Anyone know about medical CRE? Need some advice on purchase
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[{"id": "hojc86o", "text": "&gt;From what the lawyer told me looking at the lease: The situation is a   \n'triple net' lease where I would be hands off from the daily maintenance  \n and just responsible for the shell of the building The tenant would pay  \n HoA fees, property taxes, and a few other small ticket items.\n\nWould confirm this. Who handles the maintenance? What is considered maintenance vs not?\n\n&amp;#x200B;\n\nWill anything need to be updated in the next 10 years?", "replies": [{"id": "hojdtaq", "text": "It's odd because the building HoA really takes care of everything. Per the lawyer: The tenant would do daily maintenance things like a cabinet breaks or a toilet is clogged or a light is out. \n\nThe building would do big things like the HVAC, the exterior gets hit by a tree, etc..\n\nThere is a small middle ground that would fall between the buildings issue and the tenants issue and it's kind of like the interior walls, maybe the heater boxes/duct work in the ceiling, etc.. that I would be responsible for. \n\nI am actually now the HoA president, the building has just undergone most major improvements...We might need to redo the landscaping but that's optional. Nothing inside of the unit.", "replies": [{"id": "hojgafu", "text": "If it's true triple net the tenant should also be responsible for all HVAC and also your property insurance premiums.  Check on that!  If you have the lease copy, read if through yourself.  My lease actually states (so it is perfectly clear) that anything with moving parts is the tenants' responsibility.\n\nNext I'd like to tell you that the numbers on that building sound great.  If that was for sale on the open market in my area I would offer on it for sure.  It would get a dozen offers in a week.  You have a great opportunity because this person is willing to sell to you directly and not get a bidding war going.\n\nLastly, medical space IS difficult to re-lease to new tenants.  But also it is very expensive for that type of tenant to leave.  So assuming the business keeps running (which it most likely will, as the buyers obviously intend to make some money) you likely would be set for a very long time.  A space that size should have room to grow so no concern about them needing to move to larger space anytime soon.\n\nGood luck!", "replies": [{"id": "hojmdve", "text": "The lawyer did specifically mention HVAC was still landlords responsibility. We have large units on the roof that are shared by the entire building. \n\nHowever, they were replaced brand new for 250k 3 years ago. \n\nThe lawyer also said that the insurances were their responsibility.\n\nyes my only worry was that the new company running the practice would want to downsize the space to save $...but I have been told by the doctor directly that they are actively trying to higher multiple new doctors to come into the space.", "replies": [], "depth": 4}], "depth": 3}, {"id": "hojguiy", "text": "How are the HOA reserves? What happens if the HOA is broke?", "replies": [{"id": "hojn2xj", "text": "This is actually the second largest concern that I did not mention. \n\nWe had a large unit in the building get purchased by a rogue investor who has been refusing to pay HoA dues because they are failing to lease/sell their space. We brought in a law firm to foreclose and they have made whole on the collections. \n\nBut it's still a bit dicey.\n\nWhen they stopped paying before the previous HoA president allowed the dues to go unpaid for years and decided to raise everyones dues to fill in the gap. However I would not allow this. \n\nI will check on that with our bookkeeper. Edit: just checked with him, we have about 1/3rd a year of expenses for the entire building in cash. Or about 1.5 years of that rogue tenants dues.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hojgwng", "text": "If what you're telling us is true. 9K a month at true NNN terms then this property is likely worth more than $1,100,000. \n\nIs this a secondary market? How much available medical office space is there in this market right now?", "replies": [{"id": "hojlrjc", "text": "No this is coming straight from the owners. \n\nThe unit was appraised a couple of hundred thousand higher but I still think I can get it for 1.1M/friends and family style deal.\n\n\nI have not done looking at other medical space around here, but I will say that I am in a town that is centered around a large state university (which is a huge healthcare hub for my entire state).", "replies": [{"id": "hojqi79", "text": "You need to see how much vacant medical space is around the property.  If there is a bunch of vacant space I would not consider this property.  Professional medical space in my experience is harder to rent especially if there is a lot of existing inventory.", "replies": [], "depth": 3}, {"id": "hojuoft", "text": "You'd absolutely have instant equity on this purchase and for that reason I would say go for it. \n\nThat being said I wouldn't advise holding the property for all that long. The future of medical office space in my opinion is away from high concentration mega hubs like you have described and are very present in my market around Towson, Maryland, Johns Hopkins, and the University of Maryland and towards more spread out remote locations that service communities. \n\nI assume there are some tax ramifications on selling the property within X number of days after you purchase it. I would buy it then take the cash flow until you can sell it without tax headaches and then sell it.