Posted: Wednesday, February 01, 2012
Medical office buildings are considered a specialty use. Since many lenders will not or have not financed MOBs, identifying those experienced with this asset is critical for a successful financing. Whether traditional 10-year debt, fully amortizing structures or even shorter term, higher leverage or higher priced debt that can include limited value creation plays, there is typically a lender attracted to the deal based on the specific underwriting criteria.
Even in today’s market, leverage levels up to 75 percent with rates less than 5 percent are available on stabilized assets. Of course, the preference is for more conservative loan to values and shorter amortization schedules, but the point to be realized is there are more financing structures available than your standard vanilla CMBS loans. Many borrowers don’t realize that.
While the government has direct effects on the healthcare industry, demographic changes and a growing health-conscious society constantly bombarded with new pharmaceutical therapies (just count how many prescription drug commercials are in the Super Bowl) demonstrate the demand for healthcare is strong and will continue to grow.
Consolidation is a continuing trend manifest from government involvement and can quickly change a rent roll. The positive is that a weaker credit is typically replaced by a stronger one on a lease obligation, and tenants in well-located assets either on a hospital campus or in strong satellite areas will expand. These same space considerations however will often see older or functionally obsolete buildings in non-critical, off-campus locations suffer.
Sponsorship is key in MOBs — especially for off-campus assets — but not in the same way as in more traditional commercial real estate investments. Here owner-occupied doctor groups or hospitals themselves can still receive favorable underwriting treatment. Their commitment to their investments and their businesses can be more important to the underwriting than a real estate professional who will try to compete for tenants in the general marketplace.
Even better is sponsorship that features a commercial real estate professional in a joint venture with the tenants. In this very situation we have delivered quotes up to 75 percent loan to value at 5 percent for a ‘90s vintage off-campus MOB.
Lender preference is typically for on-campus MOBs, however underwriting these investments is no simple task. These assets are typically located on land subject to an unsubordinated ground lease. Sometimes they’re located in urban situations, which is what happened with a newly developed LEED-certified building that we just financed. It was part of an unsubordinated air-rights lease for a to-be-built MOB. This requirement is dictated by the fact that the hospital is already subject to underlying bond financing. Lenders have different legal requirements in these situations and others won’t consider the more complex collateral situations at all even if they are active MOB lenders in all other cases.
Like other types of real estate, development of new MOB has suffered through the Great Recession. Financing is available for build-to-suit developments, however many times healthcare providers, specifically hospitals, don’t want to be owners of MOBs. One successful development mechanism utilizes a master-lease from hospital or similar strong credit to provide a backstop for the financing. Then the developer and master-tenant can work to sub-lease space to smaller doctor groups under appropriate agreements.
The development of an MOB is typically more expensive than a traditional office building when providing the needs for the end-user. Higher rents sometimes require that comps be located outside the subject area, submarket or even market. The resulting high loan per foot can also scare lenders that are willing to consider the underwriting as a whole. Such was the case in a recent financing we completed in California.
Even with an on-campus MOB occupied under a long-term lease by the same investment-grade credit hospital contributing the land and a national developer, many lenders had a difficult time reconciling the high loan per foot. This resulted from the use of the building as an ambulatory surgery center. Additionally, comps were not readily available in the immediate subject area.
At the end, though, there were still lenders that could get comfortable with the investment. They quoted anywhere from 65 percent to 75 percent loan to value with rates from 5 percent to 6.5 percent. By understanding the nature of MOBs in their various formats and different risk mitigants, many capital providers are able to offer competitive terms to their clients. In doing so, they make strong investments that should perform well into the future.
Source: Western Real Estate Business, Michael Sieman