Commercial Investment Real Estate Summer 2022 | Page 37

MOB MENTALITY
Looking at the first table , if the doctors are looking for a 50,000-sf building at a price just over $ 200 per sf , a development fee of 5 percent would bring in $ 511,000 , which works out to $ 21,296 a month for two years . Now , more than $ 20,000 a month is nothing to dismiss , but a $ 10 million , 50,000-sf building isn ’ t a one-person operation . You will need to assemble a team for this development . Think of the accounting alone — it ’ s much more than sending out a bill for $ 21,296 for two years . You ’ ll need to handle the bidding , construction costs , payment authorization , and more . This project will require an accounting team . Someone else must find tenants to fill a 50,000-sf building — and negotiate leases with the renters and the doctors who own the property . Administrative tasks , property management , legal requirements — a MOB development is much more than a handshake deal or two .
But before throwing up your hands and walking away from the project , take a look at how the numbers work in the investor / developer scenario ( in the second table ). A market survey shows , with the same 50,000-sf building , a reasonable market rent for triple net leases is about $ 22.50 per sf . Based on 100 percent occupancy , that means $ 1,125,000 in annual net operating income . The total cost of the MOB development is $ 10,733,100 . A market cap rate of 6.5 percent , which is consistent with the market , means the estimated sales price would be over $ 17.3 million .
That ’ s a pretty impressive figure , but that ’ s not all going into your pocket . Factoring in sales costs — including commissions , title , escrow fees , and attorney costs — amounts just under $ 727,000 . Subtracting the construction costs of more than $ 10.7 million means the profit for the developer is $ 5,847,964 , which includes the development fee of $ 511,100 .
But without getting too deep in the weeds of financing , it ’ s worth asking where to find equity capital . Construction lenders alone may require 10 or 15 percent , meaning that ’ s at least $ 1.5 million to get started .
HOW MUCH SPACE ? If coming up with that amount from the start isn ’ t a possibility , the doctors could look to bring in additional investors to help write checks and get things going . In this investor / developer relationship , it ’ s important to know what all the invested parties want out of the project . What do Peach and Pass expect from the property ? What do they expect
Profit Potential for Investor / Developer Case Study
50,000-sf Medical Office Building
Cost
Triple Net Lease Market Rent ( psf )
$ 22.50
New Operating Income at Full Occupancy
$ 1,125,000
Turnkey Construction Cost ( psf )
$ 214.66
Cost
$ 10,733,100
Market Cap Rate
6.50 %
Sale Price
$ 17,307,000
Sale Costs ( at 4.2 %)
$ 726,936
Net Proceeds to Developer
$ 16,581,064
Construction Costs
$ 10,733,100
Profit for Developer ( over 24 months )*
$ 5,847,964
* Includes development fee of $ 511,100
from you , as the commercial real estate expert ? Do the doctors want to have room for growth ? Will they look to lease the remaining space ? Or will they allow other investors to buy into the project ?
For this case , let ’ s assume the doctors prefer to offer ownership / partnership with doctors who lease space in the building . Putting the development into an LLC , the doctors plan to use a total of 15,000 sf in the building ( and would like to have about 40 percent more space for speculative tenants ).
With any medical office development on a hospital campus , you can expect there will either be a ground lease with use restrictions or CCRs spelling out what can and cannot be in the building .
Initially , the doctors have interest from a radiologist ( 4,000 sf ), a physical therapist ( 2,500 sf ), and a urologist ( 2,000 sf ). The Health Co . Hospital has immediate interest in 5,000 sf for office space while committing to another 10,000 sf . That 38,500 sf along with 40 percent more for speculation adds up to about 54,000 sf . But as the commercial real estate professional , you know that if this MOB is going to be on land owned by the hospital , the hospital will need to approve the uses in the building . The hospital would be wary of any direct competition being in the building and would likely exclude those uses . With any medical office development on a hospital campus , you can expect there will either be a ground lease with use restrictions or CCRs ( covenants , conditions , and restrictions ) spelling out what can and cannot be in the building .
In this case , the hospital has its own radiology practice , so 38,500 sf of committed tenants will shrink by the 4,000 sf of the interested radiologist to 34,500 sf , unless you can convince the hospital to use the 4,000 sf for its own radiology practice . Assuming the hospital does add the radiology , with these agreements , you could have 69 percent ( 34,500 sf ) of the space locked up in long-term leases with the possibility of more investors .
Anyone who has seen a project from initial discussions through to completion knows a lot can happen after this point . But for understanding how medical office buildings can come together and what opportunities are out there for developers , this case study helps as a primer on initial considerations . Nothing is guaranteed about the future , but with growing demand for a sector fueled by demographic trends and global events , MOB development could be an intriguing opportunity .
Editor ’ s note : This article was adapted from the CCIM Institute course , “ Evaluating
Medical Office Building Development .”
Tracy Altemus , CCIM CEO / Designated Healthcare Broker for Resource Commercial
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