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Selling Your Medical Asset With A Maturing Loan In A High-Interest Rate Environment
In the dynamic landscape of commercial real estate, timing often plays a pivotal role in making the most lucrative decisions. If you find yourself owning a medical real estate asset with a maturing loan in the midst of a high-interest rate environment, it might just be the opportune moment to consider selling.
Morgan Stanley analysts found nearly $1.5 trillion in overall commercial real estate debt is maturing by the end of 2025. With the recent spike in interest rates, challenges have been created for many owners as their low-rate loans come due. In this article, we'll delve into the reasons why selling could be a smart move and how you can navigate this situation effectively.
CAPITALIZE ON FAVORABLE MARKET CONDITIONS
Real estate markets are cyclical, and timing your actions to coincide with the right phase can yield substantial benefits. A high-interest rate environment can lead to decreased demand for property ownership, resulting in a possible slowdown in the market. With that said, the healthcare real estate market is somewhat counter-cyclical as institutional investors see this asset class as a “flight to safety”. Property valuations for medical real estate assets are holding firm in spite of raising interest rates, with institutional equity rotating out of other types of commercial real estate sectors, such as office and retail, and into medical real estate where investors see stability, positive demographic fundamentals, and a lower correlation between healthcare expenditures and the broader economy.
SALE V CASH OUT REFINANCE
A cash-out refinance made more sense than selling a few years ago for many ownership groups, as interest rates were much lower than cap rates, and ownership groups could obtain favorable LTVs and appraised values, allowing them to reduce their equity in the property and take cash off the table. In the current market environment, interest rates available to ownership groups have moved much higher while medical cap rates have stayed firm, putting the two on par for the first time in many years. It now makes much more sense for ownership groups to pursue a sale rather than refinance and get stuck with a heavy debt service load as well as less attractive cash-out options. Additionally, sellers can retain ownership (as much as 30%-40%) which is a more efficient way of reducing equity costs and allows for future buy-ins from incoming physicians.
OPTIMIZE INVESTMENT DIVERSIFICATION
A diversified investment portfolio is crucial for long-term financial stability. If a significant portion of your investment portfolio is tied up in a single medical real estate asset, selling it can provide you with the funds to explore other investment opportunities. One structure available is the UPREIT transactions which allows Ownership Members to continue to receive monthly cash‐flow, the tax benefits of depreciation, and a diversified investment in a portfolio of healthcare real estate assets that is professionally owned and managed by the REIT.
SEIZE APPRECIATION POTENTIAL
While high-interest rate environments can lead to a slowdown in the market, the healthcare real estate market has weathered the storm better than most other sectors of the commercial real estate market. By selling your medical real estate asset now, you could secure a favorable selling price that reflects the property's current value. Waiting too long might expose you to the risk of potential future market fluctuations, potentially leading to a less favorable selling price.
In recent years we have seen several partially new entrants to the market. Private Equity groups have splintered off forming smaller groups with varying investment criteria, one of which is a lower threshold in terms of deal size.
Traditionally, the majority of the PE space was occupied by groups who would not acquire assets under $10m. In the last 3-4 years numerous new groups have appeared targeting medical assets below that threshold, driving prices and demand.
STRATEGIC RE-EVALUATION OF GOALS
A maturing loan and a high-interest rate environment provide an excellent opportunity to reassess your investment goals. Consider your long-term objectives and financial aspirations. Does the medical real estate asset align with your current plans? Selling now allows you to take control of your financial trajectory and redirect your resources toward endeavors that better align with your goals.
NAVIGATING THE SALES PROCESS
Selling a medical real estate asset involves careful planning and execution. Here are a few steps to guide you through the process:
Evaluate the Market: Understand current market conditions, property values, and demand in your area to set a realistic selling price.
Engage Professionals: Collaborate with a real estate advisor who specializes in this unique asset class to ensure a smooth transaction and optimize your financial outcomes.
Market Strategically: Leverage various marketing channels to showcase the property's unique features and attract potential buyers.
Negotiate Wisely: Approach negotiations with a strategic mindset, considering offers that align with your financial objectives.
Execute Diligently: Work closely with legal professionals to ensure a well-negotiated Purchase and Sale Agreement (PSA) and seamless closing.
In conclusion, the convergence of a maturing loan and a high-interest rate environment can present an optimal window for selling your medical real estate asset. By capitalizing on favorable market conditions, mitigating financial risks, and optimizing your investment strategy, you can navigate this scenario strategically and position yourself for long-term financial success.
Your Trusted Healthcare Real Estate Partner
CREG | U.S. HEALTHCARE INVESTMENT SALES
Andrew R. Larwood
Managing Partner & Principal
m: +1 (770) 845-2091
andrew.larwood@capitalre.com
Allen C. Inman
Managing Partner & Principal
m: +1 (404) 550-7897
allen.inman@capitalre.com
Joshua D. H. Rees
Managing Partner & Principal
m: +1 (858) 312-0657
josh.rees@capitalre.com
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