Right Partner is Key to a Smooth Transition When MOBS are Sold

Jan 03, 2014 at 12:00 am by Staff

More and more hospitals and health systems are considering the sale of some of their medical office buildings or other "non-core" assets. But the change in real estate ownership and management can create uncertainty for both the hospital and physician-tenants, and that can be compounded when a third-party investor later re-sells the buildings to another. Here's what buyers and sellers can do to lessen the uncertainty and ensure smooth transitions.Hospitals and health systems have many good reasons to sell medical office buildings (MOBs) and other "non-core" real estate assets to outside investors. Such sales create financial liquidity that frees up capital for other uses, allow providers to concentrate on their core business of healthcare, and help hospitals avoid potential Stark and Anti-Kickback Law violations, to name just three. So in this era of seemingly insatiable capital needs, it's no wonder that more and more providers are selling or "monetizing" their MOBs - or at least considering it.When a hospital, health system or physician practice group sells a building to a third-party real estate investor, the physicians leasing space there find themselves with a brand new landlord. Sometimes the hospital itself ends up leasing back space in what used to be its own building. And sometimes the original third-party buyer of the building subsequently re-sells it to another investor.What are the implications of such transactions on the provider and its physicians? Does this mean they lose all control over the asset and how it's managed and leased? How can the hospital protect itself and its physicians from that uncertainty? How can the seller and buyer ensure the transaction will be a success before, during and after the closing?

Florida Hospital: Third-Party Acquisition from a Third-Party Owner

A perfect example is Duke Realty's recent acquisition of 14 healthcare facilities in six states from third-party owner Seavest Healthcare Properties, which had earlier acquired the properties from various health systems and then developed them. The acquired properties were 54 percent leased to hospital systems or their affiliates and 89 percent leased overall. Four of these properties, and a fifth property that was acquired later, are located on Florida Hospital campuses in central Florida: Celebration Medical Plaza, Kissimmee Medical Plaza and East Orlando Medical Surgical Plaza, all in the Orlando area; Sebring Medical Pavilion in Sebring; and Health and Wellness Center at Florida Hospital in Wesley Chapel. Florida Hospital, one of the country's largest not-for-profit healthcare providers and a member of Adventist Health, serves patients through 22 campuses in Florida. The acquisition of the Seavest MOB portfolio posed a number of challenges for all parties involved. Seavest and Duke Realty had never before partnered on an acquisition. And although Duke Realty and Florida Hospital had been engaged in talks for some time about possible development projects, Duke Realty had never acquired or developed a Florida Hospital-owned or leased facility.

Post-Acquisition Successes

Like Seavest, Duke Realty has specialized healthcare real estate experience, which went a long way toward making Florida Hospital and its tenants more comfortable with the latest ownership change. Although the acquisitions closed less than a year ago, the transaction looks like a success for everyone involved.Previously, the facilities were owned, managed and leased by three different firms. Now, Duke Realty plays all three roles. Before, tenants were confused about who to contact but now, whether it's a need for additional space or a concern about building services, the tenants have a much more streamlined process to communicate with ownership. Duke Realty also has implemented a number of building improvements in the facilities, including developing more visible signage; improving tenant directories; and adding new paint, carpeting and other enhancements. It added much-needed sound insulation in the surgery center of the Sebring Medical Pavilion to shield against the high noise level and is adding a console in the Celebration Medical Plaza lobby to assist patients with wayfinding and other needs.While Seavest did an excellent job with the buildings over the years, the new owner, Duke Realty, saw the improvements as an opportunity to make a good first impression and demonstrate goodwill to the hospital client, as well as help them improve their image in the communities they serve. Those efforts are working if tenant feedback is any indication. In a recent survey, 90 percent of responding tenants expressed overall satisfaction with management and the quality of the buildings. That's good news for the tenants, and there has also been good news for the new owner as the buildings have seen increased occupancy since the acquisition. The hospital is even in talks with Duke Realty about expanding the Celebration facility or developing another freestanding building.

Lessons Learned

Executives from both Florida Hospital and Duke Realty believe the Seavest acquisition shows how important it is for all parties to do thorough due diligence and really get to know one another. Before a hospital or health system considers selling its facilities, it should study the prospective buyer's reputation, financial situation and track record. What's the size and quality of the buyer's current healthcare portfolio? How much experience does it have owning and managing healthcare facilities? Does it tend to hold onto its healthcare properties long-term or does it "flip" them? Is it well capitalized? Publicly traded? Is it a cash buyer and can it close quickly? These are all important questions. The health system and its tenants also should pay careful attention to whether the potential buyer learns as much as possible about them, takes their concerns into consideration and works to make them comfortable with the new ownership. The bottom line is that hospital executives who are considering selling their facilities should sell them to an organization they want to have a relationship with and that will be the best partner for the long term. But what should the health system do if the current owner sells to another third-party owner such as the acquisition of the Florida properties? One way the hospital can protect itself is with a long-term ground lease - selling the buildings but not the underlying land. This means that any new owners of properties on those grounds must work in partnership with the hospital, and the hospital has a say in any potential sale. Sometimes hospitals even insist on having the right of first refusal to buy back their buildings if third-party owners decide to sell.In addition, just as when the hospital first sold its facilities, it should spend time getting to know the prospective, new third-party owner and make sure the potential owner understands its perspective and challenges. Responsible, smart healthcare real estate buyers will listen seriously and learn from these interactions. After all, the buyers want the transaction to be successful and know it's imperative to ensure that the hospital and its tenants are satisfied and stay in the facility, keeping occupancy rates and patient traffic high. That's definitely the case with the five Florida medical office buildings that Duke Realty purchased. Jody Barry, Florida Hospital Administrative Director, Strategic Development, noted that it has been a favorable investment for everyone, especially when considering all the improvements that have been made to the buildings.

Mark Dukes is vice president, Asset Management for Duke Realty's assets in Florida, and Ketan Sanghvi is executive director, Business Development and Leasing for Duke Realty. Mr. Dukes can be reached at Mark.Dukes@dukerealty.com and Mr. Sanghvi can be reached at Ketan.Sanghvi@dukerealty.com. Duke Realty's healthcare experts can be visited at www.dukerealty.com/healthcare.Headshots sent to Susan