I am very close to buying a dialysis center with a long term tenant on NNN lease. This will be my first investment and the amount of investment is making me nervous.
The biggest concern is what if tenant leave. I am in process of hiring a lawyer to review the lease but i think no matter how strong or favorable a lease is, the tenant has option of declaring the bankruptcy and restructure their organization (this is just my opinion).
I talked to a friend who is a nephrologist and he says it is very very rare that any dialysis center who is in business for more than 5 years would move because all the patients are in that community and majority of the patients are long term patients. If they move they will have to built their practice from zero which take several years. I have also verified that they have enough space in the current location to grow their practice.
The numbers work out for me. Any input from the members of this group will be highly appreciated.
What kind of cap rate are you getting.
You're right, tenants can always leave. Things change. For example some people are doing dialysis at home now. Maybe that is the wave of the future, or drugs that prevent kidney failure, etc. I saw a vacant/closed Family Dollar the other day. Starbucks were considered safe at one point, but I'm sure not all are doing well during the pandemic. So there are always risks....just the nature of the game. Nothing is a sure win.
Hey Arshad, DaVita is a strong tenant that is unlikely to file bankruptcy. However, that doesnt mean that they will stick in your building after the lease has expired. A tenant can always find a sweeter deal down the street or decide that there is a better location elsewhere. I would pay close attention to the market lease rate for your building. For instance, if the current tenant is paying $25 PSF but the market rate for comparable properties is $15 PSF, then you are going to have a very hard time replacing that rent if your tenant leaves. Buy deals that are at or below market rent so that you can mitigate your downside risk of having a vacant building down the road. I happy to jump on a call to discuss in more detail if that would be helpful.
@Arshad Hussain I would tend to agree with @Jacob Franz as he makes 2 very good points. But what struck me the most was your comment about the deal is making you nervous. That's never good. The reality RE is risky and unknown enough that if you are not feeling good about the deal then my advice is to go with your gut. I get nervous for 1 of 2 reasons.
#1 is this deal is taking up too much of my cash and it would not be cool if this deal went south and single-tenant buildings are just that single-tenant so single source of payment. The other reason I get nervous is if I do not know enough about my subject project. I can study more, do more DD to get comfortable, and fix this one but I can never fix reason #1