This article is written by Jonathan C. Vick, the founder and President of ASCs Inc.Over the last 30 years we have advised hundreds of surgery and endoscopy center owners on how to maximize the value of their centers by forming strategic partnerships with leading ASC management companies and hospitals. During this period we have met many physicians who own their ASC/MOB real estate and who, at some point in their careers, have an interest in selling the real estate to free up cash and realize the increase in value.
The market for selling medical real estate is currently excellent and there are multiple buyers interested in bidding on good quality properties. The potential buyers include health REITs (such as HCP Inc., Ventas, Inc., Healthcare Realty Trust Inc., National Health Properties Inc., Health Care REIT Inc.), private equity firms and real estate investment companies.
What makes a "good quality property"? Most buyers want to invest in properties of a certain scale, usually the larger the better. In most cases properties of 10,000 square feet or more will elicit the most interest and will attract buyers with the most capital to invest. Location, of course, is important with properties in affluent, highly populated areas being the most attractive, although we have seen fully leased properties in small towns attract excellent offers. Fully leased properties, with tenants that have profitable businesses and a good balance sheet are most attractive to buyers. It is also important is to have tenant lease guarantees as this reduces the buyer's risk. Most important is to price the property at fair market value based on a rent that will generate a return for the buyer that makes the real estate an attractive investment. Today most real estate investors want to buy at a price that returns 8 percent to 9 percent (cap rate) on their investment.
Here are three suggestions for maximizing the value of your medical real estate:
o Establish your rent at the highest possible fair market value rate. The value of medical real estate is determined by the rental income so the higher the rent the more valuable your property. But rent must be fair market value so don't set a rent that is higher than any comparable property in the market.
o Leases should be triple-net (tenant is responsible for net real estate taxes, net common area maintenance and net building insurance, i.e. "triple net"); leases should be for 10- or 12-year terms with two five-year options to renew; lease should include 3 percent or CPI "bumps" each year; most importantly – leases should be guaranteed by the tenants.
o Timing: If you need to rewrite your lease to include these terms do so before you partner with an ASC management company or a hospital. While it is very beneficial to have a deep-pocketed corporate or hospital partner as a guarantor of the lease, it is very difficult to get your corporate partner to agree to a higher lease rate and other terms that will increase the value of your property after the partnership has been formed.
Here is an example of a recent (2013) ASC real estate transaction that we advised on and found buyers for:
o Location: rural town (population 12,500; market area 50,000)
o Description: freestanding 11,500 sf ASC with three ORs, one PR on two acres
o Ownership: 49 percent by nine surgeons and a corporate partner, 51 percent hospital
o Annual rent: $470,000
o Lease terms: 12-year term, two five-year options, triple-net, 3 percent annual bumps, ASC guarantees the lease
o Number of competing bidders: two
o Purchase price: $5.5 million
o Buyer: real estate investment company
The market for medical real estate is currently excellent with numerous buyers seeking good quality properties. If you have been thinking about selling your ASC/MOB real estate this is an opportune time to seek purchase proposals. We recommend obtaining bids from at least two potential buyers so that you have negotiating power, and that you work through a broker who specializes in medical property and who will discount the brokerage fee to 2 percent to 4 percent of the selling price.
Jonathan C. Vick, the founder and President of ASCs Inc., has assisted in development, merger, and strategic acquisition transactions for over 250 physician-owned ambulatory surgery (ASCs), endoscopy centers (ECs) and surgical hospitals since 1984. He founded and was a principle shareholder of SurgiCenter Development Corporation (90 ASC partnerships) in 1984 and Endoscopy Center Affiliates (20 Endoscopy Center Partnerships) in 1994. He participated as a corporate partner for a national network of surgery and endoscopy centers that was acquired by a national ASC management company in 1995. Mr. Vick has a B.A. from Hamilton College, an LL.B. from La Salle University and is a licensed real estate broker. He has extensive experience in ASC and EC sales, development, business planning, operations, valuations, and strategic mergers & acquisitions. He can be reached at 760-751-0250 or at e-mail: jonvick2@ascs-inc.com. More information can be obtained at website: www.ascs-inc.com
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