker who previously sold us a self-storage facility in Lehigh Acres.

We made three offers: one with cash and two with seller financing, each with different terms, but we didn't get the deal.

However, when the first buyer backed out, the seller approached us again.

We resubmitted our offer and this time, the seller accepted it.

We struck a deal at $2.7M with $2.16M seller financing at 5.75%, interest only, 5-year term.

Pros

• Location: Fort Myers is a hot market with high demand, solid income levels, and a dense population—perfect for what we look for in an investment.

• Property Type: The property was a small-bay industrial facility, a type we were very familiar with and knew how to lease effectively.

• Financing: We closed the deal on August 23, 2023, right as interest rates were on the rise. We secured a great 5.75% interest-only rate through seller financing, which was a huge advantage for us.

• Leasing Demand: Our experience with other properties in the area, like the small-bay industrial in Lehigh Acres, confirmed the high demand in Fort Myers market.

Cons

• Purchase Price: We bought the property for $90/sq ft, which is a lot higher than our usual Midwest purchases at $30 to $40/sq ft.

• Insurance Costs: The insurance costs were very high at $3/sq ft. That’s 10 times more than what we usually pay in the Midwest, where it’s only $0.25 to $0.30/sq ft. This significantly increased our operational expenses and made it more challenging to secure insurance.

  

  Insurance Quote

Pro Forma:

When we bought the property, it was fully rented out to 12 tenants under month to month gross leases, with rents between $8 and $9/sq ft.

These rents barely covered the common area maintenance (CAM) costs.

However, we projected that within 12 months and with approximately $50,000 improvements, we could boost the property's income to $369,000 a year.

This plan involves changing all leases to triple net (NNN) leases, which will significantly increase the property's value and cash flow.

Deal Structure:

The deal structure was pretty simple. My partner, Shea, and I each hold a 40% interest in the property.

My partner Rafik joined the LLC with a 20% ownership, providing both capital and strategic help.

On top of that, we set aside an additional profit share (a.k.a. Phantom Equity) for a leasing broker who will be essential in filling the leases and managing the future sale of the property.

I’ll explain more about this role and how it will impact us later.

Leasing Strategy:

We launched our leasing efforts right after going under contract, as we always do.

During due diligence, we started talking to the tenants about their plans and potential lease renewals.

This helped identify long-term tenants.

This deal had some challenges with rent increases because the property didn’t need major upgrades.

With a new roof already in place, our expenses were minimal—just sealing asphalt, replacing a few doors, and clearing junk cars, spending only about $50,000 total.

We knew that raising rents without significant changes could be tough.

Once our earnest money went hard, we started negotiations with the tenants right away.

Instead of raising prices right away, we set expectations to our tenants that we will be increasing rents to match the market, and asked them to check out what’s available on the market.

Once they saw that there were no better options and the market rates were higher, they were more open to paying those new prices.

We emphasized that the market, not us, dictates these rates and encouraged tenants to check the fair market value.

We made it clear that these changes would take time, but within the next six months, we needed to align their leases with market.

Partnering with Local Brokers:

We partnered with a local broker who became a key asset for this deal.

Our strategy is to see brokers as partners, not just transaction tools. We want them to feel ownership in the deal.

To do this, we offer a profit-sharing agreement that works like phantom equity.

This method really works, but it means finding brokers with the right mindset.

On this deal, our broker was very proactive, we helped him with the marketing and we stabilized this property within the 6 months.

We started with 12 tenants, but once we started raising rents, 5 tenants left.

Our broker was able to replace them with new ones and we are now at full occupancy.

Pro Forma vs. Actuals:

This deal turned out to be our second-best in terms of matching our pro forma projections.

Just before we closed exactly 1 year and 2 days ago, we projected an NOI of $369,561.32, and today our actuals are at $368,940.

The difference? Just $621.32— that’s awesome

We usually aim for a 5% to 10% variance in our pro forma projections.

But to be that close. I am very proud of my team how close they got on target.

Another key factor in this deal was quick turnaround.

We planned for 12 months of stabilization but we finished in 6 months.

We improved the value by $2 million in 6 months

Now, this was just a reminder to me that this type of deal compared for example to improving $10 million over 3 years is 12.8X better.

Cash Flow and Distributions:

Our initial plan was to stabilize the property and then sell it. But once we hit stabilization, our cash flow increased to over $16,000 a month, allowing us to distribute $10,000 monthly to our partners.

With this strong cash flow and great seller financing, we decided that there’s no need to sell right away.

Now, with interest rates being still at 7%, there’s not much incentive to refinance it either.

Listing:

We tested the market at $5.2 million, and our minimum target was $5 million.

We got 3 offers, with the highest at $4.6 million.

Since we didn’t hit our $5 million goal, we decided to hold onto the property for now.

We’ll keep assessing our options, and once interest rates go down, we’ll think about whether to sell or refinance.

The Big Idea:

After completing this deal in Fort Myers, we realized that the small-bay industrial market remains largely untapped by institutional investors. The shocker came when we compared cash flows: we had three self-storage facilities in the same market, and although they traded at lower cap rates, their cash flows were two to five times less than those of stabilized small-bay assets.

As a result, Shea and I have decided to shift our focus. We have already sold our self-storage facilities in Illinois and Wisconsin, and we just closed the sale of one in Tennessee last week. Moving forward, we will concentrate on small-bay industrial properties that are too small for institutional buyers but still offer strong returns. We’re doubling down on finding deals in Florida, and we’re also looking to partner with brokers & local operators across the nation. Whether it’s through local market knowledge, lease-up expertise, capital contributions, or any other form of collaboration, we’re open to partnerships.

If you have a deal in small-bay industrial, especially in Florida, we’d love to take a look at it.

Takeaways

1. Don’t Get Hung Up on Price Per Foot: If you can hedge the risk with seller financing or strong leasing demand, or both the deal might still be worth it.

2. Get Brokers Involved as Partners: Bring brokers into the deal as if they’re owners. This ensures the asset gets the owners' love and attention, which is a key in lease up stage.

Be Well,

Saul!