Sell and Leaseback your MOB/ASC real estate

Physician-owners are benefiting from increased demand for MOB/ASC real estate.

A seller’s market

Investor interest in MOB/ASC real estate continues to be very high, with multiple buyers competing to buy and leaseback physician-owned property.

The August 16, 2017 issue of the Wall Street Journal reported that CBRE, one of the world’s largest real estate managers, recently purchased a portfolio of 25 medical office buildings, including ASC real estate, a sign that healthcare property is becoming more popular with institutional investors, for over $500 million. The rationale cited included “recession resistance” of ASCs and the fact that “the healthcare system has designed numerous incentives to push patients to buildings where patients can walk in and out the same day with less risk of infections”. Many private investors are interested in purchasing and leasing back MOB/ASC real estate on terms that are very beneficial to the sellers, such as no increase in rent and leaving the physicians in control of the building.

Worth more than you think! Many physicians who own their MOB/ASC real estate may not realize how much value their real estate represents. These physicians have significant capital locked up in real estate that could be deployed in higher yielding investments. Take, for example, a group of surgeons who developed an MOB/ASC for $3 million 10 years ago, with $2 million in borrowed money. Now the ASC and their practices are successful and paying market rate rents and half of the debt is paid off. The rent they are paying makes their real estate worth $6 million, but appreciating only at the rate of 2 percent to 3 percent a year. So, after selling and leasing back the real estate (with no increase in rent) and paying off the loan, the physicians have $5 million to invest in higher yielding and more liquid investments. A 1031 exchange enables the sellers to defer capital gains taxes.

Sales of ASC real estate has changed over the past decade. Until recently there were not many buyers for ASC real estate. Investors in commercial real estate did not realize how profitable, stable and growth-oriented surgery centers are. This has changed and there are now multiple buyers interested in buying and leasing back MOB/ASC real estate at terms that are very beneficial to the sellers. And as interest rates remain low the prices offered have gone up. A low cost of capital enables the buyers to offer higher prices and still generate a good return on their invested capital. With more buyers than sellers, there is significant competition to acquire good quality MOB/ASC real estate and the prices offered are among the highest ever seen.

Who are the buyers? There are a growing number of private investors and real estate investment companies that realize that ASCs have proven to be excellent businesses. These buyers are offering attractive prices to acquire MOB/ASC real estate. In almost every situation each MOB/ASC property offered for sale attracts multiple offers within 30 days and at higher prices than seen in decades.

What are the potential pitfalls to avoid in today's ASC real estate market? Physicians who want to sell their MOB/ASC real estate will most likely have concerns over who they are selling to and the terms of the sale. Common questions are:

• What will be the rent and terms of a leaseback arrangement? 
• What personal guarantees will be required, if any? 
• How can we avoid giving any personal guarantees? 
• How much will the sales commission be? 
• How can I check out the reputation of the buyer? 
• If I get multiple offers at nearly the same price, how do I determine which buyer will be best for me? 
• How will the property be marketed, and to whom? How can we defer capital gains taxes on the profits?

Professional brokers who specialize in the sale and leaseback of MOB/ASC properties on a national basis should be able to easily answer these questions, and provide references to physicians they have assisted. To maximize value and have an expeditious sale it is important that the broker you use have a network of national buyers. Local brokers are unlikely to have access to national buyers. National buyers compete and push the value higher.

The goal: maximize the value of your MOB/ASC real estate for the benefit of the owners and the ongoing medical business.

Jonathan C. Vick, the founder and President of ASCs Inc., has assisted in sale/leaseback, development, merger, and strategic acquisition transactions for over 500 physician-owned ambulatory surgery (ASCs), endoscopy centers (ECs) and surgical hospitals since 1984. He has extensive experience in ASC and EC strategic partnering, real estate sales, valuations, and ASC mergers & acquisitions. He can be reached at 760-751-0250 or jonvick2@ascs-inc.com. More information can be obtained at: www.ascs-inc.com.

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