Cash Poor Newbies Seeking Advice On Purchase Of Medical Bldg From Retiring Physician
The owner of the 30 year old medical office building in which my partner and I lease space for our 4 year old family medical practice has recently retired. My partner and I have approached him about potential building purchase to be done in partnership with another group of 2 physicians leasing in the same building. Building is 10,000 sq. ft. with January 2003 tax appraised value of $950,000 ($225,000 land; $725,000 building). The building needs a new roof at cost of $30,000. We are unaware of any other necessary repairs and would make offer contingent upon satisfactory inspection. Owner would be willing to take back a large first mortgage at competitive interest rate, but wants some cash out. A local bank would be willing to supply the cash to bring financing up to 100%. An 11,000 sq. ft. medical building of similar vintage located about 2 blocks away has recently been put on the market by a commercial real estate company with asking price of $1,750,000. New medical building costs in area begin at $125 per sq ft. (excluding land cost). What price should we offer this retiring physician ? What rate of interest & financing terms should we request ? Any other pearls of advice would be very welcome.
2 questions : Have you talked about any numbers with the current owner of the building and are your sure that your local bank is comfortable giving you a second mortagage bringing financing up to 100% on an investment property?? At first glance, with the comp that you gave, asking for the 2003 appraised value may not be a bad idea and he may be more apt to go for a lower price if you can give them more cash at closing ( i.e. get as much from the bank that you can )
The key of course is, how long has he owned this building? What depreciation rate did he use. The ploy you use is the taxes and how much of what he receives will he keep from the greedy fingers of dear Uncle Sam. You then try to play problem solver. How much cash does he need and for what purpose. You can perhaps set up a new lst mortgage for him and an equity loan from the bank to produce the required downpayment. You can then make arrangements. For example you all will make the payments on the equity loan which as you reduce it will increase your equity position. You can then arrange graduated payments on the note and mortgage that he takes back. You might have no payments for the first six months to enable you to install the new roof. I suggest you get a little competitive on that. You need other bidders and examine with great care just what kind of materials used in the new roof and the method used. Times have changed and there are some interesting roofing solutions for commerical buildings.
I supose you will be forming a Medical type Corp. LL. I do hope you are friendly with the other practicioners with whom you will now associate. Perhaps a nice referal exchange can be created. Sounds exciting and the beginning of a very proper means of controling your working environments and with a few small corrections the building can become reflective of the modern medicine that you will now practice.
Good luck. Lucius
Tax appraisal are irrelivant,they do not give a true indication of value. Before making an offer have an appraiser and inspector look at the building. Ask the retired doctor/owner to hold financing (1st mortgage). Offer him a .5% less than bank financing. He may be interested in doing this to save on taxes and supplement his retirement.
Gentlemen, thank you for your comments and advice. I am new to this website and very appreciative of the potential for good advice.
Lucius, I think you are right that the problem solving approach will yield mutual best results. Am I correct in my belief that by taking back a mortgage, the owner will have to pay capital gains only on the principal received in the same tax year ?
Mike, I have yet to explore with the owner how much cash he is wanting, but will be doing so over the next few weeks. He stated he had a debt he wished to pay off, so there is a specific number he is looking for. As above, he will probably want to take into consideration his capital gains.
Michael, I think you are probably right that the owner may be too sophisticated to settle for tax appraised value; nevertheless, do you think he would be insulted by such an amount as an initial offer ? It has been suggested to me that we offer the tax value, on the condition that it does not appraise for lower. On the subject of financing rate, it is my understanding, that in this situation, better owner financing rate may equate, effectively, with a lower rate. On the web, I have seen commercial lending rate for medical buildings at 5.75% fixed for 10 years. The current 10 year treasury note is at about 4%. Do you think a request to finance at 1% over the rate i.e. 5% for 10 years is unreasonable in current market conditions ? Lastly, I assume that ultimately we will have to “fork over” for appraisal and inspections. How much are we looking at for these services on a building in the one million dollar range ?
Again, I thank y’all for your advice on these items, and would welcome advice from any other sources. I would be happy to continue posting developments as this negotiation unfolds. I suspect the negotiations may occur over the next couple to three months.
I posted a reply about why the retired physician did not sell his practice and the fact that you could try to broker the selling of his practice (if it is not too late) to sweeten the deal. Wonder what happened to my post??
Brenda
Brenda,
In this case, the physician's practice is past the point of being sellable.
Still hoping to get an idea on appraisal, inspection and closing costs for a $1million commercial building.
Concerning your questions about appraisal and inspection:
If I want an appraisal done on a commercial building, I talk to the lender I most likely will work with. The lender will use their own appraisal firm to determine the value according to what they will lend. If you talk with the lender and obtain the name of their appraising firm, you can obtain an appraisal and pay for the one the lender would make you pay for in closing fees down the line anyway. You will also have a better idea, after your due diligence period, if your offer price is on by comparing it to the appraisal. Kind of killing two birds with one stone.
As far as the inspections go - I haven't entered this phase of my due diligence yet. But I have learned there are three phases to Environmental Inspections in the commercial real estate world. First is a Transaction Screen - these are sometimes required by lenders if the owner needs money for capital improvements and is a very brief inspection usually only involving property history with a quick walk-around.
If there are problems that need further investigation or either a buyer or lender wants a more thorough inspection, they will purchase a Phase I environmental report. These can range from $500-$3000 depending on the expertise of the inspector and the size of the building. These are usually done once a purchase agreement is drawn up and the agreement is contingent on inspection approval.
If serious problems arise or a hazardous material is present, a Phase II inspection is done, which can range from $150-$300/hr depending on the scope of the project and the expertise of the inspector.
Beyond this is Phase III or "clean-up" which cost obviously depends on the issue.
Go to this website to find an inspector in your area - they all have to be certified/educated and maintain license to belong to this national organization:
http://iami.org/2/directory1.cfm
Hope this helps![ Edited by MNInvestor on Date 03/12/2004 ]
Also - for closing costs - estimate between 0% and 2% with 2% being high. So I would estimate around $10,000-$15,000 for a 1 mil loan. But ask around when talking to lenders - they should disclose that to you when you're shopping around.
MN Investor,
Thanks for the responses. As a preliminary step towards appraisal, I was able to get the county "CARDS" on 3 similar medical clinics within close proximity or in the same medical park area, at a cost of a nickel per page. These "CARDS" which are more detailed than MLS listings also include comprehensive tax appraisal data, recent sales prices etc. Further I believe the actual full tax appraisals themselves (done Jan 03) may be obtained for inspection as they are part of the public record. While this may not qualify for a lender's appraisal, I think we have a good feel for a reasonable offering price. Since the vendor may take back a large first mortgage, conceivably we could even avoid appraisal cost. My only question would be whether in a perhaps slighlty overbuilt new medical building market, an older medical clinic may sell well below even a tax appraisal value.
Thanks again.
Do a LPO, then use the medical AR to help finance the purchase.