Medical Practice Operations with Private Equity: Don't Forget Real Estate!

Medical Observe Operations with Non-public Fairness: Do not Overlook Actual Property!

The variety of medical practices transacting with personal fairness in recent times has elevated year-on-year over the previous 5 years, with 2021 recorded because the yr with probably the most offers on this sector. Low rates of interest and excessive valuations have prompted many medical teams to promote their medical practices, typically with little regard for the true property wherein the practices are positioned, lots of that are additionally owned by the medical doctors. This text explains why practices considering a non-public fairness deal ought to pay explicit consideration to their actual property belongings, not simply the follow’s actual property.


Many physicians nonetheless personal the true property that serves their medical follow. Observe and surgical middle actual property has important worth, not solely as a result of it’s the place affected person care is offered, but in addition as an funding. Nonetheless, the transition to the sale of the medical workplace is more likely to change the objectives of those holdings, or at the very least spark an argument.

Whereas the standard mannequin of doctor associates systematically taking up the pursuits of senior companions as they retire has labored for a lot of a long time, healthcare stays dynamic, requiring fixed recalibration. This is applicable not solely to a health care provider’s workplace or ambulatory surgical procedure middle, but in addition the true property sector from which these companies function, which frequently ends in questions reminiscent of:

  • How will the medical doctors finally get their capital out of the constructing?
  • Are the related medical doctors in a position/prepared to imagine the debt/fee for the acquisition of the property?
  • How does a non-public fairness sale have an effect on doctor actual property?

Questions 1 and a couple of are situational and strongly depending on the composition of the partnership. Total, as revealed by means of discussions and consultations with a whole bunch of specialty doctor teams nationwide, the consensus seems to be that youthful physicians are extra threat averse. like the concept of ​​investing in a dated constructing. How do their decisions have an effect on the senior companions’ actual property exit technique?

For the rest of this text, let’s deal with query 3 above, which is extra goal and preparatory in nature. If a bunch of physicians is exploring a non-public fairness transaction, it is vital to additionally take into account how actual property matches into the equation. It is virtually all the time true {that a} follow sale will generate extra whole worth, however actual property comes second and nothing to scoff at.

How does a non-public fairness sale have an effect on our actual property holdings?

Most doctor teams purchased or constructed their very own actual property to regulate the destiny of their follow; as owner-occupiers, they’ll dictate their very own phrases of lease and lease. In distinction to location, location, location assumption, lease and lease phrases are the first worth drivers in medical actual property. Let’s not overlook that this isn’t an actual association alongside the arms; lease is solely paid from pocket to pocket (follow entity to actual property entity). At any level in its possession cycle, a medical group can improve or lower the worth of its constructing by adjusting the lease you pay. All of that may change as a part of a non-public fairness transaction.

Now, the lease can be paid by the personal equity-backed follow to the doctor-owned actual property entity. It’s typical for a brand new lease to be entered into as a part of the settlement, formalizing the landlord-tenant relationship, together with the duties of each events. On the identical time, the worth of the property turns into mounted and is very depending on the phrases of the brand new lease that has been negotiated. Correct lease structuring throughout a non-public fairness transaction is crucial to preserving and maximizing (or, at the very least, not compromising) actual property worth. This may be achieved with fundamental preparation and little or no impression on sensible evaluation.

So what does it take to maximise property worth? Considerate lease structuring, together with:

  1. Honest market payment – Will be established by means of a evaluate of market comparables or by partaking an actual property guide who makes a speciality of healthcare properties. Medical properties are completely different from different actual property, so particular care must be taken to establish properties which are certainly comparable.
  2. Long run rental – A minimal of 10 years, however 12 or 15 years is good, serving to create a safe stream of rental earnings for the foreseeable future.
  3. Annual lease will increase – Sometimes within the vary of 2-3% pa, with exceptions in inflationary intervals when annual CPI progress exceeds mounted will increase.
  4. NNN phrases – Along with the essential lease, the studio/tenant should even be liable for paying property taxes, insurance coverage, constructing upkeep, repairs and replacements.
  5. Firm assure – As an alternative of sustaining the follow as a leasing entity, the owner advantages from having the bigger company entity (i.e., the personal fairness backed platform) because the tenant or guarantor of the lease.

Along with monetary concerns, there are additionally authorized and tax implications to contemplate when structuring a lease throughout a non-public fairness deal. It is very important work with skilled authorized and tax advisors to make sure that the lease is structured to maximise worth whereas complying with related laws (together with, if relevant, federal and state fraud and abuse legal guidelines governing medical doctors) and minimizing tax liabilities.

So why is it so essential to correctly construction a bunch lease as a part of a non-public fairness transaction? The reason being as a result of as soon as the deal is closed and the lease is executed, it’s troublesome to barter and alter the phrases later. Additionally, it makes monetary sense to restructure the lease previous to a non-public fairness transaction as a result of the numbers are additionally fascinating as a result of whereas we will all agree that actual property has intrinsic worth, property valuations are completely different than the evaluations of medical research. Because the diagram under exhibits, medical practices are valued as a a number of of EBITDA whereas actual property is valued as a a number of of lease. Generally, excluding very massive practices, actual property multiples are virtually all the time larger. Consequently, restructuring the lease as a part of the personal fairness transaction is a worthwhile enterprise. Whether or not or not you propose to promote your property immediately, a well-crafted lease ensures that you are able to do so sooner or later.

One other essential consideration is the impression of the lease construction on potential patrons. If a medical group decides to promote their follow and properties sooner or later, a well-structured lease settlement could make the property extra enticing to potential patrons. Patrons can be extra prepared to pay a premium for a property with a long-term lease and steady rental earnings. This may finally end in a better promoting worth for the property.

In conclusion, a non-public fairness transaction can have a major impression on the worth of the properties owned by the physician, making the proper structuring of lease agreements important. By working with skilled consultants and taking the time to develop a effectively thought out lease settlement, medical teams can maximize the worth of their actual property holdings and guarantee they’re effectively positioned for the long run.

Collin Hart is the managing director and managing director of ERE Healthcare Actual Property Advisors. Anjana Patel is an legal professional for Epstein Becker Inexperienced.

Leave a Reply

Your email address will not be published. Required fields are marked *