Feedback about strategy/inviting a partner to go in on a deal?

[Jon Gorman]

Hi All,

A few years ago I bought a commercial office building that I rent out to healthcare professionals and it has been successful so far. I know there is some demand in my area from people wanting to rent a similar space.

I found one property I am considering buying. It's 4 offices. I have one potential tenant who wants 3 out of the 4 offices and a few other possibilities lined up who might be interested in the 4th.

Here are some factors to the decision:

• My ultimate goal is to buy and hold properties for a long period of time so that once they are paid off, this will be my retirement income (I'm currently 35).
• While I have a positive cashflow on my first property, I don't have a lot saved up at this point that I could put towards a downpayment for the second property.
• I talked to a banker who, based on my current finances, would finance 100% of the property, 5 or 10 year loan, 4.5%, amortized either 20 or 25 years.
• So...from my perspective that looks like $0 down other than closing costs, and tenants lined up who are interested in the office.
• One problem is that given the asking price, and what the monthly mortgage + operating costs would be, the rents for the 4 offices would be 20-25% higher than the market rate.
• The potential tenant who is interested in the 3 offices is willing to pay that because there are some unique characteristics that they are specifically looking for that would be hard to find somewhere else.
• Let's say that tenant is willing to sign a 5 year lease initially. I'm worried that if they break their lease and leave, that leaves me with 3 offices to try to fill quickly, all of which are slightly more expensive than the going rate.

I had a thought about offering to this tenant (who is interested in the 3 offices) to invite her to go in on the purchasing of the property, maybe inviting her to be a 10% owner, the thought being that if she has some skin in the game, she would be less likely to cut and run and leave me high and dry. 

Any thoughts? Should I pursue this property? Wait until something comes along that I could price to be more in line with market rents? Advice on inviting this tenant to be a part owner?

Thanks in advance!

Jon

[Steve Hall]

@Jon Gorman An office building is only worth something if it's occupied. If you could get "her" to sign a lease on 3 units BEFORE you buy it, that is the way to go. Then I would do some quick cosmetic improvements, rent the other office, and turn around and SELL the whole building, advertising it as 100% occupied with a nice big cap rate and 5+ years to go on the leases. Very desirable!

Take the profit and go buy a bigger office building (that could handle 15-20) units, or an apartment building if you don't mind residential tenants.

BTW, she does not want 10% equity, otherwise she would put 20% down and buy the building herself. Also, equity or no equity, if she goes out of business, she moves out early. A 10% stake does not stop her business from going under.

Last but not least, it seems like you have a lot riding on this one tenant. DO NOT buy this building hoping that you can get her to sign a 5 year lease with you at 25% above market rate.