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Capital Markets: Financing large MOB portfolios

Such deals have become a much more prevalent part of the MOB landscape

By Erik Tellefson

To date, 2018 has been a robust lending year for Capital One, and as a reflection of the broader acquisition market, large medical office building (MOB) portfolios have been a very important component of the volume.

We consider large portfolios to include 10 or more MOB assets and sell for a total purchase price or value in excess of $100 million.

These transactions are not merely bigger deals than small portfolios or single assets, but also have multiple financing considerations aside from the overall size. That being said, size is definitely the first financing consideration. The size of the deal typically dictates the depth of available lenders.

While an MOB portfolio of $100 million has multiple lenders that can claim an ability to close on it, a much larger deal of $600 million has very few lenders that can take it down – especially for the often preferred, balance sheet lenders.

For example, Capital One has the ability to both close on an MOB portfolio deal of almost any size, but can also agent a syndication and hold a very large portion of the debt. Closing size and hold size are often the largest considerations for lenders related to the size of the transaction.

Expertise around medical office transactions and experience with the asset class are very important considerations in any MOB deal and are exponentially more important in the larger MOB portfolios. Given multiple assets in a portfolio, there’s a high likelihood that one or more has medical office specific issues such as unsubordinated ground leases, post-acute tenancy, ground leases with hospital rights of first refusal and rights of first offer (ROFOs and ROFRs) and restrictions, or rents that appear above market but that are actually related to space usage and build-out, tenant improvements (TI), rent or other specializations.

Finding these in due diligence can be a fatal flaw to traditional lenders without healthcare experience and can be a real problem for the borrower particularly if they are well into the process.

Capacity, capital markets execution and the ability to syndicate can all be an issue, especially if the borrower is the one taking syndication risk and if the lender does not have a dedicated healthcare capital markets group.

In MOB portfolio transactions north of $400 million it’s very likely the debt needs to be sold down to other lenders to manage loan exposures. Absent a dedicated experienced capital markets team, the transaction could be at risk, especially in a club deal where the syndication is necessary to proceed.

Capacity—the amount the lender has available for both individual MOB loans as well as for the product type—is often a differentiator amongst lenders on larger MOB portfolios. A lender with limited capacity, both for the individual MOB loans and for the overall asset class, is a risk for the borrower to the extent that less is syndicated than projected in the transaction and/or the portfolio changes, for example, if assets are added. Fortunately, Capital One has an experienced healthcare capital markets group and a significant amount of capacity so that we are well positioned for transactions of any type or size.

Finally, pragmatic and flexible structures and terms are very important in large MOB portfolio transactions where the borrower’s strategy for the assets is critical for success. It’s very important to have the ability to appropriately structure multiple advance facilities for tenant improvements and leasing commissions, add release provisions and even accordion features for the addition of future assets.

One of Capital One’s value adds is structure and flexibility. Our goal is to provide a bespoke financing solution aligning with the borrower’s business plan for the assets.

In summary, large MOB portfolio deals have become a much more prevalent part of the MOB landscape and the financing around them needs an experienced portfolio lender like Capital One.

Erik Tellefson is Managing Director with Capital One Healthcare and leads medical office and medical property lending. He has 18 years of experience in commercial real estate finance, including 13 years focused on healthcare, and works with clients to finance acquisitions, refinance existing debt, support working capital needs and fund growth initiatives.

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