FEB 24, 2020
Partnering With Private Equity and Holding Your Real Estate for Cash Flow (Part 2 of 5)
As a veteran ophthalmologist, you may have built your career with the goal of owning your own practice. Along the way, you had the opportunity to buy your clinical office or even build an ambulatory surgery center, giving you control over the destiny of your practice.
There is a wealth of information surrounding practice management, but what about real estate? With an informed real estate strategy and proper structuring, you have the opportunity to maximize the value of your assets.
In Part 2 of a five-part series, Collin Hart, MBA, CEO and managing director of ERE Healthcare Real Estate Advisors, highlights the success of Delaware Eye Care Center. Leveraging an informed real estate strategy enabled the founding physician to benefit from the passive cash flow available through real estate ownership and eventually capitalize on historically strong pricing in a sale.
Delaware Eye Care Center is a comprehensive ophthalmology practice with multiple locations. Founded by Dr. Gary Markowitz in 1984, the Dover, Del.-based practice grew from its original location to six: Smyrna, Milford, Bear and Newark, all in Delaware. As a regional leader in eye care, the practice was an attractive candidate to private equity investors as a “platform acquisition.” The practice’s dominant market presence would allow private equity to quickly acquire a critical mass in the state.
Dr. Markowitz partnered with EyeCare Services Partners in 2014, one of the early private equity deals in ophthalmology. Initially put into motion by private equity firm Varsity Healthcare Partners’ acquisition of Baltimore-based Katzen Eye Group, the partnership with Delaware Eye Care Center marked the branding of EyeCare Services Partners.
As one of the original EyeCare Services Partners platform practices, Delaware Eye Care Center became a critical component of the company’s growth strategy. With each location improving the reach of EyeCare Services Partners and delivery of care to patients, maintaining control of clinical locations was paramount. Enter the long-term lease.
With professional guidance, Dr. Markowitz was able to negotiate a favorable lease for the original location, which he owned. The lease featured a 20-year term, annual rental increases and an “absolute triple net (NNN)” structure. Similar to a NNN lease, an absolute NNN lease stipulates that the tenant pays for property taxes, insurance and building maintenance, but takes it a step further.
The tenant, in this case EyeCare Services Partners, was also responsible for the cost of any capital expenditures related to the property (repairs and replacement of roof and structural components) in addition to paying taxes and insurance directly. This type of structure creates a truly passive and hands-off real estate investment.
Benefiting from the lease structure he had implemented, Dr. Markowitz received monthly payments from his practice real estate investment for several years after his private equity transaction. Eventually, recognizing that such a lease was valuable to other real estate investors, Dr. Markowitz opted to sell the facility, capitalizing on the property at its peak value and diversifying the proceeds into other investments.
- Partnering with private equity when you own your practice real estate may enable you to continue receiving passive rental income post transaction.
- Leveraging professional guidance to structure your lease with the right parameters facilitates hassle-free ownership and management, while also positioning your asset as attractive to potential buyers.
- Understanding the dynamics surrounding real estate cycles and valuations will allow you to strategically capitalize on your property at the right time.
About the Author
Collin Hart is the CEO and managing director of ERE Healthcare Real Estate Advisors where he leads the company’s strategy to provide executive level advisory to owners of healthcare real estate. Before co-founding ERE Advisors, Collin was a director in the real estate division of a private investment banking firm, where he focused on advising physician partnerships and hospital systems in sale-leaseback transactions. He earned his MBA from the SC Johnson School of Management at Cornell University.
To contact Collin, view his listing on the Academy's Consultant Directory.