Office Building - Would you pursue this deal?

Question

I think I've answered my own question, but figured I'd throw this out to the good people of BP.

While searching for a MF deal, I came across a (NNN) class a office building, The attractive part to me was that the anchor tenant would sign a 10 year lease as a condition of closing and provide a corporate guarantee.  Additionally, they would provide a guaranteed  8 cap on the purchase price.

I haven't pursued the deal much further due to a couple items.

1. The income is based on rent that is top of the market by the anchor tenant. Although, they've indicated that they will negotiate a lower rent  and lower noi to Market rent which is a few bucks lower and thus a lower purchase price.  $31 current -$26 market.

2. The anchor tenant represents 85% of income. This is my primary concern. The anchor tenant appears to be a strong national company with a corporate guarantee, but I still have a little voice in my head saying that if they go out of business you're toast.

According to my calcs. Here's a few numbers.

NOI - $335,998

Cash Flow After Debt Service - $104,049

Cap Rate at Purchase - 8.4

Average COC - 17.1%

Debt Coverage 1.44

IRR - 15.79%

I like it because there is decent cash flow from day one, no heavy lifting to reposition the property and (NNN). I would make any offer contingent on a lease agreement executed at closing but even if I got everything I wanted in lease negotiations, I still can't seem to get past item 2 above. Any thoughts? What would make a better 1st office building investment?

Kevin Sellers · Answer

Very important to review the financials of the anchor tenant and lease guarantor entity.  The term "corporate guarantee" gets used a lot but the value of the guarantee depends upon the financial strength of the lease guarantor.  The value could be very good or not worth much at all.   I've seen cases where the corporate guarantor is a subsidiary of a subsidiary of the mother company which may or not have a decent balance sheet.  If the financials of the tenant and corporate guarantor are strong, looks like you may have good opportunity!

Jaysen Medhurst · Answer

@Emilio Ramirez, I think those numbers look pretty darn good considering the property. Better returns than I'd expect from a Class-A property.

You may be scaring yourself out of a good investment here. If your real worry is that the tenant will go out of business, then you need to ask yourself what company wouldn't you worry about? If the answer, is "none," then you're probably being irrational.

Can you tell us the company name? Or maybe the industry and market cap? Of course there's always risk, but any company could go out of business.