Need Help on Medical Building for sale

[A.R Shakir]

I need some help, there is a medical office guaranteed by large hospital (nearly a 700 million in revenue) for 20 years. Its a NNN ground lease for sale for 3.3 million with a 6% cap rate. The problem I have is it is in a small town of about 5 thousand people. My concern is that if this hospital leaves after 20 years there is no way this will be worth any thing.

I will put 50% down and will about about 5 % cash on cash

Any thoughts would be helpful!

[Joel Owens]

Hi Shakir,

Number 1: Why are you putting down 50%?

In commercial STNL and MTNL typically at 25% down loan is full recourse, 30% down is 50% recourse, 35% or more down is usually full non-recourse where only the down payment is at risk and none of your personal assets or other investment property holdings.

Number 2: Ground lease does not give you any depreciation versus owning an STNL where you can depreciate generally 75% of the building. 

There is an income cap per year on depreciation but if someone such as your wife can get real estate professional status then there is no annual cap.  This is not legal advice and your tax accountant would have to show you how to keep records and set it up.

You mention 5,000 population level. Is that 1,3,5 mile ring radius? 3 to 5 mile could be high population and people should travel to the destination within that radius if not too congested.

Number 3: What is the main driver for the investment is it cash flow or tax write off? Many of my doctor clients it is tax write off as they are already making 500k to 1 million a year income.

There are a lot of good properties in Illinois right now to buy. Have you looked at the lease or placed a formal offer yet? Gotten a finance quote?

I work with clients nationally and have extensive contacts in Illinois.