Part Two: Equity Strategies if You Own the Real EstateMar 04, 2021
At the risk of stating the obvious, real estate ownership builds equity over time. For many physician groups, there is a benefit to unlocking that capital which would otherwise stay in the building and putting it better use. If you own the real estate that you practice out of, a Sale Leaseback transaction can be a very useful tool for you.
For many physicians, real estate isn’t a core driver for their respective practices, so why keep all of that money stored into the building? If you see yourself operating at a location for years to come, don’t have a need to own the building you operate out of, and can put the cash that is locked up to good use either personally or professionally, a Sale Leaseback can be a profitable strategy. What it entails is selling the building you operate out of to a 3rd party investor and in turn signing a long-term lease with the buyer. Why are health systems, physicians, and surgeons doing this across the country? Why would you liquidate your equity? Some common reasons might be if you want to…
- Sell the building in a historically strong market typically anywhere between an 11x – 17x multiple on the rent
- Have the ability to convert 100% of equity into cash on whereas a typical refinance will only provide you with 65%-70% of the building value
- Have an alternative source of financing from bank that has a balloon payment at the end of the term; a sale leaseback is essentially an interest-only structure with zero balloon payment obligation
- To fund future expansion to build or acquire new locations for your practice
- Transfer those proceeds into other investment vehicles that will provide a higher rate of return
- Take those proceeds and re-invest back into the practice to fund marketing, improvements, new machinery, equipment, etc.
- Trade that capital into management-free real estate funds with potential tax deferral benefits
Sale leasebacks are a strategic option that should be understood by Owners as one possibility prior to selling the practice, or when a Buyer of the practice does not have interest in owning the real estate. Note: There are no shortage of firms that can list your real estate in the local market. The issue becomes finding the right one. You need one that knows how to procure the highest paying Buyers in the country without over-promising and under-delivering. Too often Sellers get dazzled by overconfident sale prices from a broker trying to win their business, only to have the property sit on the market for 12+ months with little or no activity. In construction there is a saying among the less ethical, “Win the bid, make it up in change orders”. This similarly applies to eager brokers capturing a listing with unrealistic promises, knowing full well that they will later greatly reduce the price in order to sell it.
Many real estate brokers who dabble in sale leasebacks, neither have the proper resources nor the knowledge of how to properly underwrite an accurate Broker Opinion of Value for an evaluation. They are limited in their experience and relationships to procure the highest price possible for your return of equity. As the Owner, you want the most comprehensive supporting data for what your property is worth. The stronger the justification of the purchase price, the less impactful negotiation you might expect on price from a Buyer.
Choosing the right advocate also affects the level of competition generated. Local agencies can work with you to list your real estate in an investment offering, but their reach is limited in capacity and exposure when compared with a firm that solely specializes in investment real estate.
Client Story: A Client contacted me to request a local market analysis of what his property would be worth. He was interested in taking the equity and using it to purchase his next practice. He wanted me to not only review what the local investors would pay, but also what the national market may offer in comparison with more sophisticated REITs and Trusts.
Bottom Line: We found that the local real estate investors would only offer a maximum price that would yield 11% return on their cash-on-cash investment. Whereas we found the more sophisticated buyers were offering as low as 7-8% return, resulting in over a $250,000 difference of value to the Seller.
What considerations attract the highest paying Buyers and value for your real estate?
- Length of lease term
- preferably 10-15 years
- Full term Guarantee
- This can be personal and/or corporate
- Strength of Guarantor (Net worth/value)
- Absolute NNN lease(s)
- Condition of real estate
- no anticipated capital expenditures
- Geographic location
- Rental Increases
- 2% annual
For an Owner contemplating a sale to extract equity, these are some of the key considerations for which to be prepared. If you are interested in reviewing your real estate value, call KLAS for a comprehensive Broker Opinion of Value for your real estate to assist in your decision-making process. You will be with a specialist in healthcare real estate.
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