How to quantify rollover risk for single tenant building?
Working on a single tenant NNN medical office building. How would I go about quantifying rollover risk for this type of property?
[{"id": "f9b5eji", "text": "You can\u2019t quantify it, but people look at NNN single tenant buildings similar to corporate bonds, what is the credit rating of the tenant? How long have they been there (have they exercised any options?). How much (if any) have they invested in their own space beyond what the LL provided in TI? Is the company expanding? Are they a target to be acquired? Is their rent above or below market? \n\nAll of these factors should influence if the tenant will rollover upon lease expiration.", "replies": [], "depth": 1}, {"id": "f9b9oyn", "text": "Another approach is to quantify the expected cash flow in the scenario where the tenant rolls. This includes variables like rollover probability, downtime, market rent, reimbursement structure, lease term, free rent, TI, LC, whether the space is too large to lease all at once, and whether the replacement tenant is likely to have investment-grade credit. Run these assumptions through your model and see what it does to the value of the building.", "replies": [], "depth": 1}, {"id": "f9bksrn", "text": "You need tenant financials - if they\u2019re doing well at the location they\u2019re less likely to leave. Also how many years left on the lease and what\u2019s the vacancy rate on similar asset types in the market?", "replies": [], "depth": 1}, {"id": "f9cgzn3", "text": "Do you know the vacancy rate for medical buildings in your market?", "replies": [], "depth": 1}, {"id": "f9clwqi", "text": "You could, also, simply ask them if possible.  Maybe the market is soft and they are considering leaving.  You could work with your broker to find out, and start working on a new lease or at least find out what it would take to get them to sign a new lease.  Maybe some extra TIs can be agreed upon.  Then you would have lower risk, and and a good estimated cost.", "replies": [], "depth": 1}, {"id": "f9dieo1", "text": "Months of downtime between tenants.", "replies": [], "depth": 1}]