- Do you currently own the building that your practice is operating within?
- Do you see yourself or your practice continuing to operate for the next 10 to 20 years?
- Have you considered refinancing your property to pull equity out of the real estate?
- Are you continually looking for effective tax strategies to reduce your tax exposure?
- Are partnership buy-ins into the real estate getting in the way of operating a successful practice?
If you answered yes to any of the above questions, then it may be worth exploring the opportunities a sale leaseback will present to you and your practice.
By definition, a sale leaseback is a financing tool used by owner-operators across various industries. Through a sale leaseback, an owner-operator sells their real estate interests to a buyer and simultaneously signs a long-term lease as a tenant in order to secure the location and operate at the property long-term. In simpler terms, a sale leaseback occurs when you sell a property you operate out of and sign a lease with the buyer who acquires the property. In 2017, sale leasebacks of single-tenant property assets, valued at $2.5 million or more, reportedly grew 32.5%
A sale leaseback has become an important strategy used to unlock current and long-term value to better position a business for future growth. This industry-wide tool has been popular for many years, as it allows owner-operators to realize their locked up capital and use it more productively. Different practices will look to structure a sale leaseback for various reasons, which demonstrates the numerous benefits of a sale leaseback.
In the following article, Matthews™ breaks down the benefits that a sale leaseback can provide for healthcare operators around the country.
Benefits to Structuring a Sale Leaseback
Partnership Buy-Ins Getting Too Large and/or New Physicians Don’t Want to Buy into Real Estate
What some practices find is that newer physicians aren’t as eager to own a share of the business and real estate as previous physicians. Monetizing the real estate makes it much easier to attract physicians to a practice, especially in an environment where these physicians are coming out of school with higher levels of debt and less of a desire to own real estate. As a result, many physician groups have decided to remove themselves from real estate ownership altogether.
Desire to Take Capital out of the Real Estate to Reinvest
A sale leaseback allows a practice to access capital that otherwise isn’t “working” for them. Practices can use capital from a sale to reinvest back into their core business or another investment vehicle of their choosing. Groups typically receive higher returns from their healthcare business rather than from owning their real estate, so a sale leaseback can be a great tool to expand and grow their business. Healthcare is projected to account for nearly a third of job growth from 2016 to 2026.
Satisfy Debt Obligations
A sale leaseback provides the opportunity for a group to gain access to cash reasonably quickly—within three to six months. This allows them to pay down existing debt, immediately improve their balance sheet and cash position, and gain access to capital to fund new projects. A sale leaseback can be used to monetize a group’s real estate and provide much-needed liquidity.
The main tax advantage of a sale leaseback is that rental payments under a lease are typically fully deductible against the company’s taxable income. With traditional financing, a group is only able to deduct interest and depreciation.
Ability to Convert 100% of Equity into Cash
In most common financing scenarios, a bank will only allow you to borrow 60 to 70 percent of the equity that your property holds. A sale leaseback will enable you to receive one hundred percent of your equity in cash, 30 to 40 percent more than traditional financing. Additionally, when refinancing, a bank is typically in complete control of the terms of that deal. When you structure a sale leaseback, the operator decides the terms of the agreement, how the lease is structured, and how much they will be paying in rent moving forward. Variations in the lease term and rent can cause variances in the sale price of the real estate, but at the end of the day, the operator has full control as to what parameters are set. It’s also important to note that the new rent payments may be less than the current mortgage payments. When traditional financing isn’t available, a sale leaseback is always an option. Sale leasebacks allow operators to gain access to cash within three to six months of deciding to sell their building.
Capability to Structure Flexible Lease Terms
A sale leaseback gives an operator full control of the operations at the building while, allowing them to pull a large sum of capital out of the real estate. Typical leases are structured with 10, 12, 15, or 20-year base terms with multiple five-year options to renew. This gives the operator full control of real estate for the next 30 to 50 years or even beyond in some instances. A typical lease structure for a sale leaseback is a triple net lease, where the tenant is responsible for all operating expenses and taxes.
Improved Financial Statements
The gain realized from a sale leaseback increases liquidity and can often be amortized on the corporation’s income statements. The reported increase in earnings shows a substantial cash flow after the sale and a nominal cash outflow for rental expenses. This reduces the cash outflow levels immediately, which can help with liquidity ratios and margins moving forward.
Reduce Risk of Decline in Real Estate Market
By owning the real estate that they operate out of, operators are in the same risk pool as every other real estate owner in the country. The value of that building will fluctuate as the real estate market fluctuates. In most cases, the highest value of a healthcare asset will be achieved through a long-term sale leaseback.
Sale leasebacks can be an excellent tool for healthcare operators for various reasons. That said, owner-operators should take into account specific risks and considerations when negotiating any contract and lease. Working with an experienced healthcare broker and attorney can help mitigate these risks on a sale. To start exploring if a sale leaseback is the right strategy for your group, please reach out to a Matthews™ Healthcare specialist.