Healthcare is a fast-paced business subject to multiple forces of change.
Jonathan Vick, president and founder of ASCs Inc. discusses the latest developments in the market for selling and leasing back surgery center real estate.
Q: What is new in selling and leasing back surgery center real estate?
JV: What is new is that many physicians who own their ASC/MOB real estate don't realize how much value their real estate represents, and these physicians have significant capital locked up in ASC/MOB real estate that could be deployed in higher yielding investments. Take for example, a group of physicians who bought some real estate and developed an ASC/MOB 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 the real estate and paying off the loan the physicians have $5 million to invest in higher yielding and more liquid investments, with no increase in rent.
Q: How has the sale of ASC real estate changed over the past decade?
JV: Up until a few years ago there were not many buyers for ASC real estate. The companies interested in investing in commercial real estate did not realize how profitable, stable and growth-oriented surgery centers are. This has now changed, and there are many buyers interested in acquiring ASC/MOB real estate. And as interest rates have dropped the prices offered have gone up. This is because with a low cost of capital the buyers can offer higher prices and still generate a good return on capital. With more buyers now than sellers, there is significant competition to acquire good quality ASC/MOB real estate and the prices offered are the highest seen in decades.
Q: What buyers are interested in ASC real estate acquisition today?
JV: There are a significant number of individual investors and real estate investment companies that realize what great businesses ASCs have proven to be and these buyers are offering very attractive prices to acquire ASC/MOB real estate. In almost every situation now each ASC/MOB property offered for sale attracts multiple offers within 30 days of being offered for sale and at very attractive prices.
Q: How do sale and leasebacks work? Are personal guarantees required?
JV: The sellers sign a Listing Agreement with a broker who, after preparing a marketing package, solicits purchase proposals from buyers who want to invest in ASC real estate. The potential buyers submit offers, which the broker then negotiates on the sellers’ behalf. The goal is to get the highest value and best terms for the sellers with no increase in rent and no personal guarantees on a long-term (10+ years) triple net lease, as this maximizes the value. The ASC then signs a new long-term lease that is beneficial for the center as this creates stability in expense control and assures future control of the space for the business.
Q. Are there any potential pitfalls to avoid in today's ASC real estate market?
JV: Just as with choosing a strategic partner for your surgery center, physicians who want to sell their ASC/MOB real estate will have concerns over who they are selling and the terms of the sale. Common questions to ask to avoid pitfalls 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?
• What 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? What is the opportunity to do a “1031 exchange” to defer capital gains taxes?
Jonathan C. Vick, the founder and President of ASCs Inc., has assisted in development, merger, and strategic transactions for over 500 physician-owned ambulatory surgery (ASCs), surgery centers (ECs) and surgical hospitals since 1984. He has extensive experience in ASC and EC sales, real estate sales, and valuations. He can be reached at 760-751-0250 or jonvick2@ascs-inc.com. More information can be obtained at the website www.ascs-inc.com.