Healthcare: Medical office building values depend on rents

by Mark Alexander for news-press.com

One of the biggest misconceptions today involves medical office building values. The majority of medical office owners who occupy their own buildings (i.e. doctors) read the same papers and watch the same TV shows that we all watch. The economic news today is mostly bad as you know. So naturally these medical office owners think they are in the same boat as the rest of the broad market – with plunging real estate values. But they don’t realize the opposite is true.

Only investors (i.e. non-occupants) who own vacant or short-term leased medical buildings have seen plunging real estate values, but not the owner-occupied medical buildings that use sale/leaseback transactions.

These owner/occupied and long-term triple net leased medical buildings are actually the darling of the investment world right now and still command very strong values for their owners. But due to this false reading of the market coupled with the uncertainty during the long health care reform debate, most owner/occupied medical office owners have gone to the sidelines and kept their property off the market thinking (incorrectly) that they will lose value in this market. Consequently, the majority of recent medical office sales over the past 18 months in Lee County are buildings that were vacant or had some vacancy with short-term leases that all lead to low sale prices per square foot. This further falsely led doctors (who own/occupy their own buildings) and appraisers to believe the entire medical office market was down – which it is not. The high end is simply absent.

A quick study of past and present medical office sales in Southwest Florida will reveal this occurrence with clarity.

High value

There are three categories of medical office values and each is dependent upon the lease terms signed for each respective medical building.

Not all medical buildings sales are the same, which makes averaging the good, the bad and the ugly medical office sales into one batch misleading. The key to separating each of these value segments for medical buildings is tied to the quality, durability and term of leases for each building sold.

The high values of medical office sales close at prices over $200 per square foot because they are sold with no deferred maintenance and they have triple net leases with terms ranging from five to 10 years.

Owner/occupants make up the majority of this category since it is easy for them to achieve this high level of pricing by using a sale/leaseback transaction. This typically occurs mostly with medical groups where all the doctors in the practice also have equal equity ownership in their medical buildings. In this type of equalizing ownership structure, it is easier for all the doctors to make a sale/leaseback decision since what is good for one doctor is also good for all the doctors due to this unifying ownership structure.

Medium value

The medium values of medical office sales close at prices between $100 per square foot and $200 per square foot based on their leases that typically have remaining lease terms of three years or less and sometimes coupled with various degrees of vacancy and deferred maintenance. This medium price range is often seen to be achieved by split-equity medical groups. This is where a small subset of doctors from a practice will own the medical building while other doctors in the same practice have no equity in the building. When a decision to sell the building is made by the minority group of partners who own the building, it is difficult for them to convince their non-equity (in the building) partners to increase the term of the lease and/or increase the rent just to create a higher sales price (i.e. over $200 per square foot) that would solely benefit the doctors who do own the building.

Non-building-equity partners in the practice will almost always vote for lower rent or shorter lease terms since it is better for them to maximize their profit from the practice. Due to this inherent conflict of interest between partners in split equity medical practices, the buildings often get sold at whatever rental terms happen to be in place at the time of sale – which is not always optimal to achieve the highest price if the lease term is less than five years remaining.

Historically, disputes over their medical building equity and lease terms are the number one cause of doctors splitting up to start their own medical practices. When they are all in the same boat rowing together, it is easier, more harmonious and more profitable for them – as described above in the high value segment of medical office sales.

Low value

The low values of medial office sales close at prices below $100 per square foot because they are vacant with various degrees of deferred maintenance. The stronger the lease, the higher the price is created. Vacant buildings with no leases have the lowest values.

Next week’s column will look at a few more things in the medical office category.

[news-press.com]

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One Response to “Healthcare: Medical office building values depend on rents”
  1. Enjoyed the article. Content is timely. Currently working with investment/portfolio owner in selling MOB in TX.

    by Helen M. Banks
    on 19. Aug, 2010

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