Today, physician-owners and executives are inundated by companies who want to partner with your surgical facility or group practice. There is more demand than ever for successful healthcare practices and surgical facilities.
When considering a potential strategic transaction, sellers often do not consider the real estate and the current lease. This is typically because the physician-owners of the real estate may not be seeking a sale-leaseback at the onset of the strategic transaction or know that a poor lease could lead to a significant reduction in real estate value. Typically, strategic partners, private equity and hospital systems are not interested in purchasing the real estate and the current lease may barely come up in negotiations.
However, before you get deeply engaged in negotiations to sell an interest in your surgical facility or practice to a strategic partner, if you own the real estate it is critically important that you look closely at this valuable asset so as to protect you and your partners from unexpected conflicts originating from the real estate. Plan ahead so that you don’t leave money on the table.
Here are 10 reasons to review your lease and consider a real estate sale-leaseback prior to a strategic transaction for your practice or medical facility:
- The value of your real estate depends on your lease and your new business partner may not allow you to modify the lease after the strategic transaction.
- A review of your lease may show that the lease terms are not in line with market terms and conditions, which could lead to future conflicts with your new partners.
- Selling your real estate prior to a strategic transaction removes potential conflicts regarding your real estate with your new partners.
- Removing real estate from a buy-in makes it easier to add new physician-partners to your business, and new partners will increase the value of your business.
- Selling your real estate can clear your balance sheet of debt, providing for a better price for the business sale.
- Real estate buyers can pay for building expansion/renovations and additional MOBs to help fund growth and increase your business value.
- Analysis of your lease will confirm if the rent terms represent fair market value. If rent is below FMV, consider raising the rent to increase the value of the real estate.
- You have the opportunity to lower the rent to increase the EBITDA, resulting in a higher strategic sale price. A lower rent will have long-term benefits for the business.
- A real estate sale can allow you to diversify into revenue streams that provide a better return on investment than your medical real estate, and free you from paying high income taxes on your rent.
- Real estate brings the highest valuation in a sale when you have a new long-term (10-to-15 year) NNN lease.
Choosing and moving forward with a strategic partner or acquirer can increase the value of your medical real estate value and eliminate the need for personal lease guarantees. The current lease is often an afterthought to a merger or acquisition. However, it can greatly impact the business operations in the future if it is not fair market value or does not fit into the long-term plans for your business.
Having your real estate and your lease reviewed by experts does not take the focus away from a strategic transaction. Modify your lease or selling your real estate can often add additional value or enhancements to a strategic transaction.
A strategic transaction is a complicated process best handled with the guidance of experienced strategic advisors, attorneys, and accountants. The timeline on this transaction may be 12-18 months depending on the intricacy of the business details and variables. A real estate sale process typically closes within 4-6 months of the initial listing and commencement of the competitive process. Removing the real estate and lease from the strategic transaction in the beginning of the process often removes an additional complexity from the business sale.
A lease review and real estate valuation can be performed with a nominal cost or, depending on the type of review and valuation, can often be provided by real estate experts at no cost to the physician-partners.
Whether physician real estate owners decide to move forward and sell their real estate prior to a strategic transaction or decide to keep the real estate under a lease that best fits the long-term needs of their business, they can put themselves in a better position by knowing all of their options.
