Project Overview
Medical Office Building (MOB) sale/leaseback
Two of our brokers, Mark Johnson and Janet Rose, specialize in Medical Office Building (MOB) sale/leasebacks. In recent years, they’ve closed well over $100M in transactions and have the typical process down to a science. While they work with several groups that purchase MOBs, they use one group most often because they are the largest private MOB investment firm in the US. They’re creative, flexible, extremely well funded, and not subject to the same restrictions that many REITs are governed by.
The Challenge
Incentivize the team at Jordan Young to agree to a new, much longer lease
The brokers sourced an orthopedic building in Virginia Beach, but this time it wasn’t a simple sale/leaseback. Usually, they find physician-owned buildings and the medical group that is selling the property will become the Tenant. These transactions are generally very simple and quick to close – usually within 60 days start to finish. But this time, a developer owned the building and Jordan Young was the Tenant. Their existing lease was fairly short, reducing the value to a potential investor. To be considered “investment grade”, a lease needs to have at least a 10-year term if not longer. But from the Tenant’s perspective, a shorter term with renewals is preferable – really no reason for them to change the lease term to help out the building’s owner. Johnson and Rose knew they had to come up with a way to incentivize the team at Jordan Young to agree to a new, much longer lease.
The Solution
Co-Investing and new lease term
In this particular situation, the developer/building owner was willing to let Johnson and Rose make a presentation to the physician group directly. What the brokers learned from that interaction was that the physicians were open to a new lease term, given that they could see some economic benefit. The buyer was willing to pay them a substantial fee at closing, which was of course of interest to the physicians. But frankly, the brokers needed something more to convince them. In a typical sale/leaseback scenario, the physician group is offered a chance to reinvest in the asset. This helps defer capital gains tax, historically produces up to a 35% annual Internal Rate of Return (IRR), and also allows them to receive their pro rata monthly cash flow. But in this case, the physicians didn’t own the building. Luckily, the seller was convinced not to reinvest, and this allowed the physician group to co-invest with the buyer at 30% of the equity going into the deal. They were also given a Right of First Refusal (RoFR) for space currently occupied by another tenant in the building, which was important to Jordan Young as they were still a growing practice.
The Result
Investment Grade Property
The property was sold with a new 12-year lease in place, making the property investment grade – and boosting the sale price dramatically. The physician group was paid a handsome fee at closing, and the individual doctors invested over a million dollars into the asset. This same physician group will have the opportunity to continue to invest with the buyer in larger portfolios of MOBs, making this a transaction that will continue to have positive financial results for years to come. A true win-win for everyone involved.