All Forum Posts by: Bharath Raj

Hi Everyone,

I am looking at underwriting a multi-tenant property with a well known dialysis tenant who have exercised their first renewal option of 5 years, with 3 more remaining. The building also oddly has a pizza franchise, which has been there long-term. While a cap rate in the 6.5% range is reasonable for a new lease with 10+ years on the initial term, I am curious to see how it changes, once it' further along. Any thoughts would be greatly appreciated. 

I had to make several assumptions based on available data. https://www2.colliers.com/en/research/houston/q2-2020-fort-bend. I don't have data for Q3, but assume that it's worse, after talking to a few brokers. They can't give me more definite numbers (understandably) to plug in, due to covid related uncertainty. I assumed that I will have to pay a TI of $50/sq ft (prior endcap space was leased with landlord paying $35/sq ft), vacancy of 15.3% (based on Q2 costar data, but it' likely higher in q3.I gave myself 18 months to fill the space), rent of $28/sq ft (endcap space was leased out for $30/sq ft. The vacant spaces having asking rents of $26 to $30/sq ft, but have remained vacant for 3 years) & a acquisition cap rate of 9% (market is about 8%). My end number is approximately equal to the city' appraisal (land + building). Anything else that you guys would do differently?

I am about to place an offer on a medical building in the Houston area with 55% vacancy. The remaining 45% has strong tenants with long leases. The landlord has indicated a willingness to consider an offer based on actuals @8% cap. While underwriting the deal, how would you account for the vacant space? The income is $0, but there are significant NNN expenses to the buyer until it can leased up. I am of the view that I just adjust up the vacancy factor by a percentage (5%) over market vacancy, while ignoring the cost of NNN to the buyer until lease up. Is that reasonable, or is there a more standardized way of doing this?

@Joel Owens I have lodged a soft protest with the bank about the appraiser' assumptions. I asked them to change my loan request from a owner occupier to a investment loan, since that might change the numbers. We will see what they say. 

My medical practice (PLLC) is a tenant in a multitenant bldg that' in my holding company. I am looking to refinance it. The bank gave me great terms as a owner occupier, but required an appraisal. The appraiser' report just came in. He makes a "extraordinary assumption" in the beginning of the appraisal, which says that this is less than arm' length since my holding company leases it to my practice. He then proceeds to assume that the owner occupier portion is vacant, puts in high TI dollars, additional vacancy factor, to then compress my NOI, & hence the final valuation. To make matters worse, he counts this hypothetical TI against my NOI (TI is paid only once during the duration of the whole lease) & calculates the new number as the true NOI. This still meets the amount which I was planning to pull out of the building, however, it may restrict me from pulling out any more cash in the next year. The bank had said that the appraisal would be good for a whole year. My assumption going in was that the building would be valued the same, whether owner occupier or not. I did not know that they won't even factor in my lease. Any thoughts?

I got contacted by a local realtor on a townhome that we had listed for leasing out. This realtor wanted to know if we were interested in a 18 m to 24 m lease to https://rvacnllc.com/. They seem to make money off the arbitrage. They even sent us a $2M occurrence policy. I would love to hear any experiences that you guys may have had with this company. What are some questions to ask?

I just received an invoice from OConnor & Assoc (local property tax attorney firm), & I am little cross. I have several properties with them. The city of Houston in their infinite wisdom has increased the valuation of my townhome from by 12% (when compared to 2019). The attorney firm brought it down to a 3% increase from 2019. I believe that there should be a decrease from 2019 valuation. I am concerned that the attorney firm is hastily settling for less because the city has truncated the period of hearings. I am curious to hear from the investor community in the Houston area. 

@Greg Dickerson. The current tenant is a dentist who has been there for ~15 years. He has 5 more years left on the lease, but will likely renew. I can give our business a 10 year lease. The refinancing offers are good (80% LTV, 20% down, interest rate of 4%, 20 year term with 25 year amortization). My concern is to ensure that I can get all my cash out upon refinance. I have been told that we can forward useful information to the appraiser which is helpful for him to do his job ex: comps. I was wondering if there is a checklist of items that I can follow to maximize my chances of getting the building to appraise as high as it could. The income approach towards appraising is probably not valid in this case, since it' ~55% owner occupied with a fresh lease in place. The replacement cost of the building is likely $150/sq ft currently (I may be wrong). I am requesting my broker to put together a god comps set. I intend to convey all this information to the appraiser' review.

We are planning to get under contract on a 5500 sq ft office building with several short term tenants (month to month), and one healthcare tenant with a long term lease. Our intention is to vacate the month to month tenants and owner occupy ~55% of the building (office hack). We will give ourselves (via a 3rd party property management firm) a long term lease (we are a healthcare tenant too). We are unsure about the status of any deferred maintenance, but intend to fully fix up/replace any major issues ex: HVAC,roof,etc. We plan to seek owner financing for the initial period of implementing the above plan, until we are able to move into this space. Then, we want to refinance into a long term (20 year fixed with 25 year amortization) owner occupier business loan (may or may not be SBA). What would be the best way to position ourselves to achieve the highest appraisal value in this situation?

Bharath Raj

We are planning to get under contract on a 5500 sq ft office building with several short term tenants (month to month), and one healthcare tenant with a long term lease. Our intention is to vacate the month to month tenants and owner occupy ~55% of the building (office hack). We will give ourselves (via a 3rd party property management firm) a long term lease (we are a healthcare tenant too). We are unsure about the status of any deferred maintenance, but intend to fully fix up/replace any major issues ex: HVAC,roof,etc. We plan to seek owner financing for the initial period of implementing the above plan, until we are able to move into this space. Then, we want to refinance into a long term (20 year fixed with 25 year amortization) owner occupier business loan (may or may not be SBA). What would be the best way to position ourselves to achieve the highest appraisal value in this situation?