Deal One: The health system desires to sell an MOB to a REIT and lease the related land to the REIT under a long-term ground lease; the health system will then master lease the building back.
Deal Two: The health system desires to ground lease an area on its campus to a developer, who will build an MOB; the health system will then master lease the new building from the developer.
The ground lease and space lease components of these two transactions were nearly identical, but Deal One closed in under three months, while Deal Two took over six months and incurred significantly larger legal and advisory fees for both parties.
Why the difference?
The parties to Deal One employed a robust letter of intent (“LOI”), while the parties to Deal Two had a very short LOI and opted to jump straight to negotiating the definitive documents.
What makes a good health care lease LOI?
The first step to a good LOI is having an LOI to begin with! Often, when the legal team is brought in, the deal terms are already set. If the terms only exist in the minds of the parties or their brokers, there is bound to be confusion and inconsistency, which leads to multiple redrafts of documents. If health system strategy leaders have a robust LOI they can populate during the initial negotiation stage, they can often undertake the bulk of negotiations before the legal teams are brought in.
But what should the LOI contain?
At a minimum, the LOI should contain basic deal terms, such as the location and size of the premises, the initial term and renewal options and the rental rate. But Deal Two had all of these components in its LOI and still floundered. Why? The devil is in the details, and the earlier in the process, the better to pin down those details while the parties are still acutely focused.
Here are some terms the Deal One LOI contained that the Deal Two LOI lacked:
- A clear and complete definition of how base rent will be set (particularly for new build-to-suit developments);
- A robust work letter or contemporaneous development agreement setting forth the process, timeline and responsibility for tenant improvements;
- A detailed description of the covenants and restrictions that the health system needs – this could include restrictions on services provided, competitor tenants or subtenants, medical staff membership requirements and any religious or charitable use limitations;
- Health care regulatory compliance provisions;
- Market-based lender restrictions that sophisticated parties can anticipate based on past experience;
- A purchase option and early termination rights, including specific terms on mechanics and pricing;
- Details on how the parties would handle the costs incurred in a break-up situation;
- Identifying who would draft the documents, and under what timeframe;
- Articulating the contingencies on either side (Does the health system want to minimize balance sheet impact? Are internal or Board approvals yet to be obtained?); and
- Whether the parties’ marketing teams can announce the deal publicly, and if so, at what stage in the process.
In Deal One, all of these specifics were spelled out clearly in the LOI, and that made the process of drafting and finalizing the definitive documents (and ultimately moving to closing of the lease and financing portions of the transaction) much smoother and with fewer frustrations.
Which lease negotiations were most memorable to you (either as particularly painful or especially efficient)? Let us know – we’d love to hear from you!
For questions or additional information, please contact:
- Andrew Dick at adick@hallrender.com or (317) 977-1491;
- Joel Swider at jswider@hallrender.com or (317) 429-3638; or
- Your primary Hall Render contact.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot give legal advice outside of an attorney-client relationship.
