The estoppel almost killed my first medical building in week five

Been planning this for two years and reading everything twice, so here's what actually happened.

3,400 sf single tenant medical building, built 2004, in a town of about 28,000 with a small hospital four blocks away. Two physician family practice, been in the building since it was built, they were the original tenant and paid for their own build out. Purchase price $1.05M. In place rent $78,200, so $23/sf, triple net with the landlord holding roof and structure. 4 years left on the current term with one 5 year option at fair market. Going-in cap 6.9% after I put in a $6,000 a year reserve the seller wasn't showing.

Financing: local bank, 25% down, 20 year amortization with a 5 year fixed period. Seller carried $75k of the down payment on a second at a rate we agreed on, three year term. My lender knew about it and approved it in writing before we signed, which I understand is not always the case and is the part I'd tell anyone to do first.

The part that nearly broke it: the estoppel certificate came back in week five and the tenant listed a rent abatement I had never seen. The prior landlord had given them three months free in exchange for them paying for a parking lot resurface in 2022, and it was documented in an email, never amended into the lease. The tenant's position was that they had two of those three months still banked. The seller's position was that it expired. I had a signed estoppel saying the tenant believed two months of free rent, roughly $13,000, was still owed to them.

We fixed it by having the seller credit me $13,000 at closing and having the tenant sign a short amendment confirming no other unwritten agreements exist. Took eleven days and I extended the study period once to get it.

What I'd keep: ordering the estoppel early instead of at the end, and interviewing the tenant myself. What I'd do differently: I would have asked for every email between landlord and tenant for the last five years on day one, not just the lease file.

First rent check cleared in October. Building has been boring since, which is what I wanted.

Answer

2carlos_nunezActive

The estoppel catch is the useful part of this post and I want to draw the line under why it worked, because people read this and hear "order the estoppel early" without hearing the rest.

You got the money because you were still inside a study period. If that estoppel had come back in week nine of a nine week diligence window with your deposit hard, your options were closing with a $13,000 liability you didn't price or blowing up the deal and eating your deposit. The seller credited you because it was cheaper than restarting a sale. That leverage disappears the day your money goes hard.

So the actual practice is: sequence diligence so the items that depend on a third party responding, estoppel, survey, tenant interview, title exceptions, all land in the first half of the period. The items you control, inspection, roof, environmental review, can slide later. Most first timers do it backwards because the inspector is easy to book and the tenant is awkward to call.

The other thing you did right was making the amendment say no other unwritten agreements exist. Side deals by email are common in single tenant medical because the relationship between a long term physician tenant and a small local landlord gets informal over twenty years. Parking, signage, after hours HVAC, snow removal, a spare storage room. None of it makes it into an amendment. The confirming amendment is what stops the next one appearing in year two.

One thing I'd add for your file: get written confirmation of who owns the generator, if there is one, and any built in casework. Same category of problem, shows up at move out.

6 replies

1aliyah_bAU2APRO6

$23/sf triple net in a town of 28,000 sounds low to me but I have no basis for that other than the numbers I see in bigger markets. Did you get comps, and did you underwrite the option renewal at fair market as flat, up, or down? That option is the whole back half of your hold.

3angela_burkeServicePRO6

Roof and structure on a 2004 building with $6,000 a year reserved. What's the remaining roof life estimate you got, and is $6,000 a number from a consultant or a number that made the cap rate work?

1aaron_fitz10 Get yoursPRO6

The seller carry at $75k is the piece I keep turning over. Three year term on the second, five year fixed on the first. In year three you're refinancing or paying off the second out of cash flow. What's the plan there, and what does the debt service look like if you have to roll that $75k into the senior at a different rate?

1laurenkim53Passive

This is the size of deal I actually look at, so thank you for the real numbers. Question about the town. Two physician practice, both presumably somewhere in their careers. If one retires and the other can't recruit a replacement, you have a vacant single tenant medical building in a market of 28,000 people. How long did you assume that suite would sit in your downside case?

0renee_dubois Get yours

@hollow that's the question I'd want answered too. quill, did you ask the physicians their ages or their succession plan? It feels intrusive and it's the most important thing in the deal. Every unit I own has taught me that the tenant's life plan is the real lease term.