Transactions: Atlanta MOB deal (March 2006)

RREEF acquires MOB for $61.3 million

NEW DETAILS EMERGE IN RECENT ACQUISITION OF DOCTORS CENTER FOUR IN ATLANTA

 

By Murray W. Wolf

 

Newly obtained information reveals that RREEF North America paid $61.283 million, nearly $294 per square foot, for its recent acquisition of an Atlanta medical office building (MOB).

As reported in last month’s edition of the Healthcare Real Estate Insights^™, RREEF North America acquired the leasehold interest in Doctors Center Four, an eight-story, 208,546-square-foot, Class A MOB on the Saint Joseph’s Hospital campus in Atlanta. The San Francisco-based real estate investment advisor acquired the property on behalf of its RREEF America II Fund.

The deal closed Dec. 13 and was disclosed in January. At that time, the purchase price was not revealed. But, the sale price is now public information with the filing of the transaction with Fulton County, Ga.

“If land had been included, you could have added $20 to $30 per square foot,” for a total purchase price of up to almost $325 per square foot, notes Hayes Swann, a senior director with GVA Advantis in Atlanta. Mr. Swann, along with GVA Advantis executive director Matt Tritschler, represented Saint Joseph’s Hospital.

Mr. Swann confirmed the purchase price because it is now public record. But, he deferred to RREEF any discussion of capitalization rates (the anticipated rates of return on the property). Calls to RREEF were not returned in time to be included in this article.

A land lease – with a twist

The Doctors Center Four sale included the leasehold improvements to the site – essentially the building and lease agreements with current tenants – but not the land, Mr. Swann says. Hospitals frequently retain ownership of the land underneath on-campus MOBs that they sell in order to maintain a degree of control over the properties. As a result, the buyers typically operate such buildings with a long-term ground lease, and that’s what happened with Doctors Center Four.

But, there’s a twist. Even though there is a 99-year ground lease in place, it isn’t with the hospital. It’s with the Metropolitan Atlanta Rapid Transit Authority (MARTA). A MARTA commuter rail station is located immediately north of Doctors Center Four, and MARTA also owns the land beneath the MOB. Mr. Swann says about 95 years remain on the ground lease.

MARTA received a one-time kicker – an additional cash payment – when the sale of the leasehold closed, according to Mr. Swann. He declined to reveal the amount of the kicker.

GVA Advantis started marketing the property toward the end of last summer using Peracon, a Web-based investment sales service. GVA Advantis provided a database of potential investors, to whom Peracon broadcast emailed information about the MOB investment opportunity. Peracon also tracked the responses and hosted an online “deal room” where potential buyers could register, sign a confidentiality agreement, get more details online and request to receive a hard copy of the marketing materials.

Deal drew 20 offers

Mr. Swann said that the investment was offered to a wide range of potential buyers, both foreign and domestic, with a demonstrated interest in office properties and medical office properties in particular. The target group included pension funds, advisors and other institutional investors; real estate investment trusts (REITs); tenancy in common (TIC) syndicators; and developers and investment groups backed by institutional partners. He declined to say how many prospects were contacted.

“At the end of the day, we had interest coming from a very broad range of investors,” he says.

GVA Advantis received 20 “very qualified” offers, Mr. Swann says, mostly from institutions and investment groups backed by institutional capital.

“That’s a good number on a deal this size,” he says. GVA Advantis had discussions with several other interested parties but, on the basis of those conversations, those parties determined that they were not willing to submit bids that would be competitive with the anticipated sale price.

Even so, the choice of RREEF came down to more than money, Mr. Swann says.

“It was really something where we wanted to find not only the price and terms …,” he says. “As important was to find the right buyer.” GVA Advantis’ client, Saint Joseph Hospital, needed “a good landlord, a good neighbor” and a firm with a sophisticated understanding of medical real estate.

RREEF, a unit of Deutsche Bank, is one of North America’s largest private property owners, with $27.5 billion in assets under management. The firm also recently launched a joint venture with NexCore Group LP, a Denver-based medical and mixed-use real estate developer. (For more on the RREEF-NexCore joint venture, please see “”JV mix med and money” in last month’s edition of Healthcare Real Estate Insights^™.)

Upside potential

Doctors Center Four opened in July 2003. The MOB was developed for Saint Joseph Hospital by Carter Real Estate, the Southwest’s oldest and largest privately held commercial real estate firm. Carter will also continue to lease and manage the MOB.

The property was about 83 percent leased at the time of the sale, which means that the current cap rate is most likely less than optimal. RREEF was clearly attracted by the potential upside – the opportunity to improve its rate of return by leasing up the building. Discussions are already under way with several potential tenants, Mr. Swann says.

The property also has development potential. When Carter Real Estate negotiated the original land deal with MARTA to meet the hospital’s immediate needs, it also secured an option to expand facilities on two additional sites as part of the hospital’s future master plan objectives.

Mr. Swann praises the Saint Joseph Hospital board for making timely decisions on a complex transaction.

“There were a lot of moving pieces to it, especially with the MARTA ground lease,” Mr. Swann says of the deal. “But all in all it was a very good transaction.” q