If your practice owns the property where your medical office / clinic is located, a Sale-Leaseback transaction may be an ideal strategy to maximize value. Below, our experts break down exactly what you need to know about Sale Leasebacks.
What is a Medical Building Sale-Leaseback
The basic structure of a sale-leaseback is straightforward. The healthcare provider owner sells the building to an investor buyer and then leases back all or part of the building back, pursuant to a long-term lease (usually 10 years or more). In the event, some of the ownership group does not want to sell, Skyview can structure a partial sale-leaseback where those owners who choose can remain in an ownership position with the buyer investor are able to do so. This is particularly attractive to buyers as a vested interest in the property stays with the tenant resulting in enhanced credit and an increased sales price.
Why Does it Work for Medical Buildings?
A sale-leaseback allows the owner medical practice to recover the capital that was spent on the development or purchase of the property and improvements while maintaining the ability to occupy the property and continue practice operations without having to relocate. This is an important strategy to unlock capital which may be required or better positioned in the operation of the practice and likely earn a greater return on investment than the real estate.
The strategy can also provide tax advantages in contrast with conventional mortgage financing of the property. The sale-leaseback strategy is also a good way to realign practice dynamics and facilitate recruitment of new physicians.
Is it the Right Time to Sell Your Medical Office Building?
Medical Office Building values are at an ALL-TIME HIGH but with interest rates rising, values will be negatively impacted. Capitalization rates, after a historic downtrend over the last decade are now stable but showing signs of trending upwards thus reducing values. At the same time capital inflows to the sector are increasing as investors seek the protection of recession resistant real estate like medical office. The timing may be right to look at a potential sale-leaseback of your facility.
Cap Rate Trends from 2014-2022
Is a Sale-Leaseback Right for Your Practice?
A look at the economic and operational benefits of a sale-leaseback will help determine if such a transaction is right for you.
Realization of 100 Percent of the Real Estate Equity
The Sale-Leaseback transaction allows the practice to realize 100% of the equity in the real estate whereas conventional financing is usually capped at the 65%-75% of value level.
Reduce Debt and Personal Guarrantees
Disposition of the practice’s real estate allows the practice to eliminate the mortgage debt and improve their balance sheets (perhaps to facilitate other borrowing for operational uses. It will also eliminate any personal guarantees the physicians may have on the mortgage thus improving their personal financial circumstances.
Redeployment of Capital
Practices can use capital from a sale to reinvest back into their core operations, facilitate expansion to grow the business or simply make partnership distributions. The return on investment in the practice is usually greater than that of the real estate.
Create High Valuation and Control Costs through a Long-Term Lease
The economic terms and structure of the lease will substantially determine the value of the property. While it is advisable for the rental rates to be in line with market range the practice has the luxury of determining whether to capitalize on the higher property value on sale or the benefit of below market rental rates over the long term.
Eliminate Real Estate and Personal Risk
Commercial real estate is a cyclical market and subject to macro-economic trends and influences. Ownership of your building entails assuming the risks inherent in the asset class. Converting building ownership to a leasehold interest effectively eliminates this risk.
Ownership usually comes with debt obligations. In some instances, recourse financing with a personal guarantee may have been undertaken by the physician, which can create issues with the doctor’s personal finances. A sale-leaseback transaction can eliminate this obligation and help physicians achieve their personal financial goals.
Aligning Physician Partnership Interests
Are partnership buy-ins into the real estate getting in the way of operating or expanding your practice? Often when recruiting new physicians for the practice they are not interested in buying into the real estate component due to the increased value of the asset(s), lack of financial resources or other reasons.
In larger physician groups, the problem often arises when have older physicians retiring and newer physicians coming into the practice. This can create misalignment between the two groups, when it comes to retiring physicians concern over return on the investment in the real estate vs. the younger physician’s concern about rising occupancy cost This makes it difficult to align the various partners economic interests. Monetizing the building and leasing it back to the practice, properly structured, can align those interests.
Control of Office Space
With a sale-leaseback transaction and a long-term lease with options, the practice retains long term control over the property and defined long term occupancy costs. Also, these leases can give greater rights for alterations, operations and change of use/occupancy and sub-leasing flexibility.
Ability to Structure Advantageous Lease Terms
The practice is very much in the “drivers seat” when executing a sale leaseback. Terms of the lease can be determined as a condition of the sale of the property. This allows the practice to structure a lease which conforms to its long-term business plan. Leases can be structured long term with successive options giving control over the office space for the many years.
SkyView can Expertly Structure Your Sale-Leaseback
There are many factors that make a medical property appealing to investors. Deal terms (ex: long-term, triple-net leases), property location, strong financials and the tenure of the medical staff are just a few of the items that investors consider. This is a complex real estate transaction so having the advice and guidance of an experience healthcare real estate advisor can help you navigate the transaction and result in a much more successful outcome.
Our team of healthcare real estate specialists have advised on many sale-leaseback transactions and have the experience and skills to assist physicians with this type of sale. We have wide and deep relationships with potential buyers for your property and we are confident we can find the right owner “partner” for your property.
We encourage healthcare professionals and HRE investors to reach out to Skyview Advisors for more information regarding sale-leaseback transactions.