April 24, 2017

Deals Look Sweet but Leave Too Much on the Table

“UPON FURTHER REVIEW”. It’s a commonly heard sports refrain that is being echoed in the halls of MOBs, ASCs and other physician owned properties: when things are slowed down so that a closer inspection can be made, physician-owners are finding that they would be better off in the long run by holding on to their property and taking advantage of improved cash flows and increased asset value arising from the same leases required by the REIT under the provisions of sale. 

Recently, a physician-owned orthopedic group in the Southeast was offered in excess of $25 million for its real estate.  The doctors, who stood to make more than a 400% return in 5 years immediately said “YES”… then (upon further review) they said “NO”!

This group looked at a model and found that if they held the property even just another thirty six months with the new lease, they could increase the after-tax benefit by another 35% (see chart).  Additionally, there were other downsides with respect to loss of control and loss of recruiting leverage that would have impacted the owners. Here’s a closer look at those three reasons:

The Economics

While the REIT sale would have put more money in the partners’ pockets immediately, it would require the execution of a new long-term lease. The combination of the new lease terms and the availability of low cost financing would result in a substantially improved cash flow. The lease increases also meant that the value of the property would continue to rise, even considering a higher cap rate expected with higher interest rates. What they found, is that a later exit strategy would mean substantially more after-tax dollars in their pockets. The MedVest model developed by CMAC and employed by the group’s CPA showed that even with a 2-year hold under the new lease terms and a sale (of any individual investors ownership interest) at a less aggressive cap rate, there would be an improvement of several million dollars. The MedVest model is available to any CMAC client and, in this case, the outcomes of this specific case are shown below.

Group Recruiting Tool

Today, more groups are realizing that physician ownership in their own real estate provides substantial additional passive income to the partners and can be a significant determinant in the decision of where a doctor chooses to practice. While it is prudent for every owner to have an exit strategy, that strategy should involve the sale of the partner’s individual interest and does not have to involve the sale of an asset that the other investors depend upon for future income.

Facility Control

The intangible benefit of controlling the facility from which you operate your practice is of immeasurable value. What is right for the operation and will result in substantial additional income, is not always the right economic outcome for the real estate. By owning your building, you will be able to make the best decisions that will result in the maximum benefit for the practice and the partners.