As the strong fundamentals underlying the medical office real estate sector have attracted more investors, physicians are increasingly receiving inquiries about selling the buildings they own and where they practice. As they consider their options, physician groups would do well to avoid several common misconceptions.
In a session sponsored by Montecito Medical Real Estate at the Becker's ASC Review and Becker's Spine Review 19th Annual Spine, Orthopedic and Pain Management-Driven ASC Conference, Tyler Rhoades, Montecito’s Director of Acquisitions, and Rus Gudnyy, Senior Vice President of Investments, led a discussion of factors physician groups should consider before entering a real estate transaction.
Among the key takeaways:
- Appraised value ≠ market value. The market for medical real estate is not immune to changes in the broader economy, and rising inflation and interest rates are having second-order effects on pricing and market expectations.
- The “young doc vs. older doc dilemma.” Succession planning is a key part of the equation, and a real estate transaction can be a great way to align interests of younger and older physicians. Practices often must balance the need to cash out retiring physicians with the priorities of younger colleagues. The calculation will vary based on the group’s composition. For example, cautioned Mr. Gudnyy, “If you have a lot of doctors that are all looking to retire, that's probably not the best time for selling real estate, because [potential investors] are going to look at that and say, 'Who's going to run your practice?'”
- Lease terms affect your building’s value. Long-term leases at market rental rates and annual increases mean reliable, secure income streams to investors, who are willing to pay more upfront for properties than for buildings without such leases in place. Long-term leases also can provide certainty for younger physicians as long-term leases provide a relatively more steadfast projection of future occupancy costs for the practice.
- There are several considerations besides price. For example, Mr. Rhoades said, “physicians should think about their group’s capital needs.” Does the practice need more operating capital? Are there growth plans (or aspirations)? Is it important to retire debt (or avoid additional debt)? Montecito assists physicians with these questions every day.
- Selling doesn’t have to limit expansion capabilities or mean loss of control. As Mr. Rhoades showed in a case study, one large physician group opted to sell part of its real estate portfolio to buy additional property for expansion and for the benefit of its younger members while meeting the needs of physicians ready to retire. Similarly, with the right partner, physicians can maintain a share of ownership in (and control over) the property after a sale — and continue to receive monthly income from the building(s).
- “Everything’s great! Why sell now?” This mindset, Mr. Rhoades explained, is a frequently heard objection to selling — one that may hinder medical office owners from accurately assessing whether the time is right to monetize their buildings. It’s also important to keep a pulse on current market conditions as rising interest rates in the future might have a negative impact on succession planning if your plan is to refinance to cash out retiring partners. As a company that has partnered with provider groups since 2006, Montecito is distinctively qualified to help evaluate practices particular needs and help them assess their options and opportunities.
If you are interested in learning whether the timing is right to monetize your medical real estate, contact us to speak with one of our experts.