Please evaluate this value add deal, class a healthcare
Class A healthcare space 

Next to new hospital in high end demographic in growing city 

11k SF existing building with pad site next to it 

5.5k SF leased at 27.50 modified gross with expirations 2023/24/25 (around 20/sf net on that before debt service) 

5.5k SF is vacant (tenants did not renew within past 6 months) 

Includes pad site for possible 7.5k sf building (not verified) 

Upside : there is not much available, high end demographic, some existing cash flow 

Downside: 20k sf new construction space in immediate radius (not clear if leasing up), lease up and build out fees for vacant space, high cost of construction to build out pad site, building will be cash flow negative after debt service, even with me starting to occupy some space until leases up 

I plan to come in and occupy 1500 sf of the vacant space. Build out cost for me is around 300k on that 1500 sf (specialist healthcare provider - buildout is expensive)  

Asking price - $3.7M 

Cap rates for comps around 8% 

I see the building as worth closer to $2.5MM fully leased with NNN leases in place and 5+ years remaining - none of which are in place. pad site perhaps closer to 800k? And I’ll have to spend around 400k on buildout (for myself) + lease up/build out for vacant spaces 

Any feedback?
[{"id": "gyibjiq", "text": "The existing building, fully occupied would be worth $2.75m at a 8% cap, but you need to take into account the risk and cost of lease up.. \n\nSounds like you answered your own question, no matter which way you look at this $3.7m is ridiculously over priced\u2026", "replies": [{"id": "gyickfi", "text": "Right , thanks. I had planned to offer 2.3 on building, 800k on pad site, so 3.1 total but I agree. On top of that, listing agent has not yet even confirmed the amount of vacancy, but has stated the seller is not going to be too flexible on price.", "replies": [{"id": "gyifnqt", "text": "It\u2019s a nutty market, but as a serious buyer, it can\u2019t hurt to make that offer. Best of luck!", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gyiik27", "text": "It may not be easy to find debt with that lease maturity schedule. You may need other collateral or heavy equity", "replies": [{"id": "gyijp08", "text": "Right - would you ask the seller to guarantee $xxx NOI for 12 months?", "replies": [{"id": "gyikg6x", "text": "That's not going to help you with the lender. The lender will be focused on the 100% lease maturities over 3 years. \n\nInfo to research with a leasing broker, how long is it taking to find replacement medical tenants, what is the typical lease tenor, how long to close the lease, how many months abatement, how much for TI&amp;LC. What is the cost of doomsday 100% backfill scenario over a 7 year hold? \n\nGenerally we underwrite a 70% renewal rate, crunch all those numbers and adjust your offer accordingly", "replies": [{"id": "gyikxzt", "text": "This is very helpful thank you", "replies": [{"id": "gyilfju", "text": "On loans under 5mm, the underwriting I'm describing may not be as nuanced by the bank, but you should do the analysis for your own benefit.\n\nI'm a cre lender,  feel free to shoot questions", "replies": [{"id": "gyilny9", "text": "Thank you! For the pad site - what type of financing is typical for new construction? I will plan to build an additional 7,500 SF and lease that up within 24 months.", "replies": [{"id": "gyim5jo", "text": "Without prior construction experience best case imo would be 75% LTC and I'd make you hire a 3rd party construction manager. Smaller banks may offer a straight 5 or 7 year deal, other offers will be some period of interest only for construction and then a mini perm period behind it. Ie 2+3 years or 2+5/7etc\n\nIf you have a couple million liquid that can change things", "replies": [{"id": "gyinsb2", "text": "Are you saying 2 year interest only then 3 year note on 30 yr amortization ? I don\u2019t have a couple millions liquid. 