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5 Things to Know About Hospital Sale-Leasebacks

The relative healthy performance and steady cash flows of medical office buildings has made them a much sought after property type by institutional investors and real estate investment trusts, according to Johnson Controls. Investor interest has been so high that it has driven capitalization rates for MOBs down to an average of 7.3 percent across the U.S. This means investors are paying a premium for these acquisitions. Hospitals, which are increasingly eyeing their bottom lines, can capitalize on this opportunity and consider monetizing some of their real estate assets.   

One popular way for hospitals to do so is through a sale-leaseback agreement. Sale-leasebacks, in this instance, are when hospitals and health systems sell a fixed asset, typically MOBs, and then lease them back from the acquirer. For example, Hackensack (N.J.) University Medical Center and LHP Hospital Group in Plano, Texas, recently sold the land and buildings of their joint-venture hospital in Montclair, N.J., in a sale-leaseback transaction to Medical Properties Trust, a healthcare REIT.

For other organizations contemplating a similar transaction, here are five key points to know about sale-leasebacks.

1. Sale-leasebacks are typically considered when other financing options are not sufficient. Sale-leasebacks allow hospitals to gain access to cash fairly quickly, in three to six months, according to Julie Kimble, vice president and general manager of Johnson Controls Global WorkPlace Solutions. This allows them to pay down debt, immediately improve their balance sheet and cash position allowing them to gain access to capital to fund core projects if grants, bonds or donor contributions are not adequate.

2. Hospitals should fit three requirements before considering a sale-leaseback. According to Ms. Kimble, sale-leasebacks are most appropriate for hospitals that fit the following requirements: they will occupy the facility for a minimum of seven years, are looking to access capital quickly by monetizing the value of the lease and have the ability to manage their current expenses with the addition of long-term lease payments to the purchaser.

3. Sale-leasebacks are not always an appropriate option. Sale-leasebacks may not be ideal for highly specialized environments, like core hospital facilities themselves. "[Those types of facilities] would be too cost-prohibitive to relocate if the landlord doesn't want to renew or the tenant is not agreeable to new lease terms, although we are seeing more and more of these types of sale leaseback transactions, too," Ms. Kimble says. "Sometimes, the end-benefit is the decisive factor, allowing hospitals to achieve pressing goals, be it to pay down debt, make necessary improvements or a needed acquisition." However, capitalization rates are generally higher for these specialized assets, decreasing their valuation in comparison to less specialized facilities.

Also, hospitals with credit pressures may want to avoid a sale-leaseback deal, because rent on a sale-leaseback could be influenced by the hospital's credit rating. "Sale-leasebacks for hospitals with a lower credit rating will produce a lower sale price and therefore lower cash proceeds because the rent may be capitalized at a higher rate," she says.

4. Partial sale-leasebacks can be attractive. Many hospitals opt for partial sale-leasebacks, according to Ms. Kimble, as it allows the sellers to occupy a minimum of 50 percent of the facility. "The partial sale-leaseback has the benefit of allowing a hospital to quickly dispose of excess space and occupy the needed space — and also maintain some control," she says.

5. Consider different lease structures. A typical lease structure for a sale-leaseback is the triple-net lease, where the tenant is responsible for all operating expenses and taxes. "This type of lease is typical in the sale-leaseback world and commands a higher selling price," Ms. Kimble explains.

However, there is another type of lease structure, the full-service or gross lease. This type of lease puts the responsibility for managing the facility — like cleaning, snow removal or landscaping — on the buyer. "This type of structure is less appealing to typical sale-leaseback buyers and may result in a lower selling price," Ms. Kimble states. "The tenant does not typically see savings in operating expenses under this structure as the buyer will most likely hedge [its] risks in the lease agreement." However, she does note the arrangement could provide a potential time-savings benefit to the hospital tenant.

For more from Ms. Kimble and Johnson Controls on healthcare facilities management, download this recent whitepaper.

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