Capital Markets: ‘Lease-up’ MOBs have loan options

Financing can be structured to fund tenant improvements, leasing commissions

By Erik Tellefson

Erik Tellefson

Erik Tellefson

There are various financing opportunities depending on the stage of a medical office building (MOB), whether during construction/renovation, “lease-up” or stabilized. For example, MOBs with in-place tenancy of 65 to 80 percent, and a lease-up component for the remainder of the space can be structured to facilitate the borrower’s leasing of the unoccupied square footage.

Lease-up MOBs can be highly accretive to buyers – as the spaces lease up, there is often an incremental increase in the value of the building. Understanding this dynamic, lease up MOB loans can be structured to fund the costs of the tenant improvements and leasing commissions through multiple advance debt tranches.

Transaction Case Study: Prevarian Medical Office Building
■ Owner/Borrower: Prevarian
■ Lender: General Electric Capital Corp.acting through GE Capital, Healthcare Financial Services
■ Originator: Erik Tellefson, Managing Director
■ Occupancy at Close: 73%
■ Square footage: 20,000
■ Date of Loan: 4Q 14
■ Financing: First Mortgage Term Loan
■ Future Advances: Multiple advances in excess of initial funding. Included tenant improvement and leasing commissions.
■ Term: 5 years
■ Time to Close: 40 days

Given the subject MOB’s 73 percent occupancy at close, the lender structured multiple future advances for tenant improvements and leasing commissions conditioned upon the delivery of a signed lease and the resulting increase in the debt yield and debt service coverage ratio. The multiple future advance feature allows the borrower to lease up the MOB with first mortgage loan funds as opposed to equity (provided that funding conditions are met), effectively resulting in no borrower capital calls during the loan term, and a likely overall more accretive deal for the borrower.

In the above example, Prevarian elected to utilize a loan that includes multiple advances for tenant improvements and leasing commissions, resulting in a loan that aligns the debt with their business plan and allows for a seamless transaction. Upon execution, this plan takes the property to a stabilized basis with a higher loan amount and yields a more robust overall capitalization when compared to other typical lending options.

When looking for debt on lease-up MOBs, consider options that can be structured to allow for funding tenant improvements and leasing commissions. This option often results in a loan that is well aligned with the borrower’s business plan.

Preverian’s Allan Brown and Kathy DeLaVergne recently said, “Erik and his team presented the best overall loan package for this transaction.  They were able to be creative and designed a lending structure that fit our project’s specific needs.  In addition, the experience level of the GE professionals made for a quick and efficient closing.”

Erik Tellefson is the Managing Director of GE Capital, Healthcare Financial Services’ (HFS) Medical Office/Medical Properties Loan Originations segment. Since 2011, Mr. Tellefson has originated 100+ medical office transactions for $2B+ in loan commitments using HFS’ value propositions of healthcare expertise, structure and flexibility, certainty of execution, and the ability to align GE Capital debt with borrowers’ business plans.

This article provides general information and should not be used or taken as business, financial, tax, accounting, legal or other advice, or relied upon in substitution for the exercise of your independent judgment. For your specific situation or where otherwise required, expert advice should be sought. The views expressed in these articles reflect those of the authors and contributors and not necessarily the views of GE Capital or any of its affiliates (together, “GE”), and should not be deemed as a recommendation to purchase or sell any securities or investments mentioned. Although GE believes that the information contained in this publication has been obtained from and is based upon sources GE believes to be reliable, GE does not guarantee its accuracy and it may be incomplete or condensed.

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