Don't Ignore Medical NNN, If You Can Find It

NEW YORK CITY-Changes in demographics, along with the effects of Obamacare, are helping to drive strong growth in healthcare real estate. That's hardly news. Less widely known, however, is the dual appeal of healthcare properties with a net lease structure in place.

“It's a very important sector in our general economy, both from a real estate point of view and a social point of view, given the aging population, as well from the medical point of view with diseases such as diabetes,” Marilyn Kane, founding partner and president of New York City-based Iridium Capital LLC, tells GlobeSt.com. "It does translate into an investment/real estate opportunity, one not to be ignored.”

Although Iridium has focused on net leased retail acquisitions since its launch in late 2009, the company is now looking at opportunities in other sectors. “Because of the change in the interest rate, we really want to adjust what we're doing,” says Kane. “We're going to be looking much more seriously at medical and industrial. These facilities are a little more costly, in the $15-million to $20-million range. But instead of buying 10 Dollar Generals, we can buy an assisted living facility.”

Iridium's first foray into triple-net healthcare real estate was a DaVita dialysis center in Austell, GA, which Kane says has proven to be “a marvelous investment. We bought it a very opportune time, which was in 2011. Three years before that, DaVita bought the DSI renal company, and that was exactly the opportunity we were looking for, because those DSI leases are true triple-net. It was an incredible opportunity” to find such a facility in transition.

Finding a true triple-net was also fortuitous, because such acquisition opportunities are not always what they seem. With renal centers in particular, Kane says, “very often they're put on the market as triple-net leases. Then you read the fine print, and they're not. Sometimes I wish I could re-educate some of these marketing people, because you get the memorandums and the offering plans, and then you read 'landlord responsibility limited to capital improvements.' Then they list maintenance, repair and replacement of roof, structure, HVAC and parking. That's not a triple net lease; that's exactly the kind of responsibility that we do not want. Why not simply call it double-net?”

“Buyer beware” is Kane's advice, “unless as an investor you don't care. But we at Iridium certainly wouldn't want to find out that we have to replace an HVAC system after 10 years.”

As enamored as Iridium may be with renal centers, other types of healthcare real estate can lend themselves to triple-net. “Hospitals increasingly are creating outpatient facilities such as MRIs, and they will corporately guarantee those leases,” says Kane. “Those are tremendous opportunities. And the SNFs, or skilled nursing facilities, could also easily be a good triple-net opportunity. There will be more and more of those” in the years to come.

Then there are assisted living facilities, including nursing homes and independent living facilities. “These independent living facilities are very profitable, and they usually have the nursing home affiliation right on the same property,” Kane says. “If they have a triple-net structure, those would be very viable investments.” Partnerships of doctors and dentists could also lend themselves to NNN, although Kane acknowledges that these would be more interesting to individual investors.

Finding true triple-net in healthcare means due diligence, but Kane notes that the brokerage community can play a role. She sees an opportunity for brokers to approach practitioner partnerships or hospitals “and really have them understand the merits of not owning the real estate. If they're going to be in place for 10, 15 or 20 years, they're not going to be selling the real estate at any kind of profit. So there's a real opportunity for the brokerage community to enhance the number of properties out there, and get more of these facilities to do a true triple-net.”