Medical-property clients may benefit from selling and leasing in today's market

James S. Wood Jr., broker and adviser, Calkain Cos. 
 

The sale-leaseback market recently has become more skewed in sellers’ favor. Low capitalization rates coupled with tight supply has lured investors and led to fierce competition over quality properties with potential for triple-net leases — that is, leases that require lessees to pay for net real estate taxes on the leased asset, net building insurance and net common-area maintenance. 

Keep in mind that the recent economic downturn limited the supply of quality properties that have the potential for triple-net leases. Previously, the net-lease investment market was dominated by the pharmacy, retail and restaurant industries. These industries still are expanding, but at a much slower pace than before. 

In today’s tight market, health-care properties stand out as a bright spot with significant potential supply. Although American businesses own about 30 percent of their operation’s real estate, by some estimates, the health-care segment owns as much as 80 percent of its real estate. There is obviously a large divide. Corporations of all sizes have come to understand that the return on equity in their core business is typically much greater than property appreciation — a concept that doesn’t seem to have resonated yet with health-care professionals. 

Physicians, clinics, surgery centers and hospitals may need help to understand why now is the time to let go of their real estate. Real Estate brokers should make sure that their clients are comfortable with the sale-leaseback strategy. There may be an emotional attachment with their owned real estate, or uncertainty about the effects of implementing the Patient Protection and Affordable Care Act this fall. In fact, the latter may be a reason to consider selling because of its impact in terms of increasing demand. With higher numbers of people and families covered under the Affordable Care Act, there likely will be significant expansion in medical buildings and facilities.

To help health-care providers make a decision to sell or not to sell, focus on the following market dynamics:

• Cap rates are still low, and values for owner-occupied real estate are increasing.
• If interest rates increase, cap rates will follow, causing property values to decline. Borrowing costs increasing with higher interest rates also can reduce property values.
• Medical professionals may find that a sale-leaseback is an excellent way to monetize their real estate separately from their medical-service business.
• A sale-leaseback can be a good vehicle for an exit strategy if a medical professional is retiring within the next five to 10 years.
• The proceeds can be used to buy out a senior stakeholder, buy new equipment or reduce borrowing costs.