Urgent Care Facility

[Seth Smith]

Hello,

I am considering making an offer on an urgent care. The price per sqft is very high for an office built out for medical use.. however, there is an in place tenant paying strong rent with 3% increases for 10 years (close to 7% cap, NNN)

What I don't understand is why the tenant agreed to pay close to 2X market comps in rent in price per sqft per year for this facility. It is mostly new building with new medical equipment. Do urgent care facilities really draw greater than $500 per sqft sales price

Has anyone invested in urgent care facilities? Any advice?

[Chris Mason]

Without knowing the specific area, etc, a 7% cap rate on NNN is likely somewhere on the higher end of the risk spectrum compared to the 5% that a Starbucks might command. Which is fine, it's just a matter of figuring out what that risk factor is.

For example, are they on year 13 of the 15 year lease? 

If you eyeball how full the parking lot is on historic google street view, has it gone from always packed 10 years ago, to half full 5 years ago, to 1/4 full today? 

If both of those things are true, then you have a higher than average risk of tenant turnover, which is where that cap rate is coming from. If this healthcare facility had one of the big national dialysis companies on year 2 of a 15 year lease, it would likely be chilling at a 5 cap next to Starbucks. 

"What I don't understand is why the tenant agreed to pay close to 2X market comps in rent in price per sqft per year for this facility."

Maybe the landlord paid for the TI in exchange for higher rent. Maybe the tenant improved the property 13 years ago, in exchange for a 15 year lease. Yes, that's a great question, but we don't have the answer, that's for you to dig into.