When a medical lease guaranty comes from an affiliate entity rather than the health system parent, how much of a discount does that deserve

Imaging tenant means floor loading, shielding, and dedicated power. If they ever leave, that suite is expensive to make generic again. I pulled lead shielding out of an old radiology suite once and the disposal alone surprised me. Ask for the original build out drawings.

Fair question, plain answer: does the guaranty actually say the guarantor is liable for the full remaining term, or is it capped at some number of months of rent? Guaranties like this are often capped at twelve months. If this one is capped, the identity of the guarantor matters less than it seems, because the exposure is bounded either way.

Worth slowing down on the closing condition idea. Asking a health system affiliate to swap in a parent guaranty mid-term with nothing offered in return is a request that tends to get ignored, and it spends goodwill that might matter more at renewal. If the parent needs to be on the hook, the trade is usually something they want in return, extra term, a small rent concession, an expansion right. Otherwise, price it and move on.

The affiliate structure isn't automatically a red flag. Systems put outpatient operations in separate entities for a lot of ordinary reasons. What matters is whether the operating business inside that entity has revenue that covers rent. Physical therapy and imaging under a system brand usually has referral flow from the system, which is worth more than the paper.

Can you ask for a rent to revenue ratio instead of full financials? Some tenants will give a coverage number without opening the books.

I'm new and had to look up half of this, so a question for anyone: what does "base year" actually mean here in practice? My understanding is the landlord pays operating expenses at the level they were in the first year and the tenant only pays increases after that. If the base year is set from a year when the building was half empty, doesn't the landlord get stuck with an artificially low base forever?

@kevin_lombard yes, that's the gross up issue and it bites people. A well drafted lease says operating expenses are grossed up to 95% occupancy for the base year calculation, so the base reflects a full building. If that gross up language isn't in a lease, the low base travels with the tenant for six years. That's a specific clause worth searching for right now.

Sable's point is the one worth chasing before the guaranty. A bad base year is a certain loss every single year. A weak guarantor is a possible loss once.

On the discount question, there's no clean spread to quote. What tends to happen is that unguaranteed practice credit gets underwritten on renewal probability rather than on credit at all. So the questions become: how long has this practice been in this suite, how much of their build out did they pay for, how far are their patients traveling. A group that spent $400k of its own money on an imaging suite eight years ago is not moving over $2/sf. That's worth more than a guaranty from a shell.

The lender is going to have an opinion on this before anyone else does. If the suite is 38% of income and the guarantor is unrated with no financials, expect the loan sizing to treat it as local credit and expect a question about lease term versus loan term. Six years of lease against a five year loan with a balloon is a conversation. Get the term sheet language in writing rather than assuming.

Nobody has said the obvious one so I will. Rent at $35.83/sf, is that market? Pull three medical comps in that submarket. If the space is 15% over market, the guaranty question is moot because at renewal you're rolling down regardless of who signed what. If it's under market, you have cushion and I'd stop losing sleep over the LLC.