As a physician-owner of your medical real estate, it is important to understand the factors that can impact the value of your building. Additional variables arise when partners have varying interest in the practice and the building it operates in. Understanding your options allows you to strategically approach your ownership, and navigate variables accordingly.
One option to consider is a sale and leaseback transaction, which can have several benefits for partnerships facing a growing misalignment of ownership between practice and real estate partners.
First, a sale and leaseback transaction can help to align the interests of all partners and avoid potential conflicts or tension. Through a sale-leaseback, all partners can benefit from the passive income generated by the property while still retaining control over the space. This can be particularly beneficial for practices that are in growth mode and want to focus on their core operations.
Second, a sale-leaseback transaction can help to simplify the ownership structure and decision-making process. By selling the property and leasing it back, you can reduce the complexity of the ownership structure and make it easier to manage the property and make decisions about its use. This can be particularly beneficial for partnerships that want to streamline their operations and focus on their core business.
Finally, a sale-leaseback can create substantial value for the real estate partners. When structured properly, a sale-leaseback can maximize the value of the property and ensure that all partners receive a fair return on their investment. It is important to carefully consider the terms of the lease and the tax implications of selling your practice real estate, as well as the potential for passive income and the impact on recruiting efforts.
Passive income from rent has historically been a great recruiting tool, but it may not make as much sense in today’s financial climate. As the cost to borrow money increases, banks will be able to offer less favorable lending terms. In other words, yield multiples will compress and values which are directly impacted will soften. This will create a situation where refinancing becomes less attractive, and it becomes more expensive for younger physicians (who are likely taking out loans) to buy into the real estate (or practice) due to higher interest rates.
If you are in the midst of a private equity deal or considering selling your practice, it is important to consider how this may affect your real estate, and prepare accordingly. When considering the sale of your practice real estate, it’s advisable to seek help when structuring the terms of the lease. This may include negotiating terms that protect the value of your property or finding ways to mitigate any negative impact on its value. Once a new lease is a signed with private equity investors (as owners of your practice), they have little incentive to change it. Because of this, it often makes sense to sell your real estate in advance, while you still control both entities, practice and real estate. A long-term lease with favorable terms not only acts to increase interest among institutional investors, but substantially increases the value of the property.
In summary, a sale-leaseback can be a useful tool for aligning the interests of the current real estate owners and the future practice owners. It can help simplify the ownership structure, create value for the real estate partners, and provide the practice with the opportunity to increase control and security. It is important to carefully consider the terms of the lease, the potential impact of private equity transactions, and timing of partnership alignment. By understanding these factors, you can make informed decisions about your practice real estate and more successfully navigate your investments.