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Selling ASC Real Estate: Avoiding Mistakes

May 6, 2020

Written by Jon Vick & Jason Winokur

Selling ASC Real Estate: Avoiding Mistakes

Seven Common Mistakes Made by Sellers of ASC/MOB Real Estate

Many ASC physician-owners who own their ASC real estate may be considering a sale/leaseback to provide liquidity and a source of capital during the current slowdown. Due to the long-term success and profitability of surgery centers, excellent credit history and rent coverage, and the likelihood that the ASC will remain in the same location for years to come, ASC real estate has become very attractive to real estate investors. This is reflected in the current competition to buy and leaseback ASC real estate and the high prices being offered. Today buyers are offering prices that equate to multiples of 14X or more for ASC real estate. Sellers can realize high selling prices, no change in rent, and retention of control through NNN leases. But there are pitfalls to be avoided.

Here are 7 common mistakes made by sellers of ASC/MOB real estate and some tips for maximizing the value of your real estate:

  • Mistake #1: Rent is too low. ASC owners often charge themselves below-market rent in order to maximize the EBITDA of the ASC business. Rent is a primary factor in determining the value of ASC real estate. Fair market NNN rent for ASCs averages $30 to $40 per sf, depending on location. The multiples for the sale of real estate are significantly higher than the multiples for the sale of the ASC business. With a CAP rate of 7% the buyer is paying a 14X multiple. Increasing the rent to fair market value will result in an increase in total value of ASC assets.
  • Mistake #2: Selling ASC before improving your lease. ASC owners should increase the rent and term of the lease prior to soliciting offers to sell a controlling interest in their ASC business as they may not be able to alter the terms of the lease after the sale. Prior to marketing their ASC business, the owners should ensure that the rent and lease terms are going to maximize the total value of their ASC assets. Leases should be 10 to 15 years plus renewal tenant options, and be triple-net (NNN), to get the best price and most offers.
  • Mistake #3: Using a local broker. Local brokers usually market to local buyers, and most often there are few local buyers who are educated on the value that ASC real estate represents. Brokers who have a network of national buyers who have funds available to acquire ASC real estate will bring in higher offers in less time. Sellers should engage a broker who already has buyers for your ASC property.
  • Mistake #4: Not obtaining competitive bids: Brokers with national buyers will solicit and leverage competitive offers to get the sellers the highest price. Sellers will always get a better price and terms when multiple buyers are submitting competing bids. Sales should be made when there are multiple buyers seeking to buy ASC/MOB real estate, which is currently the case
  • Mistake #5: Partnering with a strategic partner that will allow only 5 or 7 year lease renewals. Some ASC management companies will not allow lease renewals of more than 5 or 7 years. This will greatly reduce the number of buyers interested in the ASC real estate and will lower the value of the real estate. In extreme cases, the ASC real estate may not be saleable.
  • Mistake #6: Not reading or understanding the sales contract: Often there will be onerous terms in the sales contract that create significant difficulties for the sellers after the sale, such as conditions for modifying or creating a new lease. Or frequent reporting requirements, restrictions on how distributions are made, or controls on what benefits and expenses the sellers may incur. It is important that the sellers utilize a broker who will advise them on terms of the sales contract that should be removed or negotiated.
  • Mistake #7: Waiting until too late to sell the real estate: Timing of the sale of both the ASC business and the ASC real estate is critically important. The sales should be made when the physician-owners are still young enough to have 10 or so years left to practice. Otherwise the buyers will begin to discount the cases the physicians will bring as they approach retirement. At a certain point, unless there is a succession and recruiting plan in place, the value of both the ASC business and the ASC real estate will decline.

Notes:

  • Fair market value for ASC NNN rent averages $30 to $40 per sf, depending on location
  • CAP rates vary between 5% and 8% depending on location and terms of the lease
  • Current multiples of EBITDA for controlling interests are 7X to 9X EBITDA, averaging 8X.
  • Real estate sellers may use a 1031 exchange to defer capital gains taxes and use 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 (CA) or 203-733-8818 (CT).

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