Benefits of Retained Physician Ownership

When physicians consider selling their medical office buildings, most assume it's an all-or-nothing decision: either sell 100% and exit completely, or retain 100% ownership and continue managing the property. However, there's a third option that an increasing number of sophisticated physician-owners are pursuing: selling a majority stake to an institutional partner while retaining minority ownership.

This retained ownership structure—sometimes called a joint venture, partial sale, or recapitalization—offers compelling benefits: immediate liquidity, continued participation in property appreciation, professional management, and enhanced operational capabilities, all while maintaining meaningful economic interest in an asset you spent decades building.

What Is Retained Ownership?

The Basic Structure

In a retained ownership transaction:

• Physician Sells: 51-80% of property ownership to institutional investor (REIT, private equity fund, family office)
• Physician Retains: 20-49% ownership stake as minority partner
• New Entity: Property typically transferred to new LLC or partnership with defined governance
• Professional Management: Institutional partner assumes day-to-day management responsibilities
• Ongoing Returns: Physician receives proportionate share of rental income and appreciation

Example Transaction

$10 million medical office building, $3 million loan balance:

• Structure: Sell 60% stake, retain 40%
• Transaction Value: $10M × 60% = $6M
• Physician Receives: $6M − ($3M loan × 60%) = $4.2M cash at closing
• Physician Retains: 40% equity worth $4M
• Ongoing Income: 40% of net operating income (e.g., $200K NOI × 40% = $80K annually)
• Future Appreciation: If property appreciates to $12M, physician's 40% = $4.8M (gain of $800K)

Key Benefits of Retained Ownership

1. Immediate Liquidity Without Full Exit

The Advantage: Extract substantial capital (typically 50-70% of property equity) while maintaining meaningful ownership stake.

Why This Matters:

• Diversification: Move significant capital out of concentrated real estate position into diversified investment portfolio
• Debt Payoff: Eliminate or substantially reduce mortgage debt, improving cash flow
• Major Purchases: Fund retirement home, education expenses, or other large needs
• Practice Investment: Reinvest capital into practice expansion, equipment, or new locations

Unlike 1031 exchanges (which require full reinvestment) or UPREITs (which provide no immediate cash), partial sales generate substantial immediate liquidity.

2. Continued Participation in Appreciation

The Benefit: Maintain proportionate ownership in property you built, benefiting from future value increases.

Appreciation Scenarios:

$10M property, 40% retained ownership:

• 3% annual appreciation: After 10 years, property worth $13.4M; physician's 40% = $5.36M (vs. $4M initially)
• 5% annual appreciation: After 10 years, property worth $16.3M; physician's 40% = $6.52M
• Rental growth + cap rate compression: Could achieve 6-8% annual returns, significantly enhancing retained equity value

Physicians who believe in long-term healthcare real estate fundamentals can "have their cake and eat it too"—liquidity now, appreciation later.

3. Professional Management Without Burden

The Structure: Institutional partner assumes all property management responsibilities as majority owner and operating partner.

What This Means:

• Day-to-Day Operations: Institutional partner handles tenant relations, rent collection, vendor coordination
• Maintenance and Repairs: Partner manages maintenance schedules, contractor relationships, emergency response
• Capital Planning: Partner develops and executes capital improvement plans
• Leasing: Professional leasing agents negotiate renewals and attract new tenants
• Financial Management: Partner handles accounting, tax reporting, investor distributions

For physicians approaching retirement or overwhelmed by property management, this is transformative—ongoing economic interest without time commitment.

4. Enhanced Property Operations and Value

The Advantage: Institutional partners bring professional expertise, capital, and capabilities that often enhance property performance beyond what individual physician-owners can achieve.

Operational Improvements:

• Vendor Relationships: National partnerships provide better pricing on insurance, maintenance contracts, capital projects
• Leasing Expertise: Professional tenant representation, market knowledge, negotiation skills improve lease terms and occupancy
• Capital Access: Partner funds major capital improvements (renovations, expansions) that might be difficult for individual owners
• Technology and Systems: Sophisticated property management software, financial reporting, tenant portals
• Risk Management: Professional insurance programs, legal resources, compliance expertise

Many physicians find their retained equity actually appreciates faster after partnering than it would have under continued individual ownership.

