Deal One: The well being system wishes to promote an MOB to a REIT and lease the associated land to the REIT below a long-term floor lease; the well being system will then grasp lease the constructing again.
Deal Two: The well being system wishes to floor lease an space on its campus to a developer, who will construct an MOB; the well being system will then grasp lease the brand new constructing from the developer.
The bottom lease and house lease elements of those two transactions have been practically an identical, however Deal One closed in below three months, whereas Deal Two took over six months and incurred considerably bigger authorized and advisory charges for each events.
Why the distinction?
The events to Deal One employed a strong letter of intent (“LOI”), whereas the events to Deal Two had a really quick LOI and opted to leap straight to negotiating the definitive paperwork.
What makes a great well being care lease LOI?
Step one to a great LOI is having an LOI to start with! Typically, when the authorized workforce is introduced in, the deal phrases are already set. If the phrases solely exist within the minds of the events or their brokers, there may be sure to be confusion and inconsistency, which ends up in a number of redrafts of paperwork. If well being system technique leaders have a strong LOI they will populate through the preliminary negotiation stage, they will usually undertake the majority of negotiations earlier than the authorized groups are introduced in.
However what ought to the LOI comprise?
At a minimal, the LOI ought to comprise primary deal phrases, corresponding to the situation and dimension of the premises, the preliminary time period and renewal choices and the rental price. However Deal Two had all of those elements in its LOI and nonetheless floundered. Why? The satan is within the particulars, and the sooner within the course of, the higher to pin down these particulars whereas the events are nonetheless acutely targeted.
Listed below are some phrases the Deal One LOI contained that the Deal Two LOI lacked:
- A transparent and full definition of how base hire will probably be set (significantly for brand new build-to-suit developments);
- A sturdy work letter or contemporaneous growth settlement setting forth the method, timeline and accountability for tenant enhancements;
- An in depth description of the covenants and restrictions that the well being system wants – this might embrace restrictions on companies supplied, competitor tenants or subtenants, medical workers membership necessities and any spiritual or charitable use limitations;
- Well being care regulatory compliance provisions;
- Market-based lender restrictions that subtle events can anticipate based mostly on previous expertise;
- A purchase order choice and early termination rights, together with particular phrases on mechanics and pricing;
- Particulars on how the events would deal with the prices incurred in a break-up scenario;
- Figuring out who would draft the paperwork, and below what timeframe;
- Articulating the contingencies on both aspect (Does the well being system need to reduce stability sheet affect? Are inner or Board approvals but to be obtained?); and
- Whether or not the events’ advertising and marketing groups can announce the deal publicly, and in that case, at what stage within the course of.
In Deal One, all of those specifics have been spelled out clearly within the LOI, and that made the method of drafting and finalizing the definitive paperwork (and in the end shifting to closing of the lease and financing parts of the transaction) a lot smoother and with fewer frustrations.
Which lease negotiations have been most memorable to you (both as significantly painful or particularly environment friendly)? Tell us – we’d love to listen to from you!
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