Medical Office Building in North East

[Kristy Oshita]

Hi I'm a multi family investor looking to move to investing in medical office buildings.

I'm looking at a package of 2 100% leased stand alone medical office buildings that has a terrific cap rate, north of 10%. They are both leased to the same tenant.

It seems the owner has paid for a million plus renovation for one of the buildings and in return the medical office signed a long lease at a high cost per sq foot. 

There are a lot of pros, but there are some risks I'm trying to figure out how to assess such as the tenant and if the cost per sq foot is inflated. 

I was wondering if anyone had advice evaluating a MOB for these risks?

Here are the pros

• Tenant has been at the buildings 5+ years and pay their rent
• The building is in great shape
• It's a NN, so it has some expenses but they are small costs
• I believe the recently renovated building has 10 years left on their lease.
• The 2nd building is undergoing a million plus renovation, paid by the tenants.  I believe there is 5 years left on their lease.

The Risks/Concerns

• The medical practice has been sold to a larger new company maybe 1.5 years ago.  The acquiring company seems to be aggressively expanding & has credible founders & board of directors.  It seems like a risk and a benefit.
  
• I was told that the seller is NOT related to the ownership of the medical practice.  Perhaps this is true now post sale.  However from my google'n I think that the owner of the building, was the owner of the medical practices before it was sold. 
• I believe he is now part of the new company.
• A medical lease back is common, I'm just not sure why they would lie about the owners relationship (but perhaps I'm wrong).
• The buildings are near a medium sized city, in the suburbs about 25 min to downtown.  Does it matter that the towns they are not high income areas, median house hold income is $45-50k?  The buildings are located off a main road in a retail strip.

• Is it normal to get some type of verification that a medical practice tenant is credit worthy and their operational income supports their rental payments?  If so, is there a company to get this report or do I ask the broker for tax returns or P&Ls of the practice?
  
• Is it normal that a renovated MOB could rent for $34-$38/sq foot, while retail rent is more around $15/sq foot in that area? 
• I tried to find medical leasing comps but couldn't find similar buildouts.  Nationally I saw renovated space for more like $22-$25/sq foot I think? 
• MOBs and Commercial RE are based on it's income, but how much do you take into account the area?

• Is there anything else I should be looking out for regarding MOB investments?
  
  Thank you in advance.

[Chris Cambridge]

Deal sounds exciting! I hope they are raking in the dough in that location. Income demographics are weak but if they cornered the market and is the best game in town then that may be a reason for look deeper. The $1M spend by the tenant may indicate plans to stay or cash out on RE to balance books. If the previous owner kept the building ask him to renew the lease for 15 years.