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Landlords Stand to Benefit from Surging Medical Practice M&A

Posted by: | Posted on: July 16, 2020

Allison Nelson, co-deputy chair of Akerman’s real estate group, does a lot of mergers and acquisitions work for local healthcare systems. Since COVID-19, she has noticed what some consider an alarming trend.

“I see an uptick in physicians selling their practices,” she says. “If you have a small solo practitioner or even a mid-sized or regional practice group, they’re looking at the uncertainty of where things are going to go with COVID. If there is a large healthcare system that’s coming in and wanting to buy their practice, I think that this is helping them decide to go ahead and sell.”

Nelson isn’t alone picking up on this trend. In April, Axios reported that the coronavirus was forcing smaller providers to consider selling or shuttering their practices.

“I think the individual practitioners have been hit hard [by COVID-19], and even the hospitals, because they’re losing revenue from elective surgery,” Nelson says. “This is unlike the 2008 downturn, where I didn’t see that much of an impact on the healthcare industry.”

While there are any number of reasons for doctors to sell their businesses, medical office landlords might see advantages to working with a larger medical practice.

“The larger health care system coming in and taking an assignment of that lease is probably a good thing for you [as the office landlord] because now you’re going to have a more creditworthy tenant,” Nelson says.

Nelson says the larger healthcare systems will often ask for additional regulatory language in their leases. The medical operator will probably want changes to the lease around regulatory compliance or some better assignment rights.

“That’s not terrible for me as a landlord, so that’s an easy give,” Nelson says. “Sometimes, the parking isn’t sufficient, or they want additional signage or better alteration rights because they’re going to refresh or improve the space.”

If the landlord is willing to negotiate terms, the healthcare system will often welcome this conversation, according to Nelson. “I think it’s just a good opportunity for both parties to sit down at the table and reconfigure the arrangement,” she says.

In the process, the landlord can ask for some concessions. “That might be a good time [for the landlord] to open negotiations,” Nelson says. “They can talk about the rent rate and renegotiate the deal.

If these larger providers get the lease provisions that they’re asking for, Nelson says they may be willing to give a corporate guarantee or other concessions, such as a longer lease term, depending on the circumstances.

“They are sometimes willing to give a corporate guarantee or make other concessions in exchange for a lot of lease provisions that they would like to get,” Nelson says.

While renegotiations can often happen, not all new tenants want to make changes. “I represent a lot of the healthcare systems and while they may be open to negotiations, sometimes they just want to take the existing lease ‘as is,’” Nelson says.

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