1 million in cash, another 750k in net worth between other RE and practice. I had planned to either have the owner finance 10%, if he won\u2019t, then do 20% down on 3M. Save 400k cash. I have access to 300k hard money loan (family) to buildout my space in the building, finish up the lease up, then cash out refinance to pay off hard money loan. Hopefully net income will be closer to 120k/month with within 12 months between the practices and real estate, and I will build out pad site within 12 months.", "replies": [{"id": "gyiofho", "text": "Correct, several years interest only and then some term amount of time, probably up to total 10 years. The rest of what you are describing may work, but my advice probably isn't as applicable to you.\n\nMy experience is with a regional bank making smaller loans and is less aggressive with a \"box\" of what we do.\n\nYou should talk to several local banks which will be more aggressive than regional banks like myself. Feel free to dm and if I'm familiar with your region I'll tell you who 8s aggressive", "replies": [], "depth": 9}], "depth": 8}], "depth": 7}, {"id": "gyimfhv", "text": "Also, you will need to identify and sign the tenant to get the financing in the current market. There is very little spec  office construction. This is also in your interest, do you really want to take on construction debt and risk without a tenant in hand? You could get 99% to completion and there is some big market pullback and then your just pissing away interest to the bank with zero revenue", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gyildd8", "text": "*\"I see the building as worth closer to $2.5MM fully leased\"*\n\nOffer them 2.5 million when it's fully leased.", "replies": [{"id": "gyim02u", "text": "\ud83d\udc4d\ud83c\udffb agreed. I\u2019m a bit tired of offers being considered unreasonable  by the sell side (this is our second project like this). Especially since I am building out, leasing up, then cash out refinancing and need the wiggle room to get the cash out!", "replies": [{"id": "gyim73v", "text": "There's no such thing as an unreasonable offer.\n\nThere are only offers.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gyj0a38", "text": "The in place leases sound weak. If you don\u2019t have a plan around long term utilization you\u2019re in no position to outsize the risk here. If the hospital is friendly and you\u2019ve put calls into colleagues, and are having discussions, your utilization picture could look very different in 3-5 years and the deal profile completely changes... value add. If you know it\u2019s value add don\u2019t pay stabilized asset prices. PS buy the pad if you are able to put together some sort of provider mix/ utilization frame work. 8k makes for great ancillary space. Good luck. Sounds like you know what you\u2019re doing.", "replies": [{"id": "gz1l0ii", "text": "Yep sounds good. My broker must be slow because he is saying he 8% cap may be high, but I am seeing deals I t he 6-7 range for NNN with 5+ years remaining + credit tenants. This building is 70% vacant with solo providers so I don\u2019t think a 6-7% cap is accurate. \n\nI mean - they are wearing me out for line item deducting expenses I will have that the cure t owner doesn\u2019t have. I.e - a property manager. The leases are modified gross and I don\u2019t have time/am not qualified to manage the building \ud83e\udd14", "replies": [], "depth": 2}], "depth": 1}, {"id": "gz1xgxe", "text": "Please provide the following:\n\n1) How long have other tenants been in the space?\n\n2) Has seller's had discussions about their renewing? Have you? Will seller allow that during DD? \n\n3) what is the going-in yield on just the existing tenants and a market rate for your space on your total basis and does that cover your debt service? \n\n4) can you approach existing tenants about renewing (blend and extend) during DD? Do that and recalculate your yield and see if that make sense to you.", "replies": [{"id": "gz1yqge", "text": "Tenants \n7 spaces total in the building. \n\n2 are vacant. 