It’s no secret the medical office asset class has become the darling of healthcare real estate. Viewed as a safe haven for capital amidst the current economic uncertainty, medical office buildings (MOB) continue to impress, showcasing upward performance since 2021.
National demographic shifts and upheaval due to the pandemic changed the landscape of healthcare delivery. MOBs deliver off-campus convenience for patients and are attractive income-producers for buyers and investors.
Brian Bruggeman of Colliers Healthcare was recently quoted in the Minneapolis/St. Paul Business Journal stating, “What’s appealing to investors is the high probability of lease renewal; tenants spend a lot up front to develop the buildings, so they’re less likely to move out. And those healthcare industry tenants tend to be well-established companies with good credit.”
As the MOB market continues expand, transactions structured as sale-leasebacks are emerging as a growing trend because of its distinct benefits for owners and investors.
What is a Sale Leaseback?
A sale leaseback is a transaction type that occurs across most all commercial real estate sectors, including retail, industrial, office and more.
In most healthcare real estate scenarios, a sale leaseback is when a physician group who owns the MOB sells to a third party, such as a Private Equity group or REIT. Then, as the name suggests, they then lease it back from the new owner for a stipulated period of time with specified lease terms.
The Advantages of a Sale Leaseback for Owners
If looking to sell, considering a sale-leaseback scenario can deliver several key advantages for the current owners.
As MOBs continue to thrive, a sale leaseback transaction can effectively reduce risk by allowing owners to capture their property’s current value now, versus sometime in the future when market conditions are unknown and may be less favorable. This is a major factor right now for many, as current interest rates and economic instability may continue to worsen and hamper cap rates.
Renting back from the new buyers also has tax advantages. When leasing a facility, the medical tenant can write off 100% of their lease payments, rather than only writing off the interest portion of the loan.
By selling, owners can quickly eliminates debt and can free up operating funds or fuel growth for their practice, and leasing it back allows “owner-occupiers can remain in place and continue business operations without disruption,” according to Commercial Property Executive.
What’s Attracting Buyers
On the flipside, sale-leasebacks also offer many benefits from an acquisition standpoint. MOBs have continued to be safe bet for investors during this volatile market. For example, OrbVest aggressively expanded into medical office real estate in 2021 with 10 acquisitions. And Forbes summarized MOB’s appeal as: “The demand for these properties is ceaseless due to their resilience during economic slumps.”
What’s more, the sale-leaseback structure means the new owner doesn’t have to go searching for tenants – the occupancy is immediate, and likely more reliable due to previous ownership.
Among investors, single tenant is higher in demand, as they’re simpler to manage and ensure occupancy with one tenant. When considering what may increase the value or attractiveness of a certain property to investors, many factors come into play: location, lease terms, building size, size of practice, practice financials, the average doctor age, its patient coverage area and more.
As the medical office sector continues thrive, it’s likely the sale-leaseback transaction type will follow a similar trajectory as more owners and investors recognize its unique benefits.