Note: In the first part of this article, we looked at the nuts and bolts of and the motivation for the $141 million sale of medical office buildings by a large physician practice in the mid-Hudson Valley region of New York. This story looks further at the deal.

As Crystal Run Healthcare in Middleton, NY, looked to its future as an expanding, multi-specialty physician group with a strong, perhaps dominant, market share, it considered several ways in which to garner capital in order to keep growing.

Assisting the 300-plus physician practice in analyzing the options was the healthcare group at Raymond James in New York, which won the advisory assignment through a competitive process.

Among the alternatives considered, according to Laca Wong-Hammond, a senior VP with Raymond James, was to sell (monetize) some or all of its six owned medical office buildings, find an equity partner, and/or borrow more capital.

“We analyzed these scenarios from a number of fronts, and we did it concurrently with looking at the monetization of the real estate,” Ms. Wong-Hammond says. “But it came down to trade-offs between cost of capital, credit implications and qualitative considerations affecting cultural fit.”

As it turned out, Crystal Run's leaders chose a sale-leaseback of its owned properties, In late 2013, in two tranches, Crystal Run, which serves 200,000 patients annually, sold six medical office buildings (MOBs) to Griffin-American Healthcare REIT II for $141 million.

Competition was strong among bidding investors, of which there were 12, “in large part because of the Crystal Run brand,” notes Wong-Hammond.

“We cast a wide net, including a number of net-lease investors, because of the way the structure was set up, opportunity fund investors, developers, because of future development possibilities, REITs, private and public, private equity,” she recalls.

The sale of the assets, according to Crystal Run officials, provides the group practice with capital to continue growing operations and recruit more physicians to serve its increasing patient base. The 300-plus doctor, 40-plus specialty group, which is one of just six accredited physician-hospital network accountable care organizations (ACOs) in the country, is also planning to launch its own health insurance plan.

While Wong-Hammond would not confirm whether Griffin-American was the highest bidder, she did add that Crystal Run was looking for a long-term partner with experience in healthcare real estate that might want, if offered, participate financially in future development projects.

“As important as total (price) consideration was Crystal Run's requirement to structure a long-term partnership with the buyer to allow Crystal Run to retain an ownership type perspective toward its single-tenant office buildings,” said Douglas Sansted, Crystal Run's chief legal officer.

Best serving its patients could entail adding new facilities that Griffin-American, which has an overall HRE portfolio of more than $2.2 billion based on purchase price, will likely get a chance to finance or partner in, according to Ms. Wong-Hammond. 

According to Danny Prosky, president and COO of Griffin-American, “the deal was at a 7.1 percent going-in cap (capitalization) rate with fixed annual bumps.” Those bumps, or annual rental rate escalations, are 3 percent, he notes.

As part of the negotiations, Griffin-American gained ownership of the buildings on a fee simple basis, meaning there are no ground leases involved.

“We're always looking to partner with the people and organizations who we think will be the winners in the new healthcare paradigm,” Prosky says. “And we think Crystal Run is certainly one of those groups that will continue to be one of the winners,” he says.