# Small-bay industrial acquisition and lease-up

Canonical: https://chicagocommercialfunding.com/deal-lab/small-bay-industrial-acquisition-and-lease-up/
Markdown: https://chicagocommercialfunding.com/deal-lab/small-bay-industrial-acquisition-and-lease-up/index.md
Resource ID: small-bay-industrial-acquisition-and-lease-up
Published: 2026-10-21
Updated: 2026-10-21
Attribution: Chicago Commercial Funding Editorial
Topic: deal-lab
Asset types: Industrial
Investment stage: Underwrite
Experience level: Advanced

A hypothetical small-bay industrial acquisition connects divisible space, tenant demand, utility delivery, leasing costs, and the cash needed during incremental occupancy.

Small-bay industrial value can come from leasing useful space to several businesses rather than finding one large tenant. The opportunity depends on whether each bay has workable loading, access, power, utilities, parking, and permitted use at an all-in cost tenants can support. Subdivision on a floor plan alone does not establish six financeable leases.

This hypothetical Chicago-area acquisition has 30,000square feet divided into six 5,000-square-foot bays. The thesis is to improve functional delivery and lease vacancy in stages while preserving adequate cash. The investment must support the space's actual users rather than borrow demand assumptions from modern large-box logistics buildings.

All properties, tenants, leases, prices, costs, rates, and outcomes in this case are hypothetical. They are teaching assumptions, not market comparables, actual lender offers, or Jaken-funded transactions.

## Acquisition assumptions and balanced funding

| Initial use | Amount |
|---|---:|
| Purchase | $3,000,000 |
| Closing and financing costs | $90,000 |
| Physical work | $250,000 |
| Leasing capital | $150,000 |
| Opening operating liquidity | $120,000 |
| Contingency | $90,000 |
| Total uses | $3,700,000 |
| Initial selected debt | $2,000,000 |
| Required equity | $1,700,000 |

## Build a bay-level leasing and operating plan

At the illustrated stabilized condition, assume $18 annual gross base rent per square foot across 30,000square feet, or $540,000 revenue. Assume $180,000 operating expense, producing $360,000 NOI. This is an invented gross-lease example; it does not assume additionalNNN recovery on top of that rent.

The first year instead assumes only $180,000 NOI, followed by $260,000, $330,000, $350,000, and $360,000 as delivery and collections improve. Underwrite each bay's actual lease, starting condition, rent commencement, concession, commission, and tenant work. An annual ramp is useful for this illustration but cannot replace a monthly rent roll.

The $250,000 physical account and $150,000 leasing account fund the stated base program in the first two years. Confirm whether separation, electrical service, metering, doors, fire systems, restrooms, and shared circulation are included. The same capital is not deducted again in annual operating cash.

Prologis's 2025 filing provides primary industrial ownership context about customers, competition, and property investment. Its global portfolio is not evidence that this fictional small-bay building can achieve the stated rent. [Prologis 2025 Form 10-K](https://www.sec.gov/Archives/edgar/data/1045610/000119312526051453/pld-20251231.htm)

## Two financing structures

The selected illustration is $2,000,000 at 7.0%, with monthly payments, 25-year amortization and a five-year maturity. Monthly payment is $14,136; annual debt service is $169,627. Modeled principal after 60 payments is $1,823,243. The full commitment is assumed funded at closing; any restricted capital is tracked separately.

The alternative is $2,400,000 at 9.0% interest-only for 2 years, with $216,000 annual interest and $1,300,000 initial equity against the same uses. Principal remains $2,400,000 at its stipulated maturity without paydowns. The closing-cost allowance is held equal only to isolate structure; real proposals need their own fees, reserves, conditions, and approval.

The larger interest-only alternative lowers initial equity by $400,000 but raises current annual cash burden and creates a two-year maturity while some leases are still seasoning. Its full principal remains due. The buyer needs an actual takeout based on the condition achieved then, not year-five income.

The selected amortizing loan carries less debt and a five-year clock. It still produces an initial cash deficit under the assumptions, so the opening liquidity is deliberate funding rather than an optional cushion. Confirm whether the lender accepts the current occupancy and approved improvement plan.

The OCC handbook provides commercial underwriting and construction-disbursement context. Present the bay schedule, scope, monthly cash needs, and exit together so the proposed debt can be evaluated. [OCC CRE handbook](https://www.occ.treas.gov/publications-and-resources/publications/comptrollers-handbook/files/commercial-real-estate-lending/pub-ch-commercial-real-estate.pdf)

## Five-year cash and funding model

| Year | NOI | Debt service | Recurring replacements | Raw operating cash | Opening reserve used | Cash available before owner allocation |
|---|---:|---:|---:|---:|---:|---:|
| 1 | $180,000 | ($169,627) | ($15,000) | ($4,627) | $4,627 | $0 |
| 2 | $260,000 | ($169,627) | ($15,000) | $75,373 | $0 | $75,373 |
| 3 | $330,000 | ($169,627) | ($15,000) | $145,373 | $0 | $145,373 |
| 4 | $350,000 | ($169,627) | ($15,000) | $165,373 | $0 | $165,373 |
| 5 | $360,000 | ($169,627) | ($15,000) | $175,373 | $0 | $175,373 |

The annual model first uses opening operating and contingency cash for negative operations. It assumes all debt funds at closing, including capital accounts, so interest is calculated on full principal throughout. A staged draw structure would require a different schedule and could change both interest and temporary equity.