5. Tax Efficiency Compared to Full Sale

Smaller Immediate Tax Hit: Capital gains tax applies only to portion sold, not entire property value.

Example:

$10M property, $3M basis, 60% sale:

• Taxable Gain: ($10M − $3M) × 60% = $4.2M
• Capital Gains Tax (23.8%): ~$1M
• Net Proceeds: $6M − $1.8M (60% of debt) − $1M tax = $3.2M cash
• Plus: Retained $4M in equity (40% ownership)
• Total Value: $3.2M cash + $4M retained equity = $7.2M

Compare to 100% sale: $10M − $3M debt − $1.7M tax (23.8% on $7M gain) = $5.3M net. Retained ownership provides $1.9M more total value by maintaining equity participation.

6. Future Liquidity Options

Flexible Exit Timeline: Retained ownership doesn't lock you in forever—multiple paths to eventual full exit:

Option 1: Second-Stage Sale

• Sell remaining stake to partner or third party after 3-7 years
• Allows timing sale to optimal market conditions
• Spreads capital gains recognition across multiple tax years
• Appreciated equity provides larger proceeds

Option 2: Property Sale by Partnership

• Partnership sells entire property to third party
• Physician receives proportionate share of proceeds
• Clean exit for all partners simultaneously

Option 3: Pass to Heirs

• Hold retained ownership until death
• Heirs receive stepped-up basis, eliminating deferred capital gains
• Partnership interest easier to transfer than direct property ownership

7. Maintained Relationship and Influence

Continued Involvement: As minority partner, physicians typically maintain:

• Financial Reporting: Regular updates on property performance, occupancy, capital projects
• Major Decisions: Approval rights on significant matters (property sale, major capital expenditures, financing)
• Strategic Input: Voice in property strategy, tenant selection, capital planning
• Legacy Protection: Influence to ensure property maintained to standards consistent with your reputation

While not controlling the property, physicians maintain meaningful involvement without management burden.

Typical Partnership Structures

Governance and Control

Majority Partner (Institutional Investor):

• Day-to-day management authority
• Operational decision-making
• Vendor selection and contract execution
• Routine capital expenditure approval (under threshold)

Minority Partner (Physician) Approval Rights:

• Property sale or refinancing
• Major capital expenditures (typically over $50,000-$100,000)
• Annual budgets
• Material lease modifications
• Changes to partnership agreement

Economic Terms

Distributions:

• Typically proportionate to ownership (40% owner receives 40% of cash flow)
• Some structures include preferred returns (institutional partner receives 8% return before remaining cash flow is split)
• Distributed quarterly or annually

Capital Contributions:

• Major capital improvements typically funded by partners in proportion to ownership
• Or institutional partner funds improvements, reducing physician's ownership percentage (dilution)
• Partnership agreement defines contribution requirements and procedures

Sale Proceeds:

• Upon eventual property sale, proceeds distributed according to ownership percentages
• After mortgage payoff and transaction costs

When Retained Ownership Makes Sense

Ideal Candidates

Physicians Seeking Diversification:

• Substantial wealth concentrated in single property
• Want to reduce risk through diversification while maintaining real estate exposure

Property Management Fatigued:

• Tired of landlord responsibilities but reluctant to give up property entirely
• Value professional management but want ongoing economic participation

Capital Needs Without Full Exit:

• Need liquidity for specific purpose (debt payoff, major purchase, practice investment)
• Don't want to fully exit property ownership

Believers in Long-Term Healthcare Real Estate:

• Confident in property's appreciation potential
• Want to participate in future value creation
• Willing to accept minority position for right partner

Younger Physicians (40s-50s):

• Too young for full retirement but want to simplify
• Longer investment horizon to benefit from appreciation

