Class C/D Commercial Real Estate ?

5 Replies

I have opportunity to buy a commercial property in midwest. I live in Texas but lived in city where property is located and am familiar with area. Current tenant just started year 11 out of four 5 year options so 9 years left on lease at 5500 month gross lease. Taxes and insurance are 12,000 year. Tenant does take care of landscaping. New roof last year. Price is 350k.  That will put me at a 13.7% Cap rate.  The building is an old industrial office that has been partially renovated to serve current tenants needs. My biggest issue is that if tenant leaves it would tough to find another tenant without significant rehab on building. The tenant operates a methadone treatment center which is highly regulated and it would be very difficult for them to move to another location. But who knows if some other treatment will come out and replace this treatment option. Thoughts?

Think you brought up a good tid-bit on the lease up after the tenant leaves but it sounds like a sticky tenant for you. Hate gross leases on commercial property. Any rental increases in their lease?

Where you able to do due diligence on their business model?

I am a pharmacist so I am familiar with how these clinics operate. It is very hard to open locations do to municipalities , dea, and local opposition. There is a bump up to 5800 month in last 5 year option. Who knows what the future holds for this type of business model, there could be new medication or a political shift that opposes keeping addicts on this type of medication, etc.

I did get copy of lease and looks like landlord is responsible for taxes and insurance and structure of building but tenant is responsible for hvac, plumbing, electrical basically anything besides roof, walls and foundation.

@Phil Dodd , A couple items to note.

1) I'm getting a cap rate of 15.4%. $5500 x 12 equals $66,000. $66,000 -$12,000 is NOI of $54,000. $54,000 divided by $350,000 is a cap rate of 15.4%

2) If you put down 20% on a 20 year mortgage at 5% your monthly payments will be $1848/month. That leaves almost $32,000 in cash flow per year.

3) That amount of cash would allow you to pay off the building in full, take care of CapEx, and/or set aside a decent amount of money to do the upgrades needed if the tenant leaves.

4) When a tenant leaves, you often have the opportunity to increase the rent or re-purpose the building to us highest and best use.

Sounds like a great opportunity.