I need some advice, there is a medical office building for sale, NNN, 1.4 million with 5.8% Cap and 3 year increase in rent per year with 5 years remaining. Its a pediatric office and has been there since 2006, the group was purchased by Banner Health(MD Anderson) and they have taken over the lease, and now the physicians are selling the building that was previously there own.
I find the location stellar but I am concerned about only a 5 year lease....Any thoughts on this?
I think a 5.8 cap is reserved for properties with a very strong occupancy. If you think you can easily replace the tenant--at that rent--, then go for it you're indifferent as to the tenant.
Otherwise, offer a discount that reflects the reality of trying to re-let in 5 years...
5.8 cap is OVERPRICED for medical tenants NNN. Right now out of all NNN STNL medical office is higher cap rates like high 6's to 7's for cap rate with longer term leases than 5 years.
You have not mentioned the sq ft of the building which shows rent per ft. You need to know if that is at market, above, or below?
If tenant leaves medical TI is higher to re-lease. Doctors tend to want latest and greatest for build outs to commit to a space.
Are you paying all cash? 5.8 cap with 5 years left is very hard to finance. Likely need 40 to 50% down as interest rate is in the 4's and likely will only do a 15 to 20 year amortization if that.
Could you buy in the 6's for cap rate and talk the tenant into extending another 5 years for 10 year if you ease up on some of the rental increases? This way you get the blended cap rate up but buy 5 more years which helps financing to get a 20 to 25 year amortization.
Great for buyer but of course seller will not like selling for a lower price.
If you accept 5 cap just buy a Starbucks with 10 year lease and 10% rental increase every 5 years. Medical can be great but make sure doc's practice isn't heavily dependent on clients with government benefits to pay for services. If those get cut in the future the doc's revenue for the practice can drop.
The cap rate may be high but that is a function of market conditions more than anything else. A good market analysis or appraisal would justify the cap rate. But certainly, a longer lease would improve the attractiveness. I would still think you could get 70% financing on this project fairly easy.
What may also be of concern is the practice being bought by a larger health care provider. In my experience, those groups have specialized people who deal with leasing space. I have had clients get beat up pretty bad from negotiations with these groups. You are no longer dealing with a mom-and-pop medical practice.
One thought would be to get the property under contract and then reach out to the health care group to get an idea of their intentions. If you find out this group is planning on consolidating offices, etc and are planning on consolidating this practice into another location, that information would be invaluable.
Best of luck.
Hey guys thanks for the input.
The plan was cash, I am just scared because of the 5 years. The realtor stated that Banner Health that owns the locations probably will not re-negotiate the lease.
See link below
@A.R Shakir Totally amateur speculation here so take it for what it's worth.
That's $340/sq ft. I don't know what land near there goes for but that seems pretty high to me. Which means you are buying the lease and not only could they leave in 5 years but they could leave earlier with 6 months notice...
If I were you I would pretend you were Banner and look to see what other cheaper options they might have available. I saw a larger space on loopnet close to there already built out for medical for $860k.
It's an office condo and I'm not sure what the pros/cons of that are.
Also, the doctors in the practice probably would not want to move because it is a large hassle to them so you'd have that going for you. But if Banner can find them a nicer spot for less money you can bet they would look at that.
So knowing what the supply and demand of medical office in that area would be crucial to making a good decision.
@ Jeff Kehl Thanks for the input!
I am going to reach out to the realtor and see if they are open to negotiating the lease longer.
Did you end up purchasing this property? How did it all pan out?