Medical clinic building: is this a good investment opportunity?
An acquaintance is closing on an old 13,500 sf commercial building that used to house medical clinics. He is planning to renovate and lease offices (approx 1300 sf) mainly to clinics. He is now looking for partners to invest at a rate of $200/sf. According to him, he is expecting an annual return of $15/sf after factoring in all expenses. That’s of course assuming all space is rented out. The building is in an older part of town. Does this sound like a good investment opportunity? I am not an expert in commercial real estate and was not sure if I should believe him.
[{"id": "ivbui5h", "text": "Lots of more info needed here.   The fact that he is looking to acquaintances not involved in CRE as partners suggests he wants a better deal than banks will give him or banks won\u2019t finance him.   Its also extremely important to see if he already has potential tenants lined up.   I don\u2019t know where you are at, but if you build it, they will come doesn\u2019t always work.   \n\nExpect your money to be illiquid for years and never even expect the \u201cworst case\u201d projections someone gives.   If he expects $15 sq foot returns, expect $10 at best.   Paying $200 per sq foot for that is alot of years of tied up money before even breaking even and lost opportunity.   In a typical stock market you\u2019d be doubled than doubled again in that time frame.   \n\nUnless this sounds like he has his shit together, sounds like a hard pass unless he\u2019s got tenants lined up and TIF, and a few grants.    Even then, only do it if you don\u2019t need the $ anytime soon and have extra.   A 8% ROI for the possible risk should be alot higher IMO.\n\nYou need to talk to him alot more and see his plan", "replies": [], "depth": 1}, {"id": "ivc5s3d", "text": "Has he told you what he\u2019s actually paying for the building and what he is budgeting to spend on renovations? Rent comps? Lease up analysis? \n\nSeems sketchy as balls to me. Hard pass.", "replies": [], "depth": 1}, {"id": "ivchkn4", "text": "It will definitely be a good investment but you need to make sure you get your cost segregation study\n\nFour Story Medical Building, New Construction, UT\nCompleted Construction 3/2020, appx 276,000 sf\nTotal Construction Cost $38,836,510\n\nOwner's 2020 depreciable expense without cost segregation - $751,130\n\nOwner's 2020 depreciable expense with cost segregation $8,779,964 \n(accelerated amount was 22.6 %)\n\nWe are at 100% bonus depreciation now starting January 1, 2023 it's going down to 80% that every year down to zero if you have any questions just DM me", "replies": [], "depth": 1}, {"id": "ivdt31d", "text": "Sounds like he is inexperienced. You should pass", "replies": [], "depth": 1}, {"id": "ivejxjh", "text": "OP I would be leery on this deal without a lot of information. I handle all MOB valuations for my CRE company in a secondary Midwest market for context on me. \n\nHere is concern #1: you said you are trying to attract \u201cclinics\u201d as tenants by that do you mean your general medical practices (primary care, pediatrician, etc.)? If so, stop this deal right now. You don\u2019t need to read the rest of this. Just run. Older buildings cannot attract doctors anymore. Have you noticed all the new \u201cmedical center\u201d buildings in your market where all these doctors are grouped together in multiple practices in the same suite? Yeah you don\u2019t have a shot in hell in attracting the Dr. Joe Smith Md practice to your building. It\u2019s not just money (rent) that attracts those doctors to those buildings either, there are other business elements at play that are not your fault as the owner of one of these older buildings but you can\u2019t compete. \n\nHere is #2 concern and this is a big one too: I am assuming if you\u2019re not in NYC or Chicago, that your family member is trying to do this deal with no financing if you have to invest at $200/SF? I understand the lending market is tough right now but why wouldn\u2019t they want to finance a typical LTV of the risk on this deal? This seems\u2026 odd. There are some big red flags here OP. \n\nIf I\u2019m you I\u2019m running away from this deal.", "replies": [], "depth": 1}]