The TI reserve eats the whole spread on a $4.1m clinic

18,000 sf, three tenants, 88% occupied, asking $4.1m. In place NOI as delivered is about $290k, so 7.1% going in, and the debt quote I have puts me around a 1.35 coverage on year one.

The problem is rollover. 6,300 sf comes due inside 24 months, which is the physical therapy tenant at $27 psf and a two physician internal medicine practice at $29. Neither has stated intent. If both leave, my re-tenanting math is $85 psf of TI on second generation medical space plus $12 psf of commission plus six months of downtime, call it $610k of capital against a $290k NOI. Even at a 60% renewal probability the expected cost is well north of a year of net income, and my lender is only sizing a $150k TI and leasing reserve.

Two things I want pushed on. First, what annual reserve per square foot are people actually carrying on multi-tenant medical outpatient, because $0.25 psf that shows up in broker models is obviously fiction next to $85 psf turns. Second, does anyone underwrite renewal probability differently for a small physician owned practice versus a system leased suite, and if so what does the delta look like in your model? I'm currently using the same 65% for both and I don't believe it.