At the Becker’s ASC Review 25th Annual Meeting: The Business and Operations of ASCs, a seminar on How to maximize the value of your ASC/MOB real estate and defer taxes in a sale/leaseback was presented. Following are questions and answers from that seminar.
Why sell and leaseback my ASC/MOB real estate? Many physicians who own their ASC/MOB real estate do not realize how much value their real estate represents. These physicians have significant capital locked up in real estate that could be deployed in higher yielding investments. Take, for example, a group of 5 surgeons in Ohio who developed an MOB/ASC for $3 million 10 years ago, with a $2 million loan. Now the ASC is successful, is paying annual rent of $350,000 and the debt is paid off. The rent they are paying themselves makes their real estate worth $5 million, but appreciating only at the rate of 2 percent to 3 percent a year, and they are paying up to 40% income tax on the rent. So, after selling and leasing back the real estate (with no increase in rent), the physicians have $5 million in cash to invest in higher yielding investments and no longer have to pay tax on the rent income.
How does a sale/leaseback work? An ASC/MOB broker with a network of national buyers will create a marketing package and send to 20 or more qualified buyers (REITS, private investors, family trusts, etc.). This typically generates 6 or more competitive offers for your property. Typically, the buyer that offers the best price and terms will be selected by the sellers, who will receive cash on closing. The ASC will continue to pay the same rent as before, paid to the new owner instead of to themselves. The sellers will either pay a capital gains tax on the profits from the sale, which will be significantly less than the income tax they were paying on the rent, or they will defer the capital gains tax by buying an income-generating property in a 1031 exchange. This will also diversify the sellers’ investments.
How to sell and retain control? Most sale and leasebacks are executed with a triple-net (NNN) lease. This means that after the sale the sellers will continue to be responsible for the ongoing expenses of the property, including real estate taxes, building insurance, and maintenance, in addition to paying the rent and utilities so that the sellers continue to remain in control of the property.
Suggestions for sellers of ASC real estate to maximize value:
- ASC owners should increase the rent prior to selling a controlling interest in their ASC business. Otherwise they may not be able to increase the rent during or after a sale.
- Rent should be market rate which is $30/sf to $40/sf NNN. The higher the rent, the greater the selling price.
- Leases should be 10 to 15 years plus renewal options, and be triple-net (NNN), to get the best price and most offers.
- Sales should be made when there are multiple buyers seeking to buy ASC/MOB real estate, which is currently the case
- Sellers should engage a broker who has ready buyers for your property.
- Obtain competing purchase proposals: sellers will always get a better price and terms when multiple buyers are submitting competing bids.
- Sellers should take advantage of a 1031 exchange to defer taxes and provide tax-free use of the sales proceeds to reinvest in one or more income generating properties.
ASC Physician-owners can obtain fair market value rents, current cap rates, and valuations for their ASC business and real estate by contacting ASCs Inc. at 760-751-0250.