The impacts of COVID-19 on the overall healthcare industry and, specifically, on private physician practices, has left many groups reassessing the level of risk they are willing to bear and reconsidering the long-term viability of independent practice and evaluating whether alignment with a hospital or private equity group is the right choice for them. While much of the focus in hospital and private equity alignments is rightfully centered on the operational aspects of the medical practice itself, the real estate where the practice is located is also a key piece of the overall equation.
Physician owners must consider any adjustments to existing lease arrangements and the resulting impact to both the practice valuation and real estate valuation. A market-driven lease rate is an important variable in the overall practice valuation. The parties may agree to adjust (typically decrease) the rental rate to market in order to appropriately estimate practice earnings and establish a practice transaction value. While the above scenario may result in an increase to the practice valuation, it can have an imbalanced negative impact on the real estate valuation, resulting in negative net value to the physician owners in the overall transaction. In addition to a reduced secondary income stream, the physician-owners will need to analyze the impact that the lease adjustments will have on both their practice valuation and property value.
Real Estate Strategies
Physician real estate owners should, at a minimum, consider three primary real estate strategies in conjunction with the practice transaction: Hold (As-Is), Hold and Refinance, or Third-Party Sale / Leaseback.
Hold (As-Is): Maintaining the current real estate structure could be the best solution, as it minimizes transaction risk while maintaining full control of the property.
Hold and Refinance: Current financing rates are at a historical all-time low. Refinancing allows the physician real estate owners to benefit from low-interest rates as well as maintain control of the facilities. It also presents an opportunity to access equity (cash out) and/or improve cash flow by decreasing the annual debt payments.
Third-Party Sale / Leaseback: Selling the real estate investment allows physician real estate owners to maximize the up-front value of their assets and transfer certain management responsibilities to the new owner. However, establishing a new lease and finding a buyer (REIT or Private Investor) may take significant timing and administrative resources to execute.
Key Takeaway: Real estate is a key component to the overall transaction and can improve overall transaction value if properly positioned and aligned with the practice strategy.
An objective healthcare real estate advisor can support the practice alignment opportunity, assist in the evaluation of various real estate strategies, manage the transaction process, and potentially enhance the underlying real estate value for the physician real estate owners. The team of healthcare real estate professionals at Realty Trust Group has significant experience advising clients on similar transactions and many other complex real estate matters. For more information, visit our Innovation Center to find our White Paper “Utilizing Physician-Owned Real Estate to Maximize Value in Healthcare Transactions”.