Medical buildings are a lucrative field right now, but like most popular commercial real estate types, it can be difficult to find a prime property in a good location.
However, there is one type of property often overlooked by investors: the out-of-date medical building.
Typically, physicians and health care operators prefer long leases when choosing a medical building, since location is critical to attracting and retaining patients.
However most patients feel an aging building reflects poorly on a physician’s competence, preferring modern buildings with attractive furnishings and finishes.
Furthermore, the age of a medical building doesn’t just affect its’ looks: it can also have an impact on the ability of the staff to deliver safe, quality care.
Renovations can be extraordinarily prohibitive for many owners. In addition to cosmetic changes, renovations must be made that account for new technological advances in equipment. These can be too costly for many owners, who end up with a property they can’t use or sell at market rate.
Make An Offer They Can’t Refuse
There is a workaround, however, that allows you to make a significant profit from these older medical buildings – with minimal risk.
Since these properties often have deferred maintenance issues, outdated finishes, out-of-style public areas, and obsolete technology, they cannot be sold at market rate.
In addition, many owners already spend large sums on operating a medical building, and along with rising employee salaries, IT and equipment expenses, insurance premiums and other expenses, money for renovations can be hard to find.
A sale-leaseback is an ideal way to recover the capital that was spent on the purchase of the property and improvements, all while continuing to occupy the property via a long-term lease. It can also provide tax advantages and is an attractive alternative to conventional financing.
Thus, rather than let the building sit empty, owners are often willing to sell the property at a higher cap rate; the difference between the two cap rates can then be poured into renovations.
All of these factors mean that owners of outdated medical buildings are very likely to be open to a reasonable offer.
To determine a starting offer price, you should start by doing your due diligence, making sure you get a good idea of what it would cost to renovate the property. Then deduct this amount from the average market price for a property in top condition. The resultant number is your offer price.
Create A Renovation Plan
There are several factors that must be considered when renovating a healthcare facility:
- The layout of the rooms should easily accommodate traffic between rooms
- The infrastructure must be able to support the sophisticated technology common to medical facilities
- The design should take into consideration the comfort of both patients and staff
HVAC and electrical systems strong enough to handle the workload of large numbers of people and machines, IT systems, emergency backup systems, and specialized refrigerators are just some of the specialized equipment unique to this property type.
Keep in mind that when adding infrastructure for technology, you should also plan for future additions as well.
Patients today are quite savvy, and the ability to offer the latest technology when diagnosing and treating patients is a major factor in attracting and retaining patients. By planning for future upgrades when renovating, you can lower the cost of future renovations and shorten the amount of time it takes to complete a renovation.
In addition, investors should also consider the cost of maintenance and repairs, as well as other services (such as IT) that need to be paid on an ongoing basis. These are necessary but do add to the overall cost of renovations.
Make It A Done Deal
Once you’ve determined the cost of renovations and your offering price, it’s time to pass the ball to the other side by presenting the idea of a sale-leaseback.
If your offer is reasonable, it’s very likely it will be accepted, especially since many healthcare administrators don’t have the capital to invest in extensive renovations. Sale-leasebacks are a perfect opportunity for physicians to get a top-of-the-line facility with minimal effort: the extra money gained by the sale can be used to buy new equipment or hire additional staff.
Many sellers of a medical real estate have used such profits to buy new equipment, hire additional personnel, strengthen operational and financial performance, and invest in more flexible and high-yielding investments.
And since you end up not paying more than the market rate, you not only get a premium property, but you also end up with long-term tenants who sign triple net leases for 15-25 years, often with options for lease extensions and rent bumps.
It’s a good idea to be specific about when they can expect the renovations to be completed; a schedule of improvements and a detailed renovation plan will go a long way to reassuring the present owners that the renovation will end at a specific point in the near future.
As a bonus: sale-leasebacks can sometimes be used as a replacement property in a 1031 exchange, giving you significant tax benefits.Tags: 1031 exchange, 1031 NNN Property, commercial investment properties, commercial property investment, commercial real estate, commercial real estate investor, medical building, Medical buildings, tax benefits, Triple Net Exchange Properties