Sale/Lease-backs of ASCs allow the real estate owners to sell their ASC real estate, pocket the profits, and lease-back the ASC at the same rent they were paying before, with no personal lease guarantees.
Investors are pushing commercial real estate prices to record levels and this is increasing the value of ASC and medical office building (MOB) real estate. Low interest rates and a flood of cash being pumped into the real estate market has made commercial real estate, and especially medical real estate, look attractive compared with bonds and other assets.
Sale and lease-back transactions for ASC real estate allow physician-owners to cash out the value of their real estate holdings, which have risen sharply in value in recent years, lease-back the ASC at the same rent they have been paying, and use the proceeds for investments with higher returns. After the ASC real estate has become fully valued, which in most cases has already occurred, the real estate investment returns only 2 percent to 3 percent a year. The proceeds from the sale can be reinvested in investments with significantly higher annual returns.
ASCs and MOBs increase in value because of the leases that are put in place by the ASC/practice tenants. With average rental rates of $25 to $30 per square foot per year an ASC (and/or MOB) will command a premium value in today’s low-interest rate environment.
Due to rising demand for medical care by aging baby boomers and maturing millennials, a high demand for investment in medical real estate, and a flow of investment capital into this sector, it is a seller’s market. Prices are rising and it is expected that this trend will continue as long as interest rates remain low.
ASC real estate is considered less risky than other investments because the properties are anchored by medical practices and thus are worth a premium price. Medical facilities with long leases are trading at historically low cap rates and this significantly increases their value.
ASCs and MOBs are perceived as recession-resistant since the demand for medical care is strong in both good economic times and bad. According to the National Association of Real Estate Investment Trusts, at the height of the recession in 2008, health-care REITs fared better than all other sectors.
Typical of ASC sale/lease-back transactions is the recent sale of a surgery center in central Florida for $4.2 million to a national real estate company. This 10,500 sf ASC is owned by 12 surgeons and a strategic partner. With the ASC business returning a margin many times the margin on the real estate, the owners decided to sell the real estate and lease-back the ASC at the same rent they had been paying so there was no increase in expense. Additionally, the sellers wanted a triple-net lease so they could stay in control of the facility and their maintenance costs. The seller’s broker found a buyer who would not require personal guarantees on a long-term lease and sold the real estate for cash at a significant profit. A previous offer from a REIT had fallen through because the buyer insisted on personal guarantees of a long-term lease, a requirement that the physicians rejected.
Sellers who want to stay invested in real estate and shelter their real estate profits can take advantage of a 1031 exchange, an IRS-sanctioned transaction that allows the sellers of commercial real estate to roll over gains into a new project and defer 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), endoscopy 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.