Many physicians who own their ASC and MOB real estate may be considering a sale-leaseback of their ASC/MOB real estate to take advantage of the increase in value of medical real estate.
Due to the long-term success and profitability of surgery centers, excellent credit history and rent coverage, and the likelihood that the ASC/MOB will remain in the same location for many years to come, ASC/MOB real estate has become very attractive to real estate investors. This is reflected in the current competition to buy and leaseback ASC/MOB real estate and the high multiples of 14X to 16X rent being offered. Sellers can realize high selling prices, no change in rent, and retention of control through NNN leases.
Seven common mistakes made by sellers of ASC/MOB real estate
Here are 7 common mistakes made by sellers of ASC/MOB real estate and some tips for maximizing the value of your real estate:
➢ Mistake #1: Rent is too low. ASC/MOB owners often charge themselves below-market rent in order to maximize the EBITDA of the ASC business. Rent is a primary factor in determining the value of ASC real estate. Fair market NNN rent for ASCs averages $30 to $40 per sf, or sometimes more, depending on location. The multiples for the sale of real estate are significantly higher than the multiples for the sale of the ASC business. With a CAP rate of 7% the buyer is paying a 14.3X multiple. Increasing the rent to fair market value will result in an increase in total value of ASC assets.
➢ Rent is too high. The opposite side of the coin is charging yourself rent that is above fair market value (FMV). While this may show a high value for the real estate on paper, when it comes to selling an interest in the ASC business to a strategic partner, rent that is above FMV can negatively impact the strategic deal. Most buyers of the ASC business will require that the rent be within the FMV range.
➢ Mistake #2: Selling ASC business before improving your lease. ASC owners should modify the ASC lease prior to soliciting offers to sell a controlling interest in their ASC business as they most likely will not be able to alter the terms of the lease after the strategic sale. Prior to marketing their ASC business, owners should ensure that the rent is FMV. The lease term should be 10-to-12 years plus renewal options and be triple-net (NNN) to maximize the real estate value.
➢ Mistake #3: Using a local broker. Local brokers who do not specialize in ASC/MOB real estate typically lack the knowledge to be able to advise on a lease that will both maximize the value of the ASC real estate sales price and the ASC business. In addition, they usually market to local buyers. Most often there are few local buyers who are educated on the value that ASC real estate represents. Brokers who have a network of well-funded national buyers will bring in higher offers in less time. Sellers should engage a broker who already has buyers for your ASC property.
➢ Mistake #4: Not obtaining competitive bids: Brokers with national buyers will solicit and leverage multiple competitive offers to get the sellers the highest price. Sellers will always get a better price and terms when multiple national buyers are submitting competing bids. Sales should be made when there are multiple buyers seeking to buy ASC/MOB real estate, which is currently the case.
➢ Mistake #5: Partnering with a strategic partner that will not agree to a long-term lease. Some ASC management companies and private equity companies will not allow leases of more than 5 or 7 years. This will greatly reduce the number of buyers interested in the ASC real estate and will lower the value of the real estate. In extreme cases, the ASC real estate may not be saleable.
➢ Mistake #6: Not reading or understanding the sales contract and/or buyer’s lease: Often there will be onerous terms in the sales contract or lease that create significant difficulties for the sellers after the sale, such as frequent reporting requirements, restrictions on how distributions are made, or controls on what benefits and expenses the sellers may incur. It is important that the sellers utilize a broker who will advise them on terms of the sales contract and lease that should be removed or negotiated.
➢ Mistake #7: Waiting until too late to sell the real estate: Timing the sale of both the ASC business and the ASC real estate is critically important. The sales should be made when the physician-owners are still young enough to have 10 or so years left to practice. Otherwise the buyers will begin to discount the cases the physicians will bring as they approach retirement. At a certain point, unless there are succession and recruiting plans in place, the value of both the ASC business and the ASC real estate will decline. In addition, the sale should be made before a strategic transaction is initiated as after the sale of a majority interest in the business the sellers will have little or no ability to modify the terms of the lease.
Notes:
- Fair market value for ASC NNN rent averages $30 to $40 per sf, and up to $50/sf in some locations.
- CAP rates vary between 6% and 7% depending on location and lease terms.
- Current multiples of EBITDA for controlling interests in ASC businesses are 7X to 9X EBITDA, averaging 8X for in-network ASCs. ASCs that specialize in Ortho & Spine procedures generally command higher multiples.
- Real estate sellers may use a 1031 exchange to defer capital gains taxes and use the sales proceeds to reinvest in one or more income generating properties.
ASC physician-owners can obtain fair market value rents, current cap rates, and valuations for their ASC business and real estate by contacting Jon Vick at 760-291-7745 or JH Winokur Inc. at 914-216-3574.
Since 1998 we have advised ASC physician-owners on development, merger, and strategic acquisition transactions for over 300 physician-owned ASCs, endoscopy centers (ECs) and surgical hospitals. ASC/MOB real estate expert and broker JH Winokur, Inc. specializes in ASC, MOB and Surgical Hospital real estate sales and sale-leasebacks, property valuations and 1031 exchanges.
