What We Learned Holding a MOB 9 Years

Question

Buy right, manage well, and be patient on the exit. That's the whole lesson, and it's easier to say than to actually do for nine years straight.

Back in January 2017, we picked up a 13,821 SF medical office building out in Parker at an 8.25% cap rate. At the time, suburban Denver MOB was still trading at a discount to anything inside Denver proper - same tenant quality, same healthcare demand drivers, just less attention from buyers. That mispricing was really the whole thesis.

From there it was nine years of doing the unglamorous stuff well: keeping good tenants in place, staying on top of lease renewals so vacancy never became a drag, and generally just running a tight ship. No repositioning drama, no forced refi, no rushing to flip it the second the market looked good.

We finally sold this past January for $5.7 million, which worked out to a 3.65x MOIC and an 18% IRR over the hold.

This was actually one of our earlier deals, and it's the one that taught us the most about how we still approach value-add MOB today - patience compounds just as much as cap rate does.

Curious how others here think about that tradeoff: how long do you let a "boring but stable" asset run before you start actively looking for an exit?

Darren Nakos, CCIM

Recentric Realty Capital

Joel Owens · Answer

At 51 years of age I do not think about the most money I think about how passive or active the investment is because once you have so much money the TIME to live life becomes most valuable.

There is a study out there that was very interesting. It said if you ask people from all walks off life how long they hope to live regardless of current age most say 100 years old. So they plan their life whether 15 years old, 35, 50 etc. based on that. What often happens is time goes by real fast and they miss things they wanted to experience.

The average actual statistic which I found surprising is about 3 in every 10,000 people live to be 100 years old. Of that only about HALF still have quality of life to have enjoyment day to day.

Once the allure of the first millions wears off you have to be driven by a higher purpose larger than yourself. Mine is to transform people's lives through passive wealth creation. See them flourish into the life they really want. You not only have to look at your deal with how high the equity multiple was but the time of almost a decade it took to achieve it. In that time you have to look at opportunity cost and churn of the equity.

For example could you have exited sooner and then bought another value add 1031 exchange and another for 3 exits in the 9 year time going into larger and larger projects and what would have been the return then?

I have found when you buy value add you want the best location possible because once you stabilize it a local buyer in the good location will often pay really low cap rates because they are already worth 50 or 100 million and just want a long lease to outlive them to not have to do a renewal and then leave it to the heirs in stepped up basis.

Michael K Gallagher · Answer

fantastic write up thank you for sharing, and what a great deal!  the fundamentals always seem to win out regardless!

I do work in an adjacent space, retail medicine, did some work on remote ER type deals also but never strictly med office.  Would be curious to look at what demographics and market factors you looked at to pick this building and its location specifically.  and would be very interested to learn how you picked the tenants and made sure that mix was strong and saleable.