The South Fountain View Office Center on Inkster Road in Southfield sold on March 14th, 2024, for $7,455,000.00, which translates to a 7.9% cap rate and approximately $185 per square foot. That is the headline and the culmination of our marketing efforts on the building. The story behind the headline, however, is much more interesting and highlights the art of how a transaction is formulated.
We began marketing the building for sale in 2021 at an appropriate price for a stabilized multi-tenant medical office building, however we were making an assumption that the second largest tenant, occupying approximately 40% of the building’s gross leasable area, would renew their lease which was coming due in a year and a half. We received a tremendous amount of interest based on this assumption, and most all of it was entirely contingent on some level of understanding on the renewal. Unfortunately, at the time we were still too far out for the tenant’s renewal option to be exercised, so the building sat in limbo, waiting on a direction.
That direction came about a year later. The tenant’s business had been sold to a larger architectural firm and the lease was extended, which on the surface was good news for potential purchasers as it would give some forward-looking stabilization to the property. However, in renewing the lease, the tenant determined that it needed less square footage, resulting in a downsize from 15,000 square feet to 9,000 and creating a vacancy. At this time, we had a conversation with our client and decided the only way we could sell the building at an acceptable price would be to market the building as an “owner-user” purchase based on finding a purchaser that would have need for the 6,000 square foot vacancy that had been created.
Finding an owner-user that not only could afford a nearly $8,000,000 price tag, but also had interest in becoming a landlord rather than purchasing one of many other competing properties amongst an abundance of available office opportunities was no small feat. We targeted the owner-user market to the best of our abilities, but it appeared interest was still most active from the investment market. With 15% of the income from the building no longer being realized, there would not be a way to sell the asset at a price acceptable to our client in this manner.
Further complicating the deal was the fact that the underlying mortgage included a large prepayment penalty, whereby selling the property to a purchaser who would want to put new debt on the building would cost our client a significant amount of money in order to pay off his current lender. The most logical way around this prepayment issue is to secure a purchaser willing to assume the seller’s loan, however in order to assume the loan as well as sell the property at a price acceptable to the seller would require a purchaser to place approximately half of the purchase price in cash.
Regardless of issues, we needed a direction for this building. It was not currently viable as an investment at our listing price, and the owner-user market would be similar to finding a unicorn that both needed the space and could afford the price tag. We finally received our direction when the surgical center in the building absorbed the remaining vacancy. This stabilized the building, gave us a clear “target market” of investors and we went back to everyone that had expressed interest. We were able to locate an out of state purchaser who we had closed a previous medical office transaction with and we knew would have both the cash on hand to assume the existing loan as well as knowledge of the local medical office market and the appetite for this type of building. We put the purchaser in touch with the seller’s lender and they were able to negotiate a loan assumption. We sold the building.
The final paragraph is the end of the story and seems simple enough, but the “story” is the part of this business that we love. Identifying problems and brainstorming solutions is a passion we have that is necessary for our client’s continued success.
