Posted by Brian,WI on January 09, 2003 at 15:12:04:
Terrence,
If you check the club section on CRE, we are there, but…we meet at 7:00 PM the 1st Tuesday of each month at Howell Gardens, 6247 So. Howell(right next to the Speedway gas station on the corner of Howell/College).
Come join us, just ask for a couple bucks(no more the $5, but usually 2 or 3) at the door to pay for the room!
Brian,WI
Milwaukee Mixed Property - 10-yr Lease - Posted by Isaac, WI
Posted by Isaac, WI on January 03, 2003 at 06:29:39:
My dad owns a mixed property (2 commercial and 2 residential units in one building). We purchased it for his business. All the units are rented and we?re making more than enough to pay the bills, allow the business to be there, and make a little money.
Right now,
Gross Scheduled Rents are 25,200 per year.
NOI is 15,440.
It turns out that a the largest health services provider in the state, a multi-billion-dollar company, inquired about the property a couple weeks after our offer was accepted; they were interested in buying. Instead, they asked our broker if we?d be interested in a long-term lease. We said yes and started negotiating. Since then, our attorney has drafted up a lease agreement, and they?ve had their people come out to inspect the building several times and draw up some construction plans. They?ve also agreed to a number of concessions throughout the negotiating process, and have been really flexible and good to work with.
This company has purchased just about everything in a half-mile radius of one their facilities (one of the largest hospitals in our state, if not the largest). The street our building is on is across the street from one of their outpatient facilities, and a couple blocks from their hospital compound?. And our building is already zoned for what they need (a dental clinic).
They want to remodel our largest unit and make it a dental clinic. They?re willing to give do a 10-year lease for a good amount of rent (at least double market value, and 2.25 times what we?re getting now). Additionally, they plan to spend over 100K to remodel the space. I?ve seen the plans; they would really make the place look great! It really comes down to our building?s location; it fits their needs really well.
They want us to pay to bring the building up to code (about 24K to put in ADA compliant bathrooms and replace the floor joists with larger ones to meet municipal codes) before they can begin the remodel. After some haggling, our broker said the tenant would probably be willing to pay 50% or 12K.
Our lawyer already drew up a great lease and we?re ready to go. My broker estimates that, after signing the lease and remodeling the building will increase the value by about 150K.
Here?s a quote from a fax from the broker:
?[Company] is recognized as a ?National Credit Tenant,? as such their lease would actually increase the value of your building by approximately $150,000? ? he goes on to explain the increase is a function of both the tenant?s credit and the higher rents.
Post-lease, the rent situation would be as follows:
Gross scheduled Rents: 37,050
NOI: 27,550
Here?s the problem?.
My dad is hesitant to do the deal. He agrees that it would generate decent cash flow and be a good all-around investment. His hang up is that he doesn?t want to put another 24K, or for that matter 12K, into the building, seeing as he put lots of cash down and has put some money into the building already (which would all be destroyed by the remodel).
As it stands right now, 12K is the hold up. Dad doesn?t want to borrow any money and won?t dip into his funds for this.
My questions:
Do you think it?s worth the 12K investment?
Would you do this deal?
If so, what would you do? I.E., any good arguments for spending the 12K.
Thanks!!
Re: Milwaukee Mixed Property - 10-yr Lease - Posted by Brian,WI
Posted by Brian,WI on January 09, 2003 at 04:41:09:
Issac,
We missed you at the Real Estate Club meeting, hope you can make next month’s!
Anyway you did the right thing by posting here. You will get help. It’s great having Ray Alcorn here with his selfless giving of his vast knowledge in commercial real estate!
Good luck, I hope you can make this deal work.
Brian,WI
Re: Milwaukee Mixed Property - 10-yr Lease - Posted by ray@lcorn
Posted by ray@lcorn on January 03, 2003 at 15:33:09:
Issac,
I understand the dilemma… I’ve worked in a family business for years and we’ve often had clashes of opinion and differing goals when looking at various deals.
The classic way to make a judgment between competing deals is through an Internal Rate of Return (IRR) analysis for a specified holding period for each project. Basically you calculate the income both pre and after tax, all capital invested (initial and CapEx), and an estimate of a sales price at the end of the holding period. The IRR with the highest return would be the indicated path to take.
There are a number of software applications out there that will do these calculations. I use Real Data (www.realdata.com) because they offer a level of functionality that I find valuable for long term hold properties. But there are cheaper programs, and a search on google should give you lots of options. Also, if you use Microsoft programs, Excel has an IRR function built in to the spreadsheet software. You can find the formulas and method to use the function in the help section of Excel.
One caveat I will note… the broker sounds as though he is selling the tenant more than helping you evaluate the deal. Be careful of heeding advice from anyone being paid to produce an outcome. What he says about the credit tenant bringing value to the table is true as far as it goes. But the gains can be negated by excessive out clauses in the lease, drastic modifications to the structure that would make the space expensive to refit for another tenant, and of course the underlying finacial health of the tenant entity. Health care as a sector has traditionally had its hiccups, and is not a bullet proof industry by any means. You may want to check with your local banker or loan broker to get their bond rating if they have one. Having a credit tenant does not mean you don’t have any risk. I wrote a post about credit tenant default rates a couple of months ago titled “Not All Credits Are Created Equal”. It’s way down the board, and the direct link is http://www.creonline.com/commercial-real-estate/wwwboard5/messages/7306.html
If you’d like to share a few more details such as the capital investment and the net operating income for each alternative we may be able to better help.
ray
Re: Milwaukee Mixed Property - 10-yr Lease - Posted by Terrence, WI
Posted by Terrence, WI on January 09, 2003 at 09:08:58:
I’m in Milwaukee. When and where is the Real Estate Club meeting. I would like to find out more information about the club.