Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Analysis Reflecting a Large Vacancy after Purchase

Let us assume the same purchase and sale facts as outlined above. The medical office building was purchased for $14,500,000. The down payment or equity was 25 percent of the sales price, or $3,625,000. The purchase money mortgage was 75 percent of the sales price or $10,875,000; during escrow, Mr. Stable approved the buyer's contingencies, yet did not lock in his interest rate until three days before closing. Unfortunately, the interest rate spiked upward between the time he “went hard” on the purchase and when the lender fixed the loan interest rate. The purchase was closed with a loan interest rate of 7 percent for a 10-year term, interest-only for the first three years then a 30-year amortization. Equally unfortunate, within a short time frame from close of escrow a significant number of tenants did not renew their leases or defaulted and vacated their suites.

A revised rent roll—see Exhibit A.3 in the companion website—reflects a large vacancy of 17,723 square feet, approximately 30 percent of the total square and about 34 percent of the scheduled income. The revised rent roll assumes that the surgical tenant's leases in suites 550, 610, and 620 expired and that these tenants left the project to form their own surgery center. It is also assumed that with the mass exodus of the surgeons, the business volume of the Surgical Center located on the ground floor collapsed, and the tenant vacated and filed for bankruptcy.

A quick-and-dirty ...