Blog | Understanding the Medical Office Building (MOB) Sale-Leaseback and its Advantages

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Blog | Understanding the Medical Office Building (MOB) Sale-Leaseback and its Advantages



Understanding the Medical Office Building (MOB) Sale-Leaseback and its Advantages


A medical building sale-leaseback transaction can often be overlooked, but it is a great alternative to conventional financing for medical offices looking for an infusion of capital into their business or due to the life cycle of a practice. Let’s take a look at what a sale-leaseback transaction entails and why this is a great option for the medical practices.


What is a sale-leaseback?


The basic structure of a sale-leaseback is just as it sounds: a seller sells its property and related improvements and then leases them back via a long-term lease with the buyer. For most, a sale-leaseback will have initial terms of 15-25 years, often with several options for lease extensions.


Why does it work for medical buildings?


For many developers and owners of medical office buildings, continued increases in operating costs have made cash difficult to come by. With new IT and equipment expenses, electronic medical record requirements, rising employee salaries and increases in insurance premiums, many are searching for an infusion of capital —which can be found with a sale-leaseback.


A sale-leaseback is an ideal way to recover the capital that was spent on the purchase of the property and improvements, all while continuing to occupy the property via a long-term lease. It can also provide tax advantages and is an alternative to conventional financing.


And, it’s not just medical buildings that are seeing success. Sale-leasebacks are increasing in popularity among retailers, restaurants, banks, gas stations, distribution centers and more.


Is a sale-leaseback right for you?


If you’re considering a sale-leaseback of your medical building, it’s important to compare the benefits of the sale-leaseback to that of conventional financing. What’s more, you should also understand the level of control that you’ll maintain over the property in your new role as a lessee. This includes the ability to sublease the property, if needed.


Some of the potential advantages include:


  • Economic benefits – With conventional debt-financing, terms are typically 10 years or less, whereas a sale-leaseback often has initial terms of 15-20 years, with optional extensions worked into the deal. This allows you (the new lessee) to know your operating costs for the foreseeable future; and, for some, these fixed rental payments are structured as net-zero deals where the rent is equal to the amount of debt service paid by the buyer. With traditional financing, it typically holds a loan-to-value (LTV) ratio of 70-80% —so the entire value of the property and improvements is not monetized. With a sale-leaseback, 100% of the capital can be monetized.


Additionally, in some instances, recourse financing with a personal guaranty may have to be incurred by the physician’s, which can create a hardship on their personal finances outside of the practice, which can be especially problematic for younger physicians who may have substantial student loan debt obligations in addition to this. In a sale-leaseback you eliminate this potential hurdle, which can also help in attracting new talent by keeping practice “buy-ins” low.


  • Tax benefits – If you’re planning on using the proceeds from the sale-leaseback transaction to buy a similar type of property (perhaps you’re expanding your practice), you may be able to take advantage of a capital gains tax deferral via a 1031 Exchange. In addition, there are some creative structures that exist whereby the physician group can maintain a smaller ownership in the real estate, thus reducing the amount of taxable income they may have on a sale.


  • Operational benefits – With a sale-leaseback transaction, you’ll likely retain nearly full control over the property. This often means greater rights for alterations, operations and change of use/occupancy. With conventional financing, these can be heavily regulated and require lender approval.


  • Practice life cycle – In larger private practice groups, a conundrum exists when you have older physicians retiring and newer physicians coming into the practice. This can create misalignment between the two groups, when it comes to retiring physicians concern over return on the investment in the real estate vs. the younger physicians worrying about rising occupancy cost. If a Sale-Leaseback is completed and structured correctly, then you can level the playing field on these two issues.


Is your property right for a sale-leaseback?


There are many factors that make a medical property appealing to investors. Deal terms (ex: long-term, triple-net leases), property location, strong financials and the tenure of the medical staff are just a few of the items that investors will consider. Medical Office Building values are at an All-Time HIGH and with interest rates rising, this will negatively impact these high valuations. The timing may be right to look at a potential sale-leaseback of your facility, but it may not make sense in every case. As with all complex real estate transactions, if you’re looking to sell, having the advice and guidance of an experienced broker can mean all the difference to your success.


Connect today to learn more and to discuss the specifics of the market and your property.



By Micah McCullough, CCIM, SIOR

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