More than $1 billion worth of medical buildings were sold last year, and real estate experts say the key to success is a detailed knowledge of what is involved in the sale.
Advocate Health Care Vice President Deborah Rohde oversaw one of the first big sales several years ago when the 10 hospital-organization put $62 million worth of medical office buildings on the market.
Rohde says she paid close attention to what she calls "scrubbing the data," to make sure she knew exactly what the property was worth.
The offering memorandum, or prospectus, she assembled for potential buyers took four months out of the entire 10-month sale process to complete.
"To get a handle on the true costs, you really need to spend the time," Rohde says.
The sale was among the first and biggest of its kind, but many hospitals since have shed their medical buildings, a hot commodity in recent years, to pour money back into core services. About $1.3 billion in deals were logged last year, according to Real Capital Analytics, as reported in May by Modern Healthcare's electronic newsletter, Daily Dose.
Question: How do you go about profiting from the recent uptick in medical real estate prices without alienating your doctors or otherwise harming your organization?
Many sellers offer the same advice on scrutinizing deals: Whether you're planning to sell a single building or you're negotiating a series of $100 million-plus deals, be thorough in preparing documents for buyers and know the asset you're selling. "You should know it better than they know it," says Tony Speranzo, chief financial officer of a large Catholic healthcare system. "When there are surprises, that's when there are adjustments to the purchase price."
Speranzo unloaded $300 million worth of medical real estate for 75-hospital Ascension Health in St. Louis in the past 18 months.
Every step of the way, he kept its physician tenants informed. They're your customers, he says. He suggests setting objectives early and giving doctors investment opportunities. "We didn't believe it was core to our business to own these medical office buildings, but it's core to our business to have them on our campus," he says.
That means keeping the doctors happy and making sure you're getting the right buyers. He screens potential investors to make sure they're a good fit with the hospital, then creates a bidding process with detailed markups of the ground lease and purchase agreement, all the while asking, "What are the issues for the buyers?"
"This is something I believe is important to do right," Speranzo says. "These are deals where the hospitals don't leave the property because the property is sold. It is extremely important that investors understand how to run the building."
Some questions to mull: Are the investors going to buy the building and hold it, or will they "flip it"-turn around and sell it right away? Are they regional or local firms, and how does that affect your organization? How will the buyer run the building? Do they specialize in medical facilities? If so, what's their track record? Do you understand why you're selling the property in the first place?
Speranzo enlisted the help of experts, or what Rohde calls "someone tied into the market of potential investors who purchase the building."
Ascension hired Ernst & Young to advise on the transactions. Advocate used CB Richard Ellis, of Oak Brook, Ill., where the health system is based. Both Speranzo and Rohde say using a firm experienced in selling commercial properties can make the process more manageable. Whether the hospital goes with a national firm or regional one, a real estate broker or investment bank-depends on the size of the deal and whether the hospital requires complex financing structures such as off-balance-sheet deals.
"I always want people to realize that this is a real estate transaction, not a hospital transaction," Speranzo says.
Rohde says she likes to work with real estate brokers that specialize in investment properties. Although she knows of hospitals that have used financial institutions, she says, "I don't think that's the way to go. You're not selling bonds."
She took inventory of all the buildings to find out what percentage was Advocate-occupied. If more than two-thirds of a building was occupied by other tenants, she sold. The number is important, she says, because of tax exemptions the hospital can earn on its medical real estate.
Next, she accounted for sundry costs for housekeeping, security and utilities, and measured the buildings to find out what space could be rented. To know how much investors might be willing to pay, she says they need an accurate estimate of the properties' income value.
Rohde suggests tacking on provisions such as development rights in the prospectus, rather than trying to negotiate them on the back end.
Both Speranzo and Rohde stress securing a good ground lease, or land lease, to maintain some control over buildings on the campus.
Above all, ask questions from beginning to end and make sure there are no surprises along the way.
"The devil is in the detail," Speranzo says.
* Scrub the data in your offering memorandum; include ground lease and other provisions on front end.
* Keep the doctors informed throughout the process.
* Grill the buyer to ensure a good fit with the hospital's interests.
* Check the buyer's track record.
* Get the help of experts who might know your potential pool of buyers.
* Above all, know why you're selling and know the assets you're selling.
Source: Modern Healthcare reporting