2 are probably vacant (seller has not confirmed - seller agent is basically telling us to submit an offer before he asks the seller on whether or not 2 renewed that end 5/21 and 10/21)\n\n7/20-12/24 3118 gross \n\n3/18-2/25 2897 gross \n\n7/13-7/23  3791 gross \n\nExpenses are around $7.5/SF  (not including a property manager) \n\n2. I don\u2019t know, sellers agent has dodged these questions since we have not yet made an offer \n\n3. Cash flow will be negative after debt service if 2 did not renew, around -$1,500/month. Yield is 1% (if they accept $2.9mm instead of their asking price of $3.7mm$) \n\n4. Dunno but that would be great \ud83d\udc4d\ud83c\udffb. If I knew the 2 in question we\u2019re going to renew . That would raise going in cap rate to 4.9% , and I could immediately raise that to 6.7% because I would lease space to a new business. That being said - it only raises to to 6.7% \ud83d\ude02 with no room to improve, no meat on the bone for me a buyer (and this is assuming I offer $2.9mm , again they are asking $3.7mm). The only upside would to be to build out the 7,500 pad site and lease it up.", "replies": [{"id": "gz23dv6", "text": "So ASSUMING existing tenants ALL renew and you take your space, then you are at a 6.7%...? or is the 6.7% assuming all that PLUS leasing up the vacant space?\n\nIf the former... then you need to submit an LOI contingent upon discussing renewals wit the existing tenants. Get those renewals signed before you close. \n\nIf the latter... and you have to develop the pad site to make any $$... ooph. \n\nIf the Seller is suggesting the pad site is your \"upside\" (!!!!) ask him what he thinks its worth (hopefully he gives you a big number) and knock that off the price and tell him to keep it. \n\nThats would I would do.", "replies": [{"id": "gz25sub", "text": "It is the former - thanks for the advice. One other piece of info - I will need to spend around $300k building out the space I plan to take - how would you factor that into the offer? \n\nIn place NOI is 32k \n\nMaybe (if renewals happen) NOI is $141k \n\nAdd my business in there and NOI is 180k  \n\nDebt service is 132k \n\nCAM and overhead (taxes, insurance, maintenance, and property management) is around 100k/year, current leases are modified gross and tenants pay around 7.5sf CAM)\n\nThis is all assuming I can get it at 2.9mm (this includes pad site for 7,500SF building next door)\n\nCurrent ask is 3.7mm \n\nWould you offer more or less? \n\nAgain - I will need to add 300k into my buildout (plumbing is intensive) \n\nExit cap rate is currently 8% when looking at comps, but I wouldn\u2019t look to exit for 5-10 years, and will plan to develop the 7,500SF on the pad site first", "replies": [{"id": "gz26nic", "text": "\n\n$2.9m + $300k + $50k = $3.25m... $180k NOI = 5.5% cap meh\n\nBut does this still leave 5.5k SF vacant that could be leased + the pad site?\n\nWhat is the pad site worth? Could you sell off to pay down your basis?", "replies": [{"id": "gz28a4d", "text": "No idea what pad site is worth. He won\u2019t sell without including the pad site - and there probably is not enough parking without the spaces currently built on the pad site. \n\nNo. The building is 11,200 SF. It will lease for 27.50 gross, 20/sf net. I am assuming stabilized (10% vacancy) , the building is worth $2.52m. They are asking $1m for the pad site on top of $2.7m for the building.\n\n I completely do not understand the price on the pad site - as once constructed and fully stabilized (10% vacancy) - we are talking about a fully stabilized value of $1.68mm (8%cap). Contractor is saying building a shell alone on it will run $1.125m ($150/SF) \n\nI initially discussed offering 3.2m with my broker, but I think that is wayyyy too high at this point. I think 2.75mm assuming tenants renew including the pad site is a safe number. It is $1m below their asking price but based on feedback and initial crunching of numbers - seems fair. What do you think?", "replies": [{"id": "gz28w9v", "text": "Im thuroughly confused. \n\nshort answer - if you are buying for anything less than a stabilized 10% cap when taking over 50% lease-up risk you are WAY overpaying. \n\nAssume pad site has no value.  \n\nbest of luck", "replies": [{"id": "gz29kp7", "text": "\ud83d\udc4d\ud83c\udffb thanks!", "replies": [], "depth": 8}, {"id": "gzx7lp3", "text": "Thanks for the input - deal did not work out! They didn\u2019t even counter, and borderline scolded us for offering so low \ud83e\udd14, also wouldn\u2019t provide a current rent roll. \n\nhttps://www.coldwellbankerhomes.com/fl/santa-rosa-beach/141-mack-bayou-loop/pid_40396379/", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]