As ASCs look for ways to improve liquidity, simplify ownership and increase valuation, sale-leaseback arrangements are becoming an increasingly attractive option.
Jon Vick, founding partner of ASCs and Vick & Co., joined Becker’s to discuss five things to know about sale leasebacks:
1. In a sale-leaseback, an ASC sells its facility to a third-party investor or real estate investment trust and simultaneously signs a long-term lease, typically 12 to 15 years, to remain in the space. The ASC retains full operational control of the surgery business while offloading the burden of property ownership. The lease is usually structured as triple-net, Mr. Vick said, where the ASC maintains responsibility for property expenses but preserves long-term occupancy rights.
2. For physician-owned ASCs with equity in their real estate, sale-leasebacks can convert a non-liquid asset into cash. This liquidity can be used to pay off existing debt, buy out partners, fund expansion or technology upgrades, and build cash reserves, Mr. Vick said.
3. According to Mr. Vick, in today’s high-interest rate environment, rent payments on a long-term lease often end up being lower than mortgage payments on a short-term loan. For example, replacing $500,000 in annual debt service with $350,000 in annual rent improves cash flow by $150,000. This higher EBITDA boosts enterprise value, especially if preparing for private equity investment.
“They take the money off the table and reinvest it in something that earns them more than 2% or 3%. Typically, the stock market, over history, has returned 10% to 11%,” Mr. Vick said.
4. Physicians considering a sale of the business to a private equity group or management company should time the real estate transaction carefully. Once controlling interest in the ASC is sold, the new majority owner typically gains control over lease decisions.
“If they’re thinking about a strategic transaction, they should do the real estate transaction first — then they have 100% control over the lease, and can adjust the rent and terms to suit the doctors’ goals, not the PE firm’s,” Mr. Vick said.
5. Physician-owners can use sale proceeds to invest in higher-return vehicles. Historically, the stock market has yielded 10% to 11% annually, exceeding the typical 2% to 3% return on ASC real estate, he said. Alternatively, a 1031 exchange allows physicians to defer capital gains tax by reinvesting proceeds into another real estate asset generating 6% to 8% annual returns.
Owners must also evaluate tax implications carefully, Mr. Vick continued. Capital gains may apply to the sale of the real estate, although proper planning can offset or defer these liabilities.
