Office/flex space purchase leaseback opportunity

[Brian Plajer]

Hello,

I have some experience/confidence analyzing apartment buildings however, I have zero experience analyzing a building that is flex/office space. There is a company than needs cash and needs to get out of their financing so they are doing a sale/NNN leaseback. They pay everything except building envelope. What are the major questions I should be asking? This is scary and exciting and I don't want to let my fears prevent an opportunity. thanks, Brian

[Henry Clark]

Break your approach down.  If it looks good then go to the next set of due diligence:

1.  The Tenants:

a.  What do their financials look like?

b. What does their business model look like?

c.  Is there a personal guarantee? What do their personal finances look like?

d.  Why do they need cash?

e.  If/when they leave at the end of the term, what is the cost of 1 year without rent and reno costs?  How does that factor into your analysis?

2.  The deal:

a.  Property- structural, roof, hvac, roads, parking, sewer/water,

b.  Property taxes- what will they be?

c.  Title/liens, can they clear them?

d.  Lawsuits against them?

e.  Structural- make sure any "Holes" they must leave the equipment.  Any buildouts, they have to leave in place.

f.  You have to be added as an "Additional Insured" on their policy.  State in the lease the type and levels of coverage.  Make sure they include Business Income loss, for as many months as possible, say 18 months, that way they can pay rent for that period in case of flood, damage, etc.  Also make sure it covers clean up cost.  Make a line item if they don't do this, you will get the insurance and charge them back.

g.  Make sure there are no EPA, abestos, etc issues.  How old is the property and what type of both property and prior businesses have been there? Realize a Flex/Office space but no details provided.

h.  Escalation factors in lease rate?  Make sure that is included.  

3.  Your funding source:

a. Make sure your funding source matches this asset play. Don't do an ARM with a long-term asset. Also make sure the lease terms match your finance balloon period if any. You don't want a 3-year lease term with a 5-year balloon term. Also put escalation terms to renew before your 5-year balloon term. That puts pressure on them to renew the lease prior to your 5-year finance balloon term.

b.  Make your money going in.  This is riskier than apartment buildings.  

This is the time in the cycle to start looking at deals.  Hope it turns out great.