In an interesting transaction, North Shore LIJ Health System of Great Neck, NY teamed up with Waterstone Development Group to purchase 600 Community Drive in Manhasset, NY. According to a release from North Shore LIJ, Waterstone paid $59 million, a price that approximates the mortgage debt on the property, for the 252,000 square foot medical office building. Waterstone will also spend another $44 million to upgrade and modernize the building. In turn, North Shore LIJ has signed a 32 year lease for much of the building. The system currently occupies 55,000 square feet in the building and indicates it will increase its occupancy in coming years.
The interesting part of this transaction is at the end of the 32 year lease, Waterstone will convey (or gift) the entire 252,000 SF building to North Shore LIJ. Philip Silverman, senior vice president and chief physical assets officer, explained that this transaction is part of a strategy designed to help North Shore-LIJ to move away from market rate leases and toward opportunities where North Shore-LIJ is rewarded for the quality of its tenancy with lower occupancy costs and long-term ownership. A quick check revealed that asking rents in the building and nearby for similar properties ranged from $30 to $40 per SF. So assuming North Shore LIJ will soon push occupancy to 90% at the low market rent of $30/SF you effectively have an investment for Waterstone that has an initial yield of 6.6% and lasts 32 years (without principal payment, of course). On the part of North Shore LIJ, you essentially have a ‘rent to own’ program that greatly reduces their cost of long-term ownership for a core, strategic asset.
Sounds like a Win-Win!