Originally published in D Healthcare by Webber Beall, EVP, Lincoln Harris CSG
Dynamic change in an industry almost always renders dynamic opportunity in real estate. And of course, with opportunity comes its closet companion - the double-edged sword of risk and reward. That has certainly been the case in the healthcare sector – specifically with MOB investments. Over the years we have watched as some physicians have celebrated their real estate successes. We have also witnessed others curse MOB ownership as the bane of their investment portfolio. With hopes of the former outcome for our physician friends we offer a few simple tips on investing in MOBs.
Manage the Financial Risk. There can be significant financial risk when it comes to investing in real estate. Unplanned or unforeseen circumstances may result in an individual investor unexpectedly becoming liable for debt obligations, operating shortfalls and capital calls. For most physician investors, we recommend investing in real estate as a limited partner (or the like), whereby the maximum financial risk is limited to the initial (planned) investment.
Liquidity. At some point after an investment is made, there will likely be a time when the investor will want to extract their equity. It is important to understand the nature and timing of the liquidity events (i.e. refinance and/or sale) that are part of the investment plan. Additionally, we favor investments whereby the general partner provides some type of liquidity guarantee or liquidity vehicle that grants the investor the periodic opportunity to sell their interest for a fair market price (e.g. annually or semi-annually).
Lease Obligations. It is common for physicians to lease space in an MOB within which they will also be investing. A good rule of thumb to remember is “wear the tenant hat when you negotiate the lease and wear the investor hat when you negotiate the investment”. Tenant / investors should avoid the temptation to inflate rent rates or take more space to enhance initial investment returns, as the incremental return may not justify the residual lease obligation.
Financial Models. A proforma or financial model can make any real estate investment look enticing. We recommend that physicians or their advisors closely review the assumptions that are built into an investment analysis. Ask to see the source data that supports rent rates, cap rates, operating expenses, debt assumptions and lease-up schedules.
Developers / General Partners (GP). When it comes to developers or the parties who will be building / operating the MOB, think “reputation,’ “track-record,” “references,” and “case studies.” Check them out thoroughly, the good ones will want you to do just that - investigate. We also recommend that physician investors understand the developer / GP’s financial structure in investments. Typically, developers are justified in receiving a favorable, risk-adjusted return, but that is not always the case. Make sure the developer / GP has “skin in the game,” not just “sweat equity.”
Professional Advice / Legal Counsel. For all but the most experienced real estate investors, we recommend seeking the advice of a qualified real estate investment advisors and / or real estate attorneys who specialize in healthcare. This is the best tip of all…
Webber Beall is an Executive Vice President of Lincoln Harris CSG and senior officer of Lincoln Property Company. Webber’s responsibilities include supervision of the Lincoln Harris CSG Healthcare Group which manages over 600 MOBs and handles over 2000 healthcare transactions per year. Webber has developed real estate strategies for numerous healthcare clients and has closed more than $1 billion in transactions. He has been with Lincoln since 1991.