Hi John
Great idea. I have no idea why the seller is selling. He is a chiropractor himself living in a city about 30 miles north of mine.
Is it normal to see tax returns? I once asked to see them on a resedential rental I was looking at and the agent an seller looked at me like I was from Mars.
I looked at the leases again I realize that the exterior building is not part of the tenant expense. It looks to be in great shape but the landlord must be responsible for roof and structure. Not sure how this changes things.
I am looking at a medical building with 2 units. Well actually the entire building is 4 units but this is just 1 side connected by a small common area. The building was built in 1963. The outside is in nice condition, the inside is good but dated. The upper tenant is chiropractor with a lease for 4 more years. The lower is a telemarketing firm under lease for 4 more years. The other side that is not for sale is a dentist and doctor so its fully medical but mostly. Its a triple net lease with both tenants, with 3% rent increases anually. The asking price is $225,000. I would have to borrow the entire amount. Rent is $1500 upper and $950 lower. I was thinking that with just being responsible for the P&I would make the cash flow pretty good with 100% financing. Am I missing something. I have no commercial experience. Thanks.
I am a physician. We don’t like to move but we generally have incorporation and asset protection tools in place, if successful. Bear that in mind, look for personal guarantees in writing. Chiropractors, in my area, frequently change because they have different market forces requiring constant marketing efforts, often requiring street front exposure. Check his/her length of stay and watch for a day how many patients are passing through. Telemarketing? Ouch.
Common trick is to lease up and sell. The financial pressures on small medical practices is immense and changing rapidly, let me tell you. All of this Electronic Medical Record will drive many small practitioners out of practice. Give me a Subway any day.
Even if the tenants were responsible for the roof and structure, you would still want to know what kind of condition the building is in. I would have a professional inspect the building for you (experienced investor, contractor, structural engineer…) if you decide to buy. You need to know how old the roof and HVAC systems are. Here’s my income analysis -
Those are the minimums I would deduct. Depending on the property and the area the expenses could be higher. Your management and reserves might need to be closer to 5%. Be sure that the CAM doesn’t involve an expense stop where you pay up to a certain amount. All in all, I’ve seen worse deals. Anything above a 10% cap is decent.
How long has the property been on the market and how did you find it? I would have a professional look at the lease to determine if it truly is NNN. This means the tenants are responsible for the actual structure and all roof repairs as well. For a building that old I find it hard to believe. Even if it is truly NNN, you need to make a vacancy deduction and a management/leasing deduction. A vacancy deduction reflects the vacancy over the economic life of the building, so even if you have 4 years remaining on a lease you still need to make a deduction. Also, don’t assume because they’re a commercial tenant they won’t just leave and refuse to pay you. It happens, so you would foolish to not make a vacancy deduction. If you are responsible for the structure, I would make a 3-5% deduction for structural reserves. You definitely will not keep 100% of the gross income. What size is the building? Make sure the rents are inline with the market. I think your red flag is that you’re neglecting expenses that WILL be there, which translants into a fictional cash flow.
Review your leases carefully, since the leases were over 5 years they need to be recorded, check the court house to ensure no surprises. Is ther a clause about structure/aspalt/HVAC? Yes it is NNN but are there any exclusions? This is a 13 cap… what is the area like? I have run into deals like this before but they are few and far between. If you want an outside opinion my cel is 330-806-4761.-John
One important item is that there is no 100% financing for commercial properties unless the seller is willing to hold a note for the entire sales price. Without seller financing you are looking at putting 25% down on that type of property. Unless there is a compelling reason why sales price is far below market value, commercial lenders will go off of the lesser of sales price or appraised value.
Cash flow is good provided that this is a true NNN lease and rents being paid + CAM are ni line with the local market
I just looked at the lease again your right, I do not see anything about the roof or srutcture in it although the tenants are responsible for glass repair. I guess the landlord is responsible for the roof and structure. How does this change things? I suppose it depends then completely on what shape the building is in. If its in good shape, then what?
Hi John. Actually there is a stipulation in the lease that says it cant be recorded, maybe its different here? As far as I can see only parking lot painting and surfacing are excluded. The area is fine. This city is around 50,000 people and this is an older area but there are other older medical buildings in the area. It seems like good cash flow but I just dont know.
I should clarify, I can get an 80/20 loan through my credit union, the 20% down would be a lien on my residence.
According the leases, thats how its written up. Not sure if the rents are normal for this type of building in the area. If the tenants are renting, they cant be too high can they? Even with financing the whole thing per above, I would have cash flow of around $900 a month. I just feel like this seems to easy and I am missing a big red flag here.
13% is great on the return… be sure you are willing to carry the nut if you lose your tenants though. If you have the capability to pay the note at 100% vacancy and are comfortable with the leasing potential in your area sounds like a hell of a buy. Can you talk to the tenants and get a feel from them on the conditions of the building (ie satisfied there, enough space, parking, previous relationship with landlord, any complaints?).
The only question you need to ask yourself is this…If the tenant leaves how easy is it to get a new tenant? The problem with condos is that they were overbuilt during the real estate boom. If your condos are in or near a commercial corridor or a hospital then it’s probably a space that can be easily rented. If just depends on the area. Pretend like your the seller and your writing up a listing for a potential buyer. Other than cap rate, why is this property unique. You will need to sell it to the next bill who comes along someday!
The tenants leaving or stopping paying is my biggest concern. The chiropractor seems well off, they are adding equipment and exam rooms rith now. The telemarketing firm was not there while I was there. They had their equipment set up but nobody was there. I talked to the chiropractor and he seemed happy, said he would like to buy it but cant right now. My agent seems to think its a good buy but knows nothing of commercial so I feel like I am going in blind.