Considerations and Potential Drawbacks

Loss of Control

As minority partner, you don't control day-to-day decisions:

• Cannot unilaterally make operational changes
• Dependent on majority partner's management quality
• Limited ability to force property sale if desired

Partner Relationship Risk

Success depends on choosing the right institutional partner:

• Poor management can harm property value, affecting your retained equity
• Conflicting priorities or strategies may create tension
• Partner financial distress could complicate ownership

Reduced Immediate Proceeds

Receive less cash at closing than full sale:

• 60% sale provides 60% of equity as cash vs. 100% in full sale (minus taxes)
• If immediate liquidity is primary goal, full sale may be better

Future Capital Calls

May be required to contribute capital for major improvements:

• Proportionate share of roof replacement, HVAC upgrades, etc.
• Failure to contribute may result in ownership dilution
• Creates ongoing financial obligation

Continued Tax Complexity

Partnership ownership requires ongoing tax reporting:

• K-1 tax forms annually
• Passive income/loss reporting
• More complex than complete exit

Structuring for Success

Key Partnership Agreement Provisions

1. Major Decision Approval Rights: Ensure minority partner approval required for property sale, major capital expenditures, refinancing, budget approval.

2. Buy-Sell Provisions: Define how minority partner can eventually exit: right of first refusal if majority partner sells its stake, drag-along rights if property sold, or put option after certain period.

3. Management Standards: Specify property must be managed to institutional standards consistent with comparable medical office buildings.

4. Capital Contribution Terms: Clearly define when capital contributions are required, amounts, timing, and consequences of non-contribution.

5. Dispute Resolution: Establish mechanisms for resolving disagreements (mediation, arbitration, buyout procedures).

6. Financial Reporting: Require quarterly financial reports, annual audits, and transparency on operations.

Selecting the Right Partner

Critical factors in evaluating institutional partners:

• Track Record: Years in business, number of similar partnerships, references from other physician partners
• Financial Strength: Capitalization, access to capital for improvements, stability during downturns
• Management Capabilities: Property management expertise, in-house vs. third-party management, technology and systems
• Alignment of Interests: Long-term hold strategy vs. quick flip mentality, commitment to property quality
• Communication and Transparency: Responsiveness, reporting quality, willingness to involve minority partners appropriately

Real-World Example

Dr. Smith's Partial Sale:

• Property: 30,000 SF medical office building in growing suburban market, purchased 20 years ago for $3M, now worth $12M
• Situation: Dr. Smith (age 58) wants to reduce management burden and diversify but believes property will continue appreciating
• Structure: Sells 65% to healthcare REIT, retains 35%
• Proceeds: $12M × 65% = $7.8M; after loan payoff ($2M × 65%) and taxes (~$1.2M), receives $5.3M cash
• Retained Equity: 35% = $4.2M value
• Annual Income: 35% of $600K NOI = $210K
• 5 Years Later: Property appreciates to $15M, Dr. Smith's 35% = $5.25M (gained $1.05M appreciation); sells remaining stake at age 63, receives $5.25M proceeds after taxes
• Total Value: $5.3M initial + $1.05M cumulative distributions + $3.8M final sale (after taxes) = $10.15M total vs. $7.2M if full sale at start

Conclusion: Best of Both Worlds

Retained ownership structures offer physicians a unique middle path between full sale and continued solo ownership. By selling a majority stake to an institutional partner while retaining meaningful minority ownership, physicians can:

• Extract substantial liquidity for diversification and major needs
• Eliminate property management burden through professional partner
• Continue participating in property appreciation and cash flow
• Benefit from enhanced operations and partner capabilities
• Maintain flexible future exit options

For physicians not ready for complete exit but seeking liquidity and simplification, retained ownership deserves serious consideration. Success requires choosing the right institutional partner, negotiating a balanced partnership agreement, and ensuring alignment of interests and expectations.

If you've built substantial equity in your medical office building but aren't ready to fully exit, explore whether a partial sale with retained ownership makes sense for your situation. It may provide the liquidity, simplification, and continued participation you're seeking.