At the Becker’s ASC Review 24th Annual Meeting: The Business and Operations of ASCs, in Chicago on October 26-28, 2017, 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 half of the debt is paid off. The rent they are paying themselves (and paying tax on) makes their real estate worth $5 million, but appreciating only at the rate of 2 percent to 3 percent a year, plus they are paying income tax on the rent. So, after selling and leasing back the real estate (with no increase in rent) and paying off the loan, the physicians have $4 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 12 or more qualified buyers (REITS, private investors, family trusts, etc.). This typically generates 6 to 10 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 for the rent they received, or they will defer the capital gains tax by buying one or more income-generating properties 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.
How to maximize the value of your property: Common mistakes made by sellers:
• Rent is too low – should be market rate which is $30/sf to $40/sf. The higher the rent, the greater the selling price.
• Leases are too short – should be 10 to 15 years, plus renewal options, to get the best price and most offers.
• Selling at the wrong time – sales should be made when interest rates are low as this will yield the highest selling price
• Selecting a local broker who has no buyers. You should pick a broker who already has buyers for your property.
• Having only one offer to consider – sellers will always get a better price when there is competition among buyers
• Sellers not taking advantage of a 1031 exchange – this will defer taxes and give you tax-free use of the sales proceeds to reinvest in one or more income generating properties.