In large-scale portfolio sales, ground lease structures with embedded Right of First Offer (ROFO) provisions are increasingly common. However, recent market activity reveals a concerning trend: prospective buyers seem to be manipulating capitalization rates (CAP rates) to disadvantage ROFO holders. While the practice may appear neutral from a seller’s standpoint, it raises questions about fairness, market integrity, and whether such tactics undermine the principle of a “bona fide arm’s length transaction.”

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Background: ROFOs in Healthcare Real Estate

A Right of First Offer gives the hospital system ground lessor the opportunity to purchase a property before it is marketed to third parties. ROFOs are commonly included in ground lease agreements to provide health systems with long-term control of their real estate footprint.

The principle behind ROFOs is straightforward: if a ground lessee (building owner) intends to sell, the ground lessor (landowner) has the chance to purchase the property under fair market conditions before outside bidders. This structure is designed to protect the tenant’s operational stability and ensure a transparent process.

The Issue: CAP Rate Manipulation in Portfolio Sales

In the event of a large portfolio sale, it is often the case that the proposed Purchaser allocates lower CAP rates (higher purchase price) to properties with ROFO options, while offsetting the portfolio’s total value by applying higher CAP rates (lower purchase price) to properties without such restrictions.

• Seller Impact: Neutral. Sellers focus on the aggregate portfolio value and are indifferent to how CAP rates are allocated across properties.
• Buyer Benefit: Strategic. By inflating ROFO pricing, buyers discourage hospitals and tenants from exercising their rights.  Additionally, if the ROFO is exercised it can create a higher CAP rate across the balance of the portfolio.
• ROFO Holder Impact: Negative. Hospital systems are effectively denied their contractual right to purchase at fair market value, as the manipulated pricing makes the transaction economically unattractive.

The mechanics of this pricing manipulation can be seen in the graphic above:

• In a bona fide arm’s length transaction MOB 1 has a 6.5% fair market value (“FMV”) Cap Rate.
• By allocating a lower CAP Rate of 5.75% to MOB 1, which has a ROFO option, the Buyer is able to discourage the ROFO holder from exercising its right. This allocation results in a proposed purchase price that is $4 million above FMV to the hospital system.
• In either scenario, the Buyer achieves a 6.3% portfolio CAP rate and the Seller realizes a $70 million total sale price.
• If the ROFO were to be exercised, the Seller would still net $70 million, while the Buyer would acquire the remaining two MOBs at a 6.75% CAP rate.

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Portfolio CAP Rate Compression and Asset-Level Conflict

In many portfolio transactions, CAP rate compression occurs because the portfolio is marketed and priced as a unified bundle rather than a set of independently valued assets. When unrelated properties — often held in separate LLCs — are aggregated into a single sale, the resulting blended pricing may no longer reflect the true, asset-specific fair market value.

This dynamic can create a pricing conflict of interest at the asset level:

• The portfolio objective is to maximize aggregate pricing, which encourages cross-subsidization between assets.
• The single-asset standard in most legal and contractual frameworks assumes pricing is based on an independent, arm’s-length value for that specific property.

If a price for an individual building is derived from a pooled or blended portfolio valuation rather than from an asset-level market process, it raises the question of whether the resulting figure can still be considered a bona fide arm’s length transaction for that specific asset.

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Legal Considerations: “Bona Fide Arm’s Length Transactions”

ROFO language typically includes language stating there needs to be a “bona fide arm’s length transaction” on the asset level.  The ROFO language may also prohibit offers that are designed to defeat or frustrate the hospital system’s ROFO.  An arms-length deal requires independent parties, each acting in their own self-interest, to negotiate a fair price based on market conditions. Deliberately altering prices to undermine a ROFO could be considered an act of bad faith that violates this principle and creates a transaction that is not “arm’s length”.

An arm’s length transaction requires:

1. Independent parties with no conflict of interest.
2. Fair market pricing established through open-market negotiation.
3. Good faith conduct by all parties involved.

Deliberately inflating CAP rates to suppress ROFO exercise appears inconsistent with these principles. By structuring transactions in a way that prioritizes buyer advantage over fair market transparency, sellers and buyers risk violating the spirit—if not the letter—of the ROFO provision.

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Implications for Healthcare Systems

For health systems, the consequences extend beyond a single transaction:

• Lost control of strategic real estate assets.
• Erosion of trust in landlord-tenant agreements.
• Potential legal disputes regarding the enforceability of ROFO clauses.

Healthcare systems should carefully evaluate ROFO notices in portfolio sales, with particular attention to CAP rate assumptions and alignment with market data.

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What Options Do Healthcare Systems Have?

Healthcare systems facing ROFO provisions in portfolio sales can take proactive steps to protect their interests:

1. Contingency Planning Review subject properties and the language associated with their ROFO rights to create contingency plans. Because ROFOs often allow only a limited response window, preparation in advance of a notice will expedite decision-making.
2. Independent Valuation Engage third-party appraisers to validate CAP rates and purchase pricing. When possible, conduct annual appraisals of ROFO-encumbered properties to ensure alignment with fair market value.
3. Legal Review Examine ROFO provisions for enforceability and potential remedies in cases of bad faith pricing. Early legal guidance helps protect against manipulative practices.
4. Negotiation Strategy Address ROFO mechanics proactively during ground lease negotiations. Clear, well-defined terms will help safeguard rights and reduce ambiguity in future transactions.  Include language that prohibits offers that are designed to defeat or frustrate the hospital system’s ROFO.

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While portfolio sales are structured to maximize aggregate value, the practice of allocating aggressive CAP rates to ROFO-encumbered properties and pooled portfolio valuations undermines the intent of these contractual rights. This manipulation disadvantages hospitals and health systems, raising critical questions about fairness, legality, and the definition of a bona fide arm’s length transaction. To protect strategic assets and ensure fair market outcomes, health systems must approach ROFO provisions with preparation, diligence, and expert support.

Colliers’ Healthcare Services team partners with hospitals and health systems nationwide to navigate ROFO notices, analyze portfolio sales, and safeguard long-term real estate interests. Whether your organization is actively facing a ROFO notice or preparing for future scenarios, Colliers can provide independent valuation, legal coordination, and strategic guidance needed to ensure your rights are protected.

Brian Bruggeman, CCIM, SIOR
Senior Vice President | Healthcare Services
brian.bruggeman@colliers.com
952.837.3079