Looking for VA financial partners
I have a deal under contract for $2.6M for two medical offices at a 10 CAP. Total value currently is $3.5M being conservative. I'm have a hard time finding a lender to lend on it because the leases expire in 2.5 years and they all want at least 5 years remaining. Therefor I'm considering going with partners on it to buy in cash. Very big tenant in place for 18 years now. 1980 build. About 20k sq ft in total between 2 buildings located in Central Virginia.
The 10 cap is irrelevant. That could be a 7 cap if the market rent for that box size has fallen since the original lease was done or the last option renewal.
5 years remaining is the standard. Most won't do under 7 years. There are some before for investment grade credit that would do less than 5 years.
The buildings you have to make sure absolute NNN and not NN because on older building the capex for roof and parking lot on larger properties could be 500k to over 1 million.
That does not include TI credits where the tenant might want to stay instead of moving elsewhere.
@John McKee 100% occupied with one tenant, HCA. Been there for 18 years now actually. I'm not really seeing 2.5 years left on the lease as odd, it's just too far out for them to go ahead and renew. I'm a fan of the deal for many reasons. All HVAC units are 4 years old, roofs are 2 years old, NNN credit tenant, buying at a 25% discount with an instant $1M+ equity, and the seller is going to carry the 25% down-payment at 2.5% interest! Great locations and buying it at a 10 CAP in a market that's currently selling at 7 CAPs.
For the roof ask if it has warranty that transfers to the new owner and ask to see the warranty requirements for maintenance and any documents that have to be signed for the transfer.
Make sure roof type that was put on has not been recalled, the contractor has not gone out of business, or the material with roof company has not gone out.
Also make sure another layer was not just added to the top. If it has too many layers the insurance companies will say not to insuring the building. In that case the whole roof has to be tore off and redone. Get core samples to see quality down to the decking. if a new layer is just on top of a bunch of crap it will fail early and be worthless.
Check parking lot for cracking. Reseal and coat depending on size can be over 100k sometimes. if you have to mill the parking lot down can go into the stratoshpere.
If the place has elevators they can be a few hundred k each to replace. Don't put blinders on because of the owner finance. Still do a complete DD.
What I mean by 10 cap could be 7 cap is not that the market is 7 caps for what people are buying.
What I am saying is sometimes say a lease was done in 2005 on a 20k sq ft building and market rents were 25 a foot. With rental increases now the rent at 32 a foot and based on existing income it is your 10 cap as you say. The current market for that building size might now be 23 a foot as the area has changed over time from new town development to old town where action is not as strong anymore.
Now when 2 years is up tenant wants to renegotiate rent down to the 23 a foot or they leave the old building for a new building a developer completed with all the bells and whistles for close to what they are paying now. You have to not just think about value TODAY but what it will likely be in the FUTURE.
I assess current in place rents in income to what current rents are in the market and where the market is trending to offer for my price.
I can buy Walgreens with 2 years left on lease for a 10 cap but it has Dollar Tree sublease and when Walgreens no longer has to subsidize the lease I have a 6 cap for what Dollar Tree would pay on their own for that space. if I have 6 cap I might as well go buy Walgreens on the hook for 10 to 12 years. Alot of this analysis comes with decades of experience in the field.
Hey @David Sanford
Have you talk to any HMLenders? I can check with our investors if they would lend this.
Maybe we can lend on it so you don't need to raise the cash and can close the deal quickly since it's under contract, then when you have it, maybe try to get lease extensions signed so you can refinance out into another long term loan before our short term HM loan ends.
Let me know your thoughts on if you want me to look into this for you.
Okay that makes sense with one tenant. I thought you had multiple tenants with 2.5 years left. HCA is a legit tenant and your property will be very valuable if you get them to renew assuming market rates don't fall. Medical tenants are generally pretty sticky with their locations. Joel makes good points about the potential Capex the building may need, but Newer HVACs and a roof is a good start! At this point it comes down to the lease and what expenses the tenant actually covers. On the surface I like the deal assuming the surrounding demographics supports the business.
When tenant is 2.5 years out UNLESS you sweeten the pot for them to renew early there is generally little motivation. So you have to analyze how to make the deal sweet for them but also make it a win for you increasing equity and value of the property.
Trying to (blend and extend) the lease before closing tends to be a major no, no with a seller. They want you buying it as-is and if they wanted to extend and work on that they would do it themselves and get the value.
I buy for cash and then seek blend and extend after the fact. There are exceptions but in general a seller does not want you tying up a property to put in a pretty bow with blend and extend and fresh lease in place before closing. Lot's of the guru's teach that stuff but rarely happens. Some lease extension negotiations can take 3 to 12 months depending on variables.
If you can't get the guarantee of an extension in time, then maybe an email, statement, or other notification of the likely hood that they will stay could suffice. A private investor may need to see something to that affect if they want to take a risk on investing with you. No bank will touch this without an extension, but an investor might.