How to increase your total ASC value

In spite of current interest rates, medical real estate is selling near historically high values. This is due to a scarcity of ASC/MOB real estate for sale and the significant amount of capital that has been raised to purchase medical real estate. ASC physician-owners who are contemplating a sale of their ASC business often may wonder “how to maximize the total value of their ASC business and their ASC/MOB real estate” when they own both and want to sell one or the other or both.

There are 4 moving parts that impact the answer to this question:

1. EBITDA of the ASC business
2. Multiple of EBITDA that a buyer will pay for the business
3. Rent being paid by the ASC, and
4. Capitalization (CAP) rate at the time of the sale of the real estate

The following examples will help physician-owners make decisions regarding how to maximize the total value of their ASC business and their ASC/MOB real estate:

Example 1: for a 8,000 sf ASC and sale of a 51% interest in the ASC business:

ASC EBITDA: $1,500,000 X multiple of 8X = ASC business value is $12 million x 51% = $6.1 million for sale of a 51% interest

Real estate (NNN) rent: $25/sf* X 8,000 sf = $200,000 per year. Value of real estate using a 7% CAP rate** = $2.85 million. [Note: Rent of $25/sf is significantly below fair market value of $40/sf, depending on location].

Example 2: Same scenario but increase NNN rent to a market rate of $40/sf

Rent: $40/sf x 8,000 sf = $320,000. Value of real estate = $4.6 million

The increase in rent reduces EBITDA by $120,000. The ASC business value is thus EBITDA of $1,380,000 times 8X = $11 million X 51% = $5.6 million for selling a 51% interest in the ASC business.

Net impact of raising ASC rent from $25/sf to FMV* of $40/sf:

Value of 51% of ASC business declines in value from $6.1 million to $5.63 million, a decline of $470K. But the value of the real estate increases from $3.0 million to $4.6 million, a gain of $1.6 million and thus a net total value gain of $1.28 million, a 14% increase in total value.

Why is this? The multiples for the sale of real estate are significantly higher than the multiples for the sale of the ASC business. For example, with a CAP rate of 7% the buyer is paying a 14X multiple of rent vs an 8X multiple of EBITDA for the ASC business.

Example: EBITDA vs Rent:

*Fair market value

Suggestions for sellers of ASC real estate to maximize value:

• ASC physician-owners should increase the rent prior to selling a controlling interest in their ASC business. New owners will not want to increase the rent after a sale.
• Rent should be market rate which is typically $35/sf to $45/sf NNN, or possibly higher. The higher the rent, the greater the selling price of the real estate.
• Lease terms should be 10, 12 or 15 years plus renewal options, and be triple-net (NNN), to get the best price and most offers.
• Sellers should engage a broker who has national buyers competing for medical properties and the largest buyer pool.
• Obtain competing purchase proposals: sellers will always get a better price and terms when multiple buyers are submitting competing bids.
• Consider a sale to a real estate buyer who will pay for expansions, renovations and potentially allow for minority equity participation in the real estate post sale.
• Sellers can take advantage of a 1031 exchange to defer taxes and provide tax-free use of the sales proceeds to reinvest in other income generating properties.

ASC physician-owners can obtain fair market value rents, current cap rates, and valuations for their ASC business and real estate by contacting Jon Vick (jvick@ascrealty.com) at 760-291-7745 or Jason Winokur (jwinokur@ascrealty.com) at 914-216-3574.

Since 1998 Jon Vick has advised ASC physician-owners on real estate sale-leasebacks and strategic acquisition transactions for over 300 physician-owned ASCs, endoscopy centers (ECs) and surgical hospitals. ASC/MOB real estate expert and broker Jason Winokur specializes in ASC and MOB real estate sales and leasebacks, ASC/MOB valuations, and 1031 exchanges, since 1979.

More information can be obtained at: www.ascrealtyadvisors.com