Why Physicians Are Using Sale Leasebacks to Maximize Medical Office Value in 2025

The average age of physicians is nearly 54, and many are seeking ways to enhance their financial flexibility while continuing to provide patient care. One strategy that can achieve this is a sale leaseback transaction. In a sale leaseback, a physician or medical practice sells their property to an investor and simultaneously leases it back, allowing them to continue operating in the same location without disruption. This approach offers several advantages, including unlocking significant capital tied up in the real estate. In the medical office sector, this often involves a physician group or hospital system selling their medical office building (MOB) to a third-party investor, such as a private equity group or a real estate investment trust (REIT) and then leasing the property back. This article explores how sale leasebacks can be financially advantageous when working on a practice sale by examining the difference in valuation multiples.

Why Are Sale Leasebacks Happening in the Medical Office Sector?

Several factors are driving the increasing popularity of sale leasebacks in the medical office sector. First, MOBs are considered a highly attractive asset class for investors due to their resilience during economic downturns and the high probability of lease renewals. Healthcare providers, particularly physician groups, are often eager to unlock the equity tied up in their real estate to reinvest in their core operations, especially in light of rising interest rates and economic uncertainty.

Understanding EBITDA Multiples In Practice Sales

When selling a medical practice in a traditional manner, the valuation often revolves around a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). EBITDA is a metric used to evaluate a company’s financial performance and provides a standardized measure of a practice’s profitability, making it easier for buyers to compare different practices. Several factors influence the EBITDA multiple offered to a practice, including:

Practice Size: Larger practices, typically those with 10 or more physicians, command higher multiples than smaller ones due to their perceived stability, economies of scale, and greater negotiating power with insurers.
Specialty: Specialties with higher profit margins or cash-pay components tend to attract higher multiples.
Physician and Clinician Demographics: Practices with younger physicians and a stable clinician base are more appealing to buyers, leading to higher multiples.
Location: Practices in growing markets with high demand for their services tend to receive higher valuations.
Financial Performance: A strong EBITDA with consistent growth attracts more buyers and allows for better negotiation.
Market Conditions: The overall economic climate and trends within the healthcare industry can influence the multiples offered.

According to recent data, average EBITDA multiples for medical practices range from 2.5x to 8x, depending on the factors mentioned above. For smaller practices with revenues between $1 million
and $5 million and EBITDA under $1 million, the multiple typically falls between 3x and 4x. Larger practices with higher revenues and EBITDA can command multiples of 5x to 8x.

Capitalization Rates and Sale Leaseback Valuations

In a sale leaseback, the valuation of the medical office building is determined using capitalization rates. A capitalization rate (cap rate) is the ratio between a property’s net operating income (NOI) and its current market value. Cap rates have an inverse relationship with property values: higher cap rates translate to lower property values, and vice versa.

Recent data indicates that average cap rates for medical office buildings have been around 6.5% to 7%. In other words, this is a 14-15x multiple of the year-one rent. However, it’s crucial to remember that cap rates are subject to change based on market dynamics. While rising interest rates have put upward pressure on cap rates, medical office buildings remain a relatively safe and stable investment compared to other commercial real estate sectors, such as traditional office spaces. This stability makes medical office buildings attractive to investors, which can benefit physicians considering a sale leaseback.

Some physicians are concerned that revenue allocated toward rent will lower the practice’s EBITDA, reducing the practice’s value. With multiples being historically higher for a sale leaseback than a practice sale, it’s more profitable to allocate revenue toward rent to realize the higher multiple on those funds, resulting in a net profit in the end.

Why Sale Leasebacks Generate Higher Multiples

The key to understanding why sale leasebacks can be more lucrative lies in the difference between how medical practices and commercial real estate are valued. While practice valuations rely heavily on EBITDA, which reflects the operational profitability of the practice, real estate valuations focus on the long-term income potential of the property. In a sale leaseback, the physician or medical practice becomes a tenant with a long-term lease, typically ranging from 10 to 15 years. This long-term lease provides a stable and predictable income stream for the investor who purchases the property. As medical practices are generally considered reliable tenants, especially those with financial performance, investors are willing to pay a premium for lease properties.

Furthermore, the sale leaseback allows physicians to unlock 100% of the equity in their real estate based on market value, compared to traditional financing, which typically provides only 65% to 75% of the property’s appraised value. This immediate influx of capital can be used for various purposes, such as:

Investing in new medical equipment
Expanding services
Hiring additional staff
Paying down debt

By converting an illiquid asset into liquid capital, physicians can reinvest in their practice, potentially generating higher returns than they would have achieved by simply holding onto the property.

Why do a Sale Leaseback Prior to Selling a Practice

Physicians typically have three options when it comes to selling their medical practice and real estate: Sell the real estate via sale leaseback, causing the new practice group to assume the lease, sell the practice and negotiate a lease as part of that process before selling the real estate with that lease in place, or sell the real estate and practice simultaneously to respective parties or both to one party

Each option has its pros and cons but the first option most likely will bring the best outcome. A physician can sell the real estate through a sale leaseback to ensure that part of the business has sold, whether or not the practice sells. In addition, most practice acquisitions simply assume an existing lease, given its reasonable, and will underwrite lease payments if there are none already. Suppose the lease is negotiated during the practice acquisition. In that case, they may include terms such as an employment agreement or early termination clause, lesser rental rates, or increases, all of which could negatively impact the value and attractiveness of the real estate. Lastly, by having the real estate sold, the physician and the practice purchaser have one less item to negotiate, creating a more efficient closing process.

