How should a buyer weigh a physician group lease against a health system guarantee on comparable off campus medical office buildings

Question

Take two off campus medical office buildings priced close enough that the spread has to come from credit rather than rent. Building A: 9,200 sf single tenant, orthopedic group, four owner physicians, ten year NNN at $32 psf with 2.5% annual bumps. Lease signed by the PC, with personal guarantees from two of the four partners, capped at twelve months rent each. Building B: 8,800 sf, same submarket, $31 psf, twelve year term, tenant is a subsidiary of a regional health system, lease signed by that subsidiary with no parent guarantee. A reasonable read is that B carries the better credit and A the better yield, and a broker pricing B seventy five basis points tighter than A is testing that view. Whether that spread is rational comes down to diligence. On B, ask whether the subsidiary has its own balance sheet or is a shell, whether the parent system has ever let a subsidiary default without stepping in, and what its standalone financials show. On A, ask what the two unguaranteed partners' exposure looks like, whether the PC has assets beyond the practice, and how the group's payer mix and specialty concentration affect the odds all four owners stay for ten years. A capped personal guarantee from real physicians is not nothing, and an unguaranteed subsidiary is not automatically investment grade.

Rena Expert · Accepted Answer

The 75 basis points is doing two jobs at once and only one of them is credit. Building B has a longer term and a lease signed by an entity you haven't seen a balance sheet for. A system subsidiary with no parent guarantee is not system credit. It's a special purpose entity that can be dissolved or defunded, and whether the parent has any obligation depends entirely on the lease language and on state law where the entity is organized, which is a question for your counsel rather than a spreadsheet input. Ask for the parent's audited financials, ask whether the subsidiary is a consolidated affiliate, and ask for a parent guarantee or a letter of credit as a price condition. If they refuse, you've learned something about how the system views that location.

On A, four partners at $32 psf on 9,200 sf means about $295k of annual rent against a practice whose revenue you can partially test. Ask for three years of practice financial statements, payer mix by percentage, the ages of the owner physicians, and whether the group has an outstanding acquisition LOI. A group with two partners in their sixties and no younger partner track is a rollover event with a lease attached. Guarantees capped at twelve months each buy you roughly two years of carry combined, not a decade of income.

What I'd test on both: whether renewal options are at market or at a fixed rate, and what the exclusive use clause blocks. An orthopedic exclusive in a multi-tenant setting kills your best backfills.

The assumption your spread rests on is that the ortho practice stays independent for ten years. Consolidation is the base case in most metros, and an acquirer may honor the rent and abandon the location at expiration.

carlos_nunez · Answer

Ask both sellers for the estoppels early rather than at the end. On a small building the estoppel is where the side letter nobody mentioned turns up, whether that is free parking for the partners or an unrecorded right of first refusal on your own building. Deals of this size turn on one line in an estoppel more often than buyers expect.

diane_kowalski · Answer

On A, I'd want to know who owns the practice's equipment financing and whether it's secured against anything at the site. If the group borrowed heavily for a surgical suite build, that debt sits ahead of your rent in a hard month, and it also makes them stickier. Both directions at once.

How should a buyer weigh a physician group lease against a health system guarantee on comparable off campus medical office buildings

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