In August of 2016, we entered into our 9th joint venture with Centum Health Properties and acquired a 39,726 square foot, two-story multi-tenant medical building in Chandler, Arizona for $129 per square foot. The building had eleven suites that ranged from approximately 1,061 to 11,541 square feet, with ten of the suites leased at closing. The building had a strong mix of tenant specialties including counseling, ophthalmology, skin cancer and dermatology, cardiology, nephrology and gastroenterology. At the time of acquisition, the building was 91% leased with 75% of the leases extending out for over 5 years in term.
The building was acquired for $5,150,000, which was significantly less than replacement cost. We raised initial investor equity of $3,480,000 ($2,280,000 in equity and $1,200,000 in preferred loan), which was paired with approximately $3,200,000 in 1031 Exchange proceeds from three other investors. The total funds were used to close on the property with the additional funds being placed in reserves for the scheduled building and tenant improvements that were budgeted over the initial 10 years. The average annual cash-on-cash return to the Equity Investors over the initial five years was projected at 8.63% with an Investor IRR, using a 5-year scenario, of 15.86%. The investors that participated in the investor loan would be paid a quarterly interest rate of 8%.
The initial strategy was to acquire the building at a price of approximately $129 per square foot, secure leases for the remaining vacancies with long term leases at current market rates and successfully renew the current tenants as their leases approach expiration. This would enable us to capture the remaining value in this already diverse rent roll and solid cash flow. The equity and loan proceeds would be used to complete the acquisition and pay for tenant improvement and commission costs to secure the lease renewals and new tenancies. Once the building reaches stabilization, a permanent loan would be secured, which would enable us to pay off the investor loan and return a significant portion of the investor equity.