Laura Dydra, the editor-in-chief of Becker’s ASC Review, sat down (remotely) with Jon Vick, the founding partner of ASCs Inc., and Jason Winokur, a healthcare real estate expert and broker and a partner at JH Winokur, Inc., to discuss what they are seeing today in the ASC real estate market.
LD - What is your sense of the current ASC Real Estate Market, especially since Covid-19 began?
JV – COVID has fueled an acceleration in medical property sale values and demand, especially in sale-leasebacks of ASC/MOB property. Due to the COVID pandemic and the closing of many retail businesses and weakness in hospitality and general office, healthcare real estate is currently preferred by real estate investors. The buyers of commercial real estate are looking for safe, low-risk investments and find that ASC/MOB property meets this criteria. They are rotating their capital from general office, retail and hospitality into medical real estate assets. This means that there are more buyers seeking to invest in ASC/MOB property and this increased competition results in higher selling prices. Additionally, towards the end of the year there are many buyers with capital they need to commit prior to year-end and this further increases the demand for ASC/MOB property resulting in higher prices being offered.
LD – Why would an ASC owner consider selling their Real Estate?
JW – Many owners of medical real estate do not realize how valuable their property has become. Due to the long-term success and profitability of surgery centers and medical clinics, excellent credit history and rent coverage, and the likelihood that the businesses will remain in the same location for many years to come, ASC real estate has become increasingly attractive to real estate investors. This is reflected in the current competition to buy and leaseback ASC real estate and the high prices being offered. Sellers can realize high selling prices, no change in rent, and retention of control through NNN leases. ASC and MOB property owners are paying ordinary income tax on the rent they are receiving so their effective ROI is likely in the low single-digits and is not likely to increase with small annual increases in rent. Physician-owners are usually better off financially by selling their property and reinvesting in a higher yielding investment, or doing a 1031 exchange and deferring taxes.
LD – It sounds like now may be the right time for many owners to sell, can you expand on that?
JW - Healthcare property valuations are currently historically high. The low interest rate environment allows real estate investors to borrow funds at a lower cost and to increase the price they are offering for ASC/MOB property. Low interest rates lower the “CAP rate” which increases property values. However, this can change due to the great uncertainty and unknowns we currently face. The national debt and current issues with the overall economy could lead to an increase in interest rates and Covid-related economic issues could eventually lead to a higher than expected jump in interest rates as stimulus program costs come due. The election also brings uncertainty and under a new administration the capital gains tax may increase or gains could be taxed as ordinary income. In light of this, now is a good time to sell your ASC real estate and avoid all these potential risk factors that could negatively impact the value of your ASC real estate.
LD – For an individual seller, aside from now being a great time to sell, are there other timing issues?
JW – When you have a “Seller’s market” such as now, there are always timing risks in waiting. If/when interest rates increase the CAP rates will increase thus lowering the prices offered. The older the average age of physician-owners, the less attractive the ASC business, which is usually the guarantor of the long-term lease. Sellers will receive the highest-priced purchase proposals when their healthcare business is generating sustainable profits, and the average age of the physician-partners promises long-term continuation of the business.
LD – What are some keys to a successful real estate transaction?
JV - Engage a brokerage firm that has a successful track record in advising owners of healthcare property on lease terms that are attractive to buyers, can produce a professional marketing package, market to a large number of national buyers, negotiate among the buyers to arrive at the highest offering price, and advise on how to minimize or remove personal guarantees of the lease. In every transaction that we advise on we assist the sellers in maximizing the total value of both the ASC business and the real estate. The knowledge and experience that we bring from strategic sales enables us to help the sellers position their real estate for maximum value without impacting a potential strategic transaction.
LD – Final thoughts or advice when it comes to what physician-owners should consider regarding a potential real estate transaction?
JW – There are a number of items that are present in every successful ASC real estate transaction and a process that only someone who has extensive experience in ASC sale-leasebacks will know to employ:
- Owners should optimize the lease terms and adjust the rent prior to selling a controlling interest in their businesses, and sell the real estate while they still have majority control of the businesses. The sellers must be careful to not get locked into a long-term lease at unfavorable rates. After a sale of the ASC business, the owners most likely will not be able to modify the lease terms.
- If you have already sold a controlling interest it is still possible to negotiate an attractive sale-leaseback, but you should select a brokerage firm that has experience in negotiating lease terms with incentives that make your strategic partner want to renegotiate the lease. Real estate buyers usually do not require personal guarantees if the business has a strategic partner.
- Rent should be fair market value (FMV) which typically is $30/sf to $40/sf NNN for ASCs, and market rate rent for offices/clinics. The higher the FMV rent, the higher the selling price.
- Lease terms should be 10 - 15 years plus renewal options, and be triple-net (NNN) to get the best price and most offers, and leave control in the hands of the sellers.
- Sales should be made when interest rates are low and there are multiple buyers competing to buy ASC/MOB real estate, which is currently the case.
- Sellers should engage a broker who has national buyers for your property. National buyers tend to have funds available to deploy, and tend to leave more control in the hands of the sellers. Ask to see a typical “marketing package” and a summary of previous healthcare real estate sales.
- Obtain competing purchase proposals: sellers will always get a better price and terms when multiple buyers are submitting competing bids.
- Sellers can take advantage of a 1031 exchange to defer taxes and provide tax-free use of the sales proceeds to reinvest in one or more income-generating properties.
Since 1998 ASCs Inc., has represented the physician-owners of over 250 ASCs, endoscopy centers and surgical hospitals on sales, merger and acquisition transactions and sale-leasebacks of their real estate. ASC/MOB real estate expert and broker JH Winokur, Inc. specializes in medical property real estate sale-leasebacks, and property valuations and has managed over $2 Billion in transactions.
ASCs Inc. (www.ascs-inc.com) can be reached at 760-751-0250 (CA) or 203-733-8818 (CT).
JH Winokur, Inc. (www.jhwinokur.com) can be reached at 914-997-9200 (NY)