Medical Center Sale/Leaseback Investment Deal

Coldwell Banker Commercial, Sun Coast Partners, is pleased to announce the sale/leaseback of 608 Dawson Street in Wilmington, NC.

The Dawson Street Urgent Care and Medical Center was sold in April for $1.3M.  The details of the leaseback were not disclosed, but the practice plans to remain in place at least until the end of the lease term.

Hank Adams with Coldwell Banker Commercial, Sun Coast Partners (CBCSCP) was the listing broker, and Mark Johnson & Janet Rose, also with CBCSCP represented the buyer.  Dawson Street LLC was the purchaser; a group that has investments in multiple states, and this is their first investment in downtown Wilmington.

A sale/leaseback is often considered by physicians who own their real estate.  There are several advantages to selling their Medical Office Building (MOB) and leasing it back from the new owner.  Aside from the obvious benefit of proceeds coming from the initial transaction, the lease payments can be deducted in their entirety from their yearly taxes.  To further defer taxes, the seller could invest in a 1031 exchange, deferring capital gains to some point in the future.  Another less-known IRS tool is the 721(a) – this can be especially helpful if the transaction involves a large physician group, such as EmergeOrtho, that closed on a sale/leaseback in 2016.

Generally, a medical sale/leaseback is very attractive to investors large and small.  They are considered to be stable, long-term-hold assets.  Often, a small/medium investment firm will collect several properties, and then sell the entire portfolio to a REIT (Real Estate Investment Trust) at a premium.

Some buyers will allow the seller to reinvest a portion of their proceeds back into the property, and possibly even co-invest with them in the future on other deals.  As Mark Johnson with CBCSCP said, “the internal rate of return (IRR) we’re seeing since 2009 has exceeded 35% annually on these types of investments.  Even with the financial crisis included, going back to 2006, the IRR is still about 20% annually.”

CBCSCP has completed several other medical sale/leaseback transactions, ranging from just over $1M to well in excess of $30M.  Another undisclosed local specialist practice is currently under contract and will close by the end of June.

With a pause in interest rate hikes, it appears that cap rates will stabilize at historically low levels, keeping the potential sale price of medical properties at an all-time high.