May 25, 2022
Maybe I’ve been watching too much daytime television but it seems like Tom Selleck is always on and telling me why, at my age, I should think about a reverse mortgage. I can take a chunk of money now and then continue to live in my home. Sound familiar? Maybe that’s because the reverse mortgage concept is really not far off from that of a sale leaseback. Reverse mortgages can be the right answer at the right time – and so can sale leasebacks.
There is a 9-letter word that will give you the correct answer to the question of whether you should sell or hold. The word is DIRECTION. The decision to sell or hold really isn’t that difficult once you understand your ideal direction.
A sale leaseback tends to favor the physician partners who will be retiring at or before the lease term. Conversely, it becomes a detriment to those remaining in the practice when others retire. New physicians will be discouraged from joining a practice that is saddled with excess overhead stemming from a lease that enriched only their predecessors and has ballooned to over-market rates through escalators it no longer controls.
If your practice has reached that point in its lifecycle when it has stopped growing and is most likely to either be absorbed or disbanded within another lease term, it might very well be an appropriate time to consider a sale leaseback. This can produce immediate income and resolve any concern about selling or refinancing the building at a future date without a lease in place.
If the practice, however, is still in growth mode or is of a younger demographic, a sale leaseback is probably the wrong move as it would hinder growth and create excessive lease costs. There would be no commensurate benefit of rental income to the younger partners.
It is estimated that “rent rolldown” on sale leasebacks is likely to average nearly 20 percent. Rent rolldown is the amount by which a contracted rental rate must be reduced to align with market rents. Let’s convert that to a real-dollar example. Take a group that enters into a 15-year lease at a market rate of $25 with three percent annual rent escalations. By the time that lease terms, the group will be paying a premium of more than $227,000 in the last year alone and some lesser amount each year leading up to that term.
That’s not to say that you couldn’t enter into that same lease while owning the building but, in that scenario, those premium rents go right back to the partners.
Groups that fully understand how a sale leaseback can help them reach the goal which best identifies their DIRECTION will be in the best position to reach the right conclusion.