Re-underwriting a medical office acquisition around one clinical lease

The initial model begins rent on April 1, applies the three-month abatement and collects six months of base rent in Year 1. It includes $80 per square foot of tenant improvements and a $280,000 commission. The remaining 114,000 square feet contributes $3.08 million of cash NOI. With the imaging suite, the model reports $3.395 million of Year 1 NOI and a 10.88% debt yield.

The current construction schedule delivers the suite on August 15. The contractual fixturing period moves base-rent commencement to November 1, so all three abatement months extend beyond year-end. The executed lease provides a $120-per-square-foot allowance, while the work letter places $1.26 million of base-building work outside that allowance. The commission is $336,000 under the executed brokerage agreement.

The lease-level case therefore produces $3.088 million of Year 1 cash NOI and a 9.90% debt yield. Landlord leasing capital rises from $1.40 million to $3.276 million. Because the acquisition loan is unchanged, required equity increases by the same $1.876 million.

The executed lease separates premises delivery, tenant fixturing, base-rent commencement and clinical opening. The initial model uses April 1 for all four. Under the current record, the landlord delivers on August 15, the 75-day fixturing period expires at the end of October and base rent commences on November 1. The tenant's equipment installation and operating approval continue on a separate clinical schedule.

That separation cuts both ways. A tenant-caused equipment or licensing delay after November 1 does not defer rent under this lease. A landlord delay in the dedicated electrical service or HVAC does. The relevant sensitivity is therefore not a general assumption about when the clinic opens. It is the lease's allocation of delay, applied to the work item causing it.

The abatement is also tied to base-rent commencement rather than a fixed calendar period. Moving commencement from April to November moves the concession with it. Expense reimbursement begins in November and contributes $26,000 in Year 1; base rent contributes nothing before December 31.

The broker file describes the suite as regional health-system imaging. The lease tenant is Metro Imaging Partners, LLC, a joint venture in which the system owns 55%. The health-system name appears in the permitted-use and branding provisions, but the system is not the tenant and does not guarantee 12 years of rent.

Its separate guaranty is capped at $2 million, supports completion and reimbursement of unfunded landlord capital, and terminates when the clinic opens. That support matters during construction. It does not convert the joint venture's lease into a full health-system credit for valuation, lender concentration or rollover analysis.

The building is also subject to an on-campus ground lease. Imaging is an approved use while the joint venture remains affiliated and its physicians satisfy the campus requirements. An assignment, replacement tenant or different clinical use requires hospital approval. The downtime case at lease expiry therefore cannot assume that any medical user paying the same rent can occupy the suite.

The file's fair-market-value support serves another purpose. It documents the rent, allowance and other consideration for a space arrangement involving referral sources. It does not add a guarantor, remove the ground-lease restrictions or turn clinical affiliation into payment support.

The initial model's $80-per-square-foot allowance is not the executed bargain. The lease gives the tenant $120 per square foot, or $1.68 million. More importantly, the landlord-work exhibit places the service upgrade, transformer, roof reinforcement, equipment dunnage, dedicated HVAC, generator tie-in and specified plumbing outside the allowance.

The current guaranteed maximum price assigns $1.26 million to that base-building scope. The tenant funds the scanner, shielding, clinical cabling and finishes above the allowance. Those items still appear on the integrated delivery schedule because they affect fixturing and opening, but they do not enter landlord basis unless the lease or a change order moves the responsibility.

This division is what makes the cost schedule usable. A transformer delay attached to the landlord scope can move contractual delivery. A scanner delay attached to the tenant scope usually cannot. A shielding change may consume the tenant allowance without increasing the landlord's capped contribution. Grouping all three as clinical build-out obscures both capital and rent consequences.

The initial case collects $280,000 of imaging-suite base rent from July through December after its assumed April commencement and three abatement months. It also collects $115,000 of expense reimbursement and carries $80,000 of incremental operating expense. Added to the occupied building, that produces $3.395 million of Year 1 cash NOI.

The lease-level case begins reimbursement on November 1 and records $26,000 through year-end. The three base-rent abatement months run through January, so the suite contributes no Year 1 base rent. The corresponding operating expense is $18,000. Year 1 cash NOI falls to $3.088 million.

Straight-line rent may produce a different accounting result, but it does not repair the acquisition cash flow. The debt yield shown here uses cash NOI against the funded $31.20 million loan. It declines from 10.88% to 9.90%, even though leased occupancy remains 100% and the stabilized contractual rent is unchanged.

The purchase price and acquisition loan do not change. The capital required to make the signed lease real does. The executed allowance adds $560,000 to the initial model. The separate landlord-work package adds $1.26 million, and the executed commission adds $56,000. Total basis moves from $54.40 million to $56.276 million.

With the acquisition loan held at $31.20 million, required equity moves from $23.20 million to $25.076 million. The increase is not a general medical-office reserve. Every dollar is assigned to a lease obligation or brokerage agreement, and the timing follows the work schedule and allowance draw conditions.

The useful sensitivities follow the lease. Completing the landlord systems by May 15 moves base-rent commencement to August 1, restores $105,000 of Year 1 NOI and reduces carry included in equity by $180,000. A landlord delivery on November 15 pushes commencement into the next year, leaves Year 1 NOI at the occupied-building level and adds $350,000 of carry.

A lease amendment shifting $650,000 of dedicated systems to the tenant has a different effect. It reduces landlord capital without changing the November commencement assumed in the base case. That treatment only works if the amended responsibility, allowance treatment and completion support all move together. Removing the cost from the acquisition budget while leaving the landlord work letter unchanged is not an alternate case.

Cap Orbit can work across the rent roll, executed lease and amendments, work letter, landlord- and tenant-scope matrices, drawings, guaranteed maximum price, construction schedule, tenant equipment plan, guaranty, ground lease, operating statements, loan terms and existing acquisition workbook in the same deal. The suite is rebuilt from its governing documents before its cash flow is added to the property.

From that record, you can have Cap Orbit apply the contractual delivery and fixturing periods, move abatement and reimbursement with commencement, separate landlord base-building work from the allowance and update cash NOI, debt yield, total basis and equity in the house model. The clinical opening schedule remains connected without being allowed to override the executed lease.

The same record keeps the tenant LLC, limited completion guaranty, system affiliation and ground-lease restrictions distinct. An early-delivery case changes the work schedule and rent. A tenant-funded systems case changes the lease responsibility and capital. A licensing delay affects rent only where the lease assigns that risk to the landlord. Each case returns the same comparable outputs rather than changing a disconnected assumption tab.

That is the standard for AI on this asset class. The signed lease is not merely evidence of occupancy. It is the set of delivery, capital, credit and use terms that determines whether the space produces the cash flow carried in the acquisition case.