Monetizing the MOB (Medical Office Building) –New Approaches Emerging

As capital demand for new technologies and the need to be competitively equipped persist, healthcare systems are once again grappling with the idea of selling, or monetizing, their non-core assets to third parties. And at the top of everyone’s list is the medical office building (MOB) –to sell the MOB to a third-party leasing and/or property management firm. This isn’t anything new, but it’s one of the ideas that keeps recycling. In fact, and in addition to hospitals and health systems, many large physician groups that had previously elected to own their real estate are now cashing out. Now that they’re signing up with the local hospital, they’re discovering that for either regulatory, business or strategic reasons, they’ve got to sell. As said, monetizing the MOB is a recurring, short listed idea for creating liquidity, but only 10% of the providers out there have done it so far. Why? Little did anyone know that when the Greenville Hospital System in South Carolina sold 16 medical office buildings (MOBs) to an investor back in 2009, that would be pretty much it for the next several years.

Again why? How difficult can assessing a lease versus buy option genuinely be? There really aren’t great answers here. An obvious observation we can make is that a healthcare provider is often and typically the largest tenant in most buildings, so the math just doesn’t work. The sales pitch from would-be investors/buyers inevitably tips toward arguments about provider opportunity cost –because the merits of the deal just don’t stand up.

There is, however, a relatively new structure for real estate transactions in health care that is known as Credit Tenant Lease (CTL) financing. This structure has been utilized in other industries for years, but has only recently found its way. Essentially, CTL financing is an alternative to the tax-exempt bond market, or the other structures described earlier. It provides up to 100% financing for existing and to-be-developed projects at extremely attractive, long-term fixed rates—at or near what could be achieved in the tax-exempt market. This structure works best for single tenant, core facilities which the health system expects to occupy for an extended period. It can be used to monetize existing facilities or for new development projects. The financing rates associated with these transactions are currently far lower than a comparable sale-leaseback.

For providers who are constantly playing catch-up –and have good credit– CTL financing may be worth a look.

Source: Realty Group

—Tom Finn

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