Understanding EBITDA Multiples in Practice Sales

In this example, even though the net operating income (NOI) from the sale leaseback is lower than the practice’s EBIDTA, the sale leaseback generates a significant higher valuation ($5.0M) compared to the traditional practice sale ($2.5M). This difference highlights the potential financial benefits of monetizing real estate through a sale leaseback. The relationship between the practice and the real estate sale can also have a financial impact, making it essential to consult with a professional before proceeding. Here are some real-life examples that highlight this connection:

A Georgia medical operator tried to sell their practice and real estate simultaneously, causing complications between lease negotiations with the new practice and the real estate buyer’s
expectations. This caused both sides of the transaction to walk away, effectively canceling the deal and motivating the seller to structure a sale leaseback before selling the practice.
A South Carolina medical clinic sold their practice without consulting a broker on the lease negotiation, and two seemingly minor clauses in those leases caused a multi-million-dollar reduction in value to their real estate.
A Tennessee medical group wanted to sell both the practice and clinic to the same buyer, and after three years of searching, they ended up closing their location and selling their real estate at a discount.

This highlights an important point: practice buyers typically do not want to buy real estate, and real estate buyers are not interested in purchasing a medical practice. As a result, sellers should handle these transactions separately to maximize value and avoid unnecessary complications.

Benefits of Sale Leasebacks for Physicians

Beyond the potential for higher valuations, sale leasebacks offer several other advantages for physicians:

Operational Continuity: Physicians can continue operating their practice in the same location without disruption, ensuring continuity of care for their patients.
Tax Advantages: Lease payments are typically fully deductible as operating expenses, potentially lowering the overall tax burden.
Improved Financial Ratios: Converting owned real estate into liquid assets can improve a practice’s financial ratios, making it more attractive to lenders and investors.
Reduced Risk: As an owner-operator, all your eggs are in one basket. An issue with the building or practice have a direct effect on the other. With a sale leaseback, a physician has the ability to exchange the value of their medical office into a separate real estate asset to diversify risk.
Focus on Core Activities: By freeing themselves from property management responsibilities, physicians can dedicate more time and resources to patient care. This can also reduce stress and allow physicians to focus on their primary role as healthcare providers.
Flexibility: Sale leaseback agreements provide healthcare organizations with more flexibility to adapt to changing market conditions or healthcare needs. For example, they may be able to lease back only a portion of their real estate or renegotiate lease terms in the future.

Recent Sale Leaseback Transactions

Sale leaseback transactions are becoming increasingly common in the healthcare industry. For example, a recent law in Massachusetts enhanced oversight of private equity in healthcare, including specific regulations for sale leaseback transactions involving medical practices. This highlights the growing recognition of sale leasebacks as a viable financial strategy for healthcare providers.

Potential Drawbacks and Risks

While sale leasebacks offer numerous benefits, it’s essential to consider potential drawbacks:

Loss of Property Appreciation: By selling the property, physicians forfeit any future appreciation in its value.
Long-Term Lease Obligations: Physicians are committed to lease payments for the duration of the lease term, which can be a significant financial obligation.
Potential for Rent Increases: Lease agreements may include rent escalations over time, potentially increasing operating costs.

Where are Sale-Leasebacks Happening Most Often?

While sale-leasebacks are a common transaction type across various commercial real estate sectors the medical office sector, along with the industrial sector, is experiencing a surge in these transactions, driven by a combination of factors. First, businesses are facing higher borrowing costs and heightened interest on their outstanding debt. For a dentist, optometrist, or physician, executing a sale-leaseback could greatly reduce financing costs without impacting operations. Second, medical professionals, especially those that operate their own practice, are aging even more quickly than the overall population is. Since 2000, the median age of a U.S. resident has risen from 35 to 39, a factor which supports heightened demand for medical facilities. At the same time, the average age among practicing medical professionals is 54 years, with nearly a quarter over the age of 65. Older providers may find that focusing solely on the practice rather than the real estate is a great way to lessen the responsibility of running the practice without reducing total patient or service counts.

The Sunbelt region, with its business-friendly environment, lower cost of living, and mild climate, has been a popular area for MOB sale-leasebacks. Places like Dallas/Fort Worth, Atlanta, Florida and Nashville are particularly attractive to investors due to their high levels of population growth, particularly among the aging baby-boomer cohort. However, other regions are also seeing increased activity, including the Midwest, with cities like Chicago, Indianapolis, and St. Louis experiencing positive momentum in the medical office market.

Southeast MOB Sale Leaseback Market

The Southeast has been a particularly strong area for these kinds of transactions. Demand from patients is growing rapidly in the Southeast, as populations balloon in many of the region’s cities. Providers are finding it difficult to expand or grow at a pace needed to meet patient needs, and the extra capital provided from executing a sale-leaseback could be exactly what a firm needs to grow. Transaction pricing and cap rates on these deals have been impacted by interest rate climbs but are holding up much more strongly than other regions of the U.S. are. In 2023, southeastern sale-leasebacks began netting higher per square foot price points than the national average for the first time on record. Within the Southeast, sale-leaseback transactions have been especially common in smaller towns, rural areas, and outer suburbs. Since 2015, 90% of MOB sale-leaseback transactions here have come from suburban or rural areas. In 2024, that figure slipped slightly to 87%, but still represents a significant majority of the deal flow.

Outlook for Sale Leasebacks in the Medical Office Sector

The outlook for sale-leasebacks in the medical office sector remains positive. The demand for medical office space continues to grow, driven by factors such as the aging population and the shift towards outpatient care. Investors are increasingly attracted to MOBs as a stable and recession-resistant asset class. However, falling interest rates could inject even more life into the market.

For physicians seeking to enhance their financial flexibility and unlock the value of their real estate, a sale-leaseback transaction can be a compelling strategy. By understanding the difference in
valuation multiples between practice sales and sale leasebacks, physicians can make informed decisions that align with their long-term financial goals.