Absolute Must Have Checklist before purchasing a commercial property!
I’m currently thinking about sending in my LOI for  a 5,000sqft medical building that has 2 tenants. NOI is right at $60k annul. Asking price is $1,000,000.  One tenant has a 10 year remaining lease. The 2nd tenant has a 3 year lease. They equally share the space at 2,500 sqft.  This is my first one real estate purchase. What should I be looking out for? Is this a good deal? Do any pros out there have a MUST-HAVE run down checklist before purchase agreement? Is it like residential where we can negotiate price? Does age of the building matter (1980s)? Building is in great shape! Broker giving me 5%, 25year amortization at 30% down. Hopefully I gave enough info. Just need some guidance here since it’s my family’s first. Thanks Everyone! Hope it goes well
[{"id": "ek5uo4m", "text": "1. Is there a maturity date for the loan? For example if it had a balloon payment in 10 years and one of the lease expiration occurs in 10 years, that could be a problem.\n\n2. Is the loan recourse or nonrecourse?\n\n3. Do the tenants have cotenancy covenants? For example, if one leaves, the other pays half of their rent until a new tenant arrives.\n\n4. Will the income from the property be pretty simple or will their be costly legal/accounting needed to reconcile any government reimbursements that the tenants rely on in order to pay rent?\n\n5. Are the tenants paying market rent? If one is paying very high rent, they may move out, your new tenant will pay the lower market rent and your property value may go down.\n\n6. Is their a ground lease you have to pay?\n\nThe age of the property shouldn't matter for such a utility like property. If it was based on consumer preferences or logistics like industrial it would but medical care in a box is still medical care.\n\n", "replies": [{"id": "ek5uzfv", "text": "1. No balloon\n2. Non-recourse. \n3. Not sure about this. Gonna have to see the contracts once their agent and I get together\n4. Simple with yearly rental bumps\n5. Not sure about this one. Gonna research more on it. This is good info!\n6.  No ground lease\n\nIm gonna brush up on 3 and 5. \n\nThese are great advice! Thank you! I will be meeting them monday so that\u2019ll give me time to research!", "replies": [{"id": "ek5v1jt", "text": "Cool. I'll let you know if I think of anything else.", "replies": [{"id": "ek5vegq", "text": "\ud83d\udc4d\ud83c\udffb\ud83d\udc4d\ud83c\udffb\ud83d\udc4d\ud83c\udffb", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ek5v91v", "text": "Get a PCA report done to understand capital needs for deferred maintenance. Also I assume you\u2019ve likely already got a Phase 1 in place or if not get that also. ", "replies": [{"id": "ek5vdz2", "text": "Ok got it! Can\u2019t forget PCA report! Thanks for the heads up!", "replies": [], "depth": 2}], "depth": 1}, {"id": "ek63td7", "text": "In addition to the great suggestions of others-\nCheck zoning ordinances.  See what \u201cuses\u201d are allowed in your district.  Hopefully you can re-let the spaces without needing to get zoning approval; ie, don\u2019t buy an industrial building that\u2019s in a retail area, or a retail building with less than 4 to 5 parking spaces per 1000 sf of space\u2014some cities will make it hard or impossible to lease if there\u2019s zoning problems. \nDon\u2019t hesitate contacting the city.  Ask the building commissioner and inspector about property.  Ask city planner if the building, and tenants in it, comply with the city\u2019s comprehensive plan. \nEstoppel letters from existing tenants might be required by your lender.  Essentially, these letters state any agreements or disputes not addressed in the lease. \nDoes the building have sufficient green space?  If improvements take up 95% of the ground, think about what you\u2019ll do if your required to meet green space requirements or retain/detain storm water to get a new tenant in the building.\nIs there a fire-rated tenant separation wall?  Are the spaces totally independent- separate hvac, restrooms, electrical service, etc.  If not, you\u2019re essentially buying a legal nonconforming structure, and that\u2019s worth much less.\nGood luck!!\n", "replies": [{"id": "ek6pc3d", "text": "Wow never thought of that nonconforming vs conforming.  Good advice. I will definitely ask the sellers broker about their financials too. Thank you \ud83d\ude4f\ud83c\udffc appreciate the advice", "replies": [], "depth": 2}], "depth": 1}, {"id": "ek6avxg", "text": "Make sure you\u2019ll have enough capital to retenant that space in 3 years. Even if the tenant renews, you might have lease commissions if there are brokers involved. The renewing tenant will most likely want some sort of TI allowance.   If they leave, your TI costs might be heavy as it is a medical use. \n\nAlso get a PZR report, financial info from the tenants to make sure they are OK, and don\u2019t forget estoppels. ", "replies": [], "depth": 1}, {"id": "ek6gcre", "text": "MOB is very tough investments - the tenants have you by the balls the renewal because TI &amp; LL work cost is astronomical for medical office and every doctor thinks he\u2019s a deal guy. A lot of practices will move out at end of term into a new build building and sign a long term lease - it\u2019s musical chairs for medical users, it\u2019s not as sticky as brokers would lead you to believe. I\u2019d also check to see if their is a CON (certificate of need) process in your state as that can be a big impediment if your tenant leaves. A CON essentially dictates if doctors can set up new clinics without government or if the government regulates the number of clinics. A bunch of states have them (mostly in south but elsewhere too). If your state has one it can be a huge impediment. \n\nAnother important thing to know is if your anchor tenant is part of an affiliate hospital system. If they are you\u2019re kind of fucked because those places only refer clients to other practices in the affiliate network so you\u2019re at the mercy off the regional hospital provider to backfill the upcoming vacancy because no one will be interested in a small space next to a doctor office they can\u2019t refer clients to (or get referrals from). MOB investing is kind of like retail in that the tenant ecosystem matters (but is a lot more complicated!)\n\nFinally unless your MOB is on a hospital property or immediately adjacent or you have like a top top top provider credit in the space, paying a 6% cap for this deal is way too expensive (unless your rents are crazy market low, but if they are I\u2019d still be nervous about the spread to rates on new build MOB) Location agnostic you should be paying an 8-9+ on in place given near term toll of 1/3rd of your building and considering the tenant costs associated with the upcoming roll over. Personally I\u2019d pencil this thing to a 14-16% IRR with a 7.5-8 cap on reversion (assuming you can backfill the vacant space). \n\nEdit: also $200 PSF is crazy high for a 50% vacant MOB. You should be paying $120-150 (absolute tops$ PSF for a property with $12/PSF net rent &amp; age of building. I assume the leases are NNN? \n\nAlso forgot to add you need to assess tenants and given age of building see if building is obsolete for a new tenant. That\u2019s really common for a lot of medical users -  a lot has changed in space requirements for like ORs and MRI machines and stuff like that over last few years. The LAST thing you want to do too is convert an MOB to an office so you need to be cocksure that this thing will stay an MOB in 3 years when the tenant rolls and you don\u2019t need to put a traditional office user in to backfill. ", "replies": [{"id": "ek6o412", "text": "Thank you for the help. This is a lot of info to ingest.  I might have to retract my offer or at least review the purchase a little more. I am worried since one of the lease has only 3 years left you\u2019re right. By the way they are both dentists.  There is a medical/hospital building adjacent to it if that helps.", "replies": [], "depth": 2}, {"id": "ekgr9ra", "text": "*OwO, what's this? * It's your **8th Cakeday** stoweker! ^(hug)", "replies": [], "depth": 2}], "depth": 1}]