The recurring replacement amount is deposited and spent each year; there is no accumulated replacement account at sale. Remaining initial liquidity returns only if unused. Positive cash is assumed released at year-end for the return calculation, while actual loan and ownership restrictions can retain it.

A six-tenant building also needs an operating plan. Budget collections, accounting, repairs, turnover, common areas, and vendor oversight. Diversification by tenant count can increase administration and does not make every small business equally creditworthy.

## Additional operating downside

A separate stress assumes $60,000 NOI and $150,000 additional unbudgeted capital in one stressed year. Cash after selected debt, recurring replacements, and that extra capital is ($274,627). Against the full opening operating/contingency balance of $210,000, the model uses $210,000 and requires $64,627 additional equity. This is a separate stress, not a claim that the same reserve remains intact after base-case draws.

The separate stress assumes substantially weaker collections and another $150,000 of work beyond the funded program. Potential causes to investigate include inadequate service capacity, unusable delivery routes, delayed separation work, or several leases failing to commence. Those are research questions rather than claims about this invented building.

Use a monthly schedule to identify peak need. A tenant allowance can be payable before first rent, and lender reimbursement can follow an inspection. The stated opening reserve may be enough in an annual base case but insufficient at a particular date or after earlier deficits.

For a City of Chicago site, the construction-code framework and zoning must be checked for the specific work and tenant uses; surrounding municipalities need their own research. The official city page is a starting point rather than a project approval. [Chicago construction-code information](https://chicago.gov/city/en/depts/bldgs/provdrs/bldg_code/svcs/chicago_buildingcodeonline.html)

## Concrete five-year exit and returns

Assume end-of-year-five sale with forward NOI of $360,000 and 2.0% selling costs. The scheduled-maturity model assumes no additional prepayment charge; actual payoff, taxes, and fees need confirmation.

| Exit calculation | Base cap | Higher-cap sensitivity |
|---|---:|---:|
| Exit cap | 7.5% | 8.5% |
| Gross price | $4,800,000 | $4,235,294 |
| Selling costs | $96,000 | $84,706 |
| Loan balloon | $1,823,243 | $1,823,243 |
| Net equity sale proceeds before reserve return | $2,880,757 | $2,327,345 |
| Remaining reserve returned | $205,373 | $205,373 |
| Total positive equity cash over hold | $3,647,622 | $3,094,210 |
| Total contributed equity | $1,700,000 | $1,700,000 |
| Equity multiple | 2.146× | 1.820× |
| Annual model IRR | 17.31% | 13.43% |

The sale uses the fully leased operating condition assumed at year five. A building that remains functionally deficient or only partly leased should not receive that NOI merely because the marketing plan targeted it. The higher-cap case changes only exit pricing, while the operating stress remains separate.

The return basis includes all equity for price, work, leasing, costs, and reserves. Initial capital spending is funded within uses; recurring replacements and reserve consumption are also reflected. The output remains before income taxes and actual member fees or waterfall.

Confirm the eventual buyer market for a multi-tenant small-bay asset, not just a large institutional warehouse. Lease duration, tenant concentration, ongoing turnover, and manager requirements can affect buyer pricing even after occupancy reaches the target.

## Diligence and investment decision

Before the inspection deadline, identify the exact tenant types likely to use each bay and the physical requirements they have. Compare actual competing spaces, asking and signed rents where available, concessions, and delivery condition. Avoid applying a headline market vacancy rate to all six bays as though they were interchangeable.

Obtain qualified scope and utility input, and test access, loading, parking, circulation, lawful use, shared systems, and environmental history. Determine which improvements benefit the building generally and which serve only one tenant. A tenant-specific cost can require a longer lease or more credit support to be economically sensible.

Prepare a lease template and operating budget that accurately allocate shared expenses and responsibilities. Confirm how disputes, after-hours access, maintenance, snow, waste, and utilities are handled in the actual agreements. The model uses gross leases here, so do not add unverified recovery revenue to make the return better.

Approve only if the documented bay economics, costed delivery, financing conditions, and monthly funding support the projected ramp. The alternative's smaller equity check is useful only if its extra payment and early balloon remain fundable. Reprice or decline if division creates space that prospective users cannot occupy economically.

After acquisition, report each bay's marketing, lease status, delivery progress, paid rent, arrears, capital commitment, and collection. Compare the aggregate NOI with the original plan while preserving the specific cause of every variance. Small-bay value is created through several executed leases and workable operations, rather than a single optimistic stabilized-income cell.

## Source registry

- [Prologis — 2025 Form 10-K](https://www.sec.gov/Archives/edgar/data/1045610/000119312526051453/pld-20251231.htm): accessed 2026-10-21
- [OCC — Commercial Real Estate Lending handbook](https://www.occ.treas.gov/publications-and-resources/publications/comptrollers-handbook/files/commercial-real-estate-lending/pub-ch-commercial-real-estate.pdf): accessed 2026-10-21
- [City of Chicago — Construction code navigation](https://chicago.gov/city/en/depts/bldgs/provdrs/bldg_code/svcs/chicago_buildingcodeonline.html): accessed 2026-10-21

## Related resources

- [A Chicago investor’s guide to industrial property investment](https://chicagocommercialfunding.com/learn/industrial/)
- [Industrial property with an environmental diligence issue](https://chicagocommercialfunding.com/deal-lab/industrial-property-with-an-environmental-diligence-issue/)
- [Owner-user industrial purchase comparing financing structures](https://chicagocommercialfunding.com/deal-lab/owner-user-industrial-purchase-comparing-financing-structures/)