Both doctors in this clinic building are past 60

Question

Asking price works out to a 9.1 cap on in-place, which for a rural building isn't strange on its own. What's making me stare at it is the tenant roster. Family practice in 4,400 sf, four years left on a flat lease, no options, no renewal notice language that helps me, and the two physicians who own the practice are both somewhere north of 60. Physical therapy operator in the remaining 1,800 sf on a three year deal, personally guaranteed by one owner.

The town has one hospital-affiliated urgent care 40 minutes away and no other medical space to speak of. So the bull case is that the practice is the only game in town, whoever buys it or inherits the patient panel has to sit in that building, and the regional system has been picking up independent practices in markets like this. If that happens I get a stronger credit paying the same rent.

The bear case is that both of them retire inside my hold, nobody buys a two-doctor rural panel, and I'm left with a purpose-built shell with plumbing in the walls in a market with basically zero general office demand. Conversion cost would exceed what the building is worth at that point. The 9 cap is paying me for exactly one thing failing.

I can't underwrite succession. Nobody will tell me their retirement plans in writing. So the question is what would actually make this ownable rather than a bet.

tashaford30 · Answer

The part I'd chase first is what a lender does with it. If a bank in that market will only go 60% on a four-year lease with a retirement-risk tenant, your real return isn't the 9.1, it's whatever you get on a lot of cash sitting in one building with one point of failure. I've had two small lenders tell me flatly that they underwrite to the remaining term, not the cap rate, and you should get that in writing from yours before you put money at risk.

Also, the flat rent bothers me more than the age. Four years at flat rent in a rural market means you can't tell if you're at market or 15% over it, and if they retire you find out the hard way.

renee_dubois · Answer

@quill's point about term is the one that matters, but I'd push on the release timeline. My small multifamily gets re-tenanted in three weeks. A 4,400 sf exam-room suite in a town of 9,000 sits. I've watched one in a similar market sit 19 months, then lease to a chiropractor at about 60% of the prior rent with the landlord funding cosmetic work.

So underwrite the downside as roughly two years empty plus taxes, insurance, and heat on an empty building, then a rent haircut. If the 9 cap still clears something you'd accept after that, fine. If it only works with continuous occupancy, you're not buying income, you're buying a guess about two people's plans.

Both doctors in this clinic building are past 60

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