May 25, 2022
Problem Identified. Solution Found.
FACT: Sale leasebacks enrich those doctors retiring before the term of the lease at the expense of every other doctor.
Could you imagine a world in which you could sell what isn’t yours and keep the money? How about an orthopedic surgeon who gets paid in advance to perform 20 knee replacements a year for the next 10 years and retires after five years, keeping the money while another surgeon takes those cases for free? It may seem ridiculous, but that is exactly what happens in almost every sale leaseback.
You need only ask yourself one simple question: if a partner retired from the practice and was bought out of the real estate, would the real estate entity continue to pay the retired partner distributions? If the answer is “no,” then read on.
How it Happens
For the sake of simplicity and this example, we will assume that the same doctors have equal ownership in the practice and the real estate. In a sale leaseback, the buyer pays the owners a specified sum in exchange for a series of monthly payments from the practice as agreed in a lease. The purchase price for that income stream is significantly more than what would otherwise be paid for the building without a lease. With equal ownership, the additional value created by the lease is received by each physician partner proportionate to their share of the ownership. The practice now has an obligation to make that stream of payments over the lease term. That arrangement is fair and equitable, so long as each partner who received the payment from the buyer is a part of the group making those payments over the lease term. Once a partner retires after receiving payment (or other benefits) for the full term of the lease, they are no longer contributing to the monthly rental payments for which they received compensation. They are also not entitled to their share of the premium received for the remaining period.
It may be easier to envision if one looks at this as debt. Think about a practice partner receiving a distribution from a loan that the practice has to repay and then leaves the practice early with the remaining partners responsible for the outstanding payments.
The Adverse Impact
In a sale leaseback, the retired partner(s)’ share of the burden has now fallen upon the remaining members who have not and will not be compensated for their new share of the payment. For the doctors remaining in the practice, it means that they have not received the commensurate premium due. This leads to a direct and possibly substantial economic loss. The reason is because if the building had not been sold and a doctor had retired, the portion of the rent received that would have gone to the retired doctor now goes to the remaining partners. That takes us back to the doctor who was prepaid for surgeries and left the practice early, leaving other surgeons to perform the work. A simplified example shows a group of 11 partners who enter into a sale leaseback with a 15-year lease. Five of the original partners leave at the end of five years and five new partners replace them. The reality is this:
The Rx - Sale Leasebacks Done Right
The good news is that a model has been developed that works to identify and correct the inequities so that every partner (retiring, remaining, and new) receives his or her proper share of the proceeds and no partners end up losing their full benefit by paying a departed partner’s obligation. Most importantly, it keeps the practice strong and improves the ability to recruit new physicians. Developed by CMAC Partners, the model accurately and impartially determines each partner's share by their commitment to contributing to the income stream that is being sold. Under this plan, partners who are committed to the full term of the lease will receive a full share and those committing to a partial term will receive that portion to which they commit. Provisions are made for changes in those commitments. The uncommitted portion can be managed in a manner that will assure the benefits of sale are realized by those paying the bill.