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Global Healthcare Services Structures Tax-Efficient Seller Reinvestment for Seattle MOB Disposition

Written by: Jonathan Kesler, Global Healthcare Services

The Newmark Grubb Knight Frank Global Healthcare Services team recently closed on the sale of Rainier Orthopedic Institute in Puyallup, WA. Anchored by Proliance Orthopedic Associates, a dominant provider of orthopedic care in the Puget Sound region, the 31,921 SF Medical Office Building (MOB) includes a state-of-the-art outpatient ambulatory surgery center and imaging suite. Seller structured the disposition as a sale-leaseback with each tenant signing long-term leases commencing upon sale. Represented by NGKF, MBRE Healthcare, a national owner/ operator of medical office buildings, won a quiet marketing process that resulted in a very aggressive sales price. The final two participants in the marketing process were MBRE and a dominant, public healthcare REIT. As both groups pushed their respective limits on price and deal terms, reinvestment of sales proceeds quickly became a deal point of great importance.

The ownership entity, a group of 6 physician partners and an outside investor, were not motivated sellers in early 2016. However, the group’s property manager and leasing agent provided them with some compelling sales comps, which prompted the group to look further into valuing the asset and testing the market. The appetite for healthcare investment in the greater Seattle market grows as the market itself grows. Fueled by a boom in the local tech industry, Seattle is the 4th fastest growing city in the country. The Seattle/ Puget Sound market has been one of the most heavily pursued markets in the country by the healthcare real estate investment sector. According to Real Capital Analytics, Seattle and Seattle Metro have seen 41 medical office building sales greater than $5mm since January 1st, 2014 for a total monetization volume of 1,691,426 square feet of space at an aggregate volume of $774mm or $413/ sf. The most notable transaction to date is the 01/2016 $199mm sale of the First Hill Medical Pavilion from Dallas based Trammell Crow Co to Chicago based Heitman and Denver-based Nexcore Group. The sales price works out to $884/sf- a record for a commercial office building in Seattle at the time.

Much of the institutional grade transaction volume in this market sold to public healthcare REITs, however the Rainier Orthopedic Institute project is a testament to the savvy and aggressive private equity that is competing with the REITs for quality, stabilized healthcare product on a national level. The decision to sell this building to MBRE was largely a result of the private equity buyer’s ability to offer the sellers the option to reinvest a portion of their choosing of their sales proceeds into the new ownership entity. Working closely with Seller’s broker, Newmark Grubb Knight Frank's Global Healthcare Services team structured a JV agreement with Buyer and Seller, which awarded the physicians a strong preferred equity return, multiple options to divest, and limited risk exposure. The seller’s equity contribution to the new JV was substantial. Todd Perman, Garth Hogan, Dana Hamric, and Jonathan Kesler represented the Buyer in this transaction and worked closely with Seller representatives Tom Sante and Keith Honsberger with Kidder Matthews to structure an offer and coinvestment model that was compelling for both parties and resulted in a successful transaction.

Please contact: Jonathan Kesler jkesler@ngkf.com or Dana Hamric dhamric@ngkf.com for more information

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