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hojk7m7", "text": "Where I am located a NNN lease typically will put the responsibility of the common areas and structural portions of the building on the shoulders of the Landlord to maintain, so I'd look deeper into that. Yes, normally the majority of these expenses can be passed through CAM to the tenant, but I wouldn't call this \"hands off\". Landscaping, day porter services, parking lot repairs, ADA compliance, etc. all come in to play here depending on the property.", "replies": [{"id": "hojlvsa", "text": "Point with this unit is that the building HoA takes care of all of that.", "replies": [{"id": "hojulvh", "text": "Well if I take all your info from your comments as fact, then yes this seems like a good deal on the surface. The major risk is the Tenant moving after their lease expires since it is a single tenant building. I would gauge their interest in extending early if it were me, but my risk tolerance is very low. Other than that a deep dive into available comparable property is important to see how hard backfilling the space would be if they did relocate or close. \n\nYour second concern is more of an advantage to me. Medical has a much higher resistance to downturns, covid mandates, etc. which is nice. \n\nRegarding the annual increases, I would consider 2.2% low. Typically I would see 3-5%.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hok8vkv", "text": "I specialize in medical office in California. \n\nWhat's the parking ratio? Are you sure he's not grandfathered parking? Sounds like the complex was built with standard office in mind, especially if 20 years ago. If he leaves, the local municipality will typically give you 6 months to fill the space with another M.D. or you lose the ability to put another medical tenant in there because of parking ratio (CA). There are new standards for parking space sizes in my state so some complexes can't even re slurry their parking lots without losing spaces. What differentiates a medical office building (MOB) from a standard office building? Well, mostly just plumbing, parking, and proximity to major hospital. Tenant Improvements cost a ton for medical, they typically require an in suite restroom, a sink in each exam room (lots of plumbing costs), sometimes dual/separate climate zones (more than one A/C unit). If you want to switch to dental then you add in vacuum lines, leaded wall for x-ray room and increased electrical to each exam room. It's not just the city planning that will want to inspect the property if you get a new medical tenant, the tenant will also have to deal with HIPAA and Medicare. Is ADA all good on the building? \n\nA lot of this is all really dependent on what state you are in. $170/sf in CA would be a steal even in most inland cities. Why not call up a local broker? You are the buyer so you wouldn't be paying the commission.", "replies": [], "depth": 1}, {"id": "hokhriv", "text": "Triple net means that your profit would be $9k/month. So if insurance and property taxes go up much higher than that 2.2%/year, the tenant is bearing that cost.\n\nIf we are sustained inflation, your worst case scenario is whatever is currently in the lease. You can always try to renegotiate in 3.5 or 8.5 years by giving money for tenant improvements or additional options in exchange for higher rent.\n\n$108k net annually for $1,100,000 purchase price is crazy. What market is this?\n\nFor tenant turnover, you can look at current lease listings nearby. Make sure to budget for 12-24 months vacancy and for TI allowance for a new tenant to build out the space to suit their needs.\n\nDoes the lease have personal guarantees from any of the principal doctors of the practice?", "replies": [], "depth": 1}, {"id": "hokya9l", "text": "Decent chance that the group who acquired his/her practice might very well move them out to consolidate with other physicians. A risk I'd look into if you're not super comfortable at the prospect of vacant space in a few years", "replies": [], "depth": 1}, {"id": "honmmx7", "text": "I would say you are taking a ton of risk with the short lease term. You obviously have a good dialogue with the current physician, but it sounds like he is handing the keys to a larger group. This group may have plans to consolidate their services to another location. To get comfortable with the investment you need to make sure of the following things:\n\n&amp;#x200B;\n\n1) The tenant is profitable in this location and has clear long term viability h ere\n\n2) There is limited to no vacancy in the market for this tenant to relocate to\n\n3) You need to think about who would replace this tenant if they left and think about the cost of retenanting the building as well as having downtime for a year or more if the tenant leaves\n\nI work in acquisitions for a major medical office investor and these are things we always think of during the transaction. I personally think you could find a better option with a longer lease term and a less dicey situation. But if you can get comfortable with the above items, then you should be fine.", "replies": [], "depth": 1}]