How to Invest in Healthcare Real Estate with Triple Net Leases and Sticky Tenants

Cody Crabb (00:00)
yeah, yeah, yeah.

Collin Hart (00:00)
Yeah, it’s hard, right? Yeah,

your investment is binary, right? You either have a tenant or you have no tenant. And so a Burger King, when you drive by it, it’s not a generic building. It’s a Burger King, right? So does McDonald’s want a Burger King building? Maybe, but it’s going to take a lot of spend in order to make that into a McDonald’s instead of a Burger King.

Cody Crabb (00:11)
Yeah.

Yeah, yeah, there’s a reason

Welcome back to the Real Estate Pros podcast. I’m Cody Crabb with Investor Fuel.

Today we’ve got Collin Hart, partner at ERE Healthcare Real Estate Advisors, focused on medical real estate development and advisory. He’s worked on over $2 billion of transactions across the US, specializing in healthcare properties where care actually happens. So thank you so much for joining today, Collin.

Collin Hart (02:14)
Cody, it’s such a pleasure. Thanks for having me today and I look forward to sharing some insight.

Cody Crabb (02:18)
Yeah, I think this will be interesting because medical real estate is not really something you hear talked about a lot. this I think this will be an interesting one. So before before we dive in, I’d love to hear a little bit about you and how you got involved in such a really specific niche part of the real estate world.

Collin Hart (02:35)
I’d love to share it with you. So I started my career at a family office where they owned about 3 million square feet of retail shopping centers all over the state of Florida. So you can think like a Publix anchored center or Winn-Dixie anchored center with all kinds of shop space around it. And so I started there in my early twenties and I was focused on acquisitions, development, leasing, dispositions, really got to cut my teeth and learn every part of the business, even back to the file room.

Right. So really learned a lot there. And as the principal started to get a little bit older, you know, shopping centers are really management intensive. And so he started looking at ways to diversify not only geographically, but also in terms of reducing responsibilities and management oversight. And so we started working on single tenant assets. So we acquired properties all over the United States that were at least to one tenant.

And so this could be fast food restaurants, drug stores, gas stations, auto parts stores, little bit of industrial, a little bit of medical. And just to put it in the minds of your listeners, any building that you drive by, whether it’s like a McDonald’s or a Burger King or O’Reilly Auto Parts or anything like that, those are all single tenant properties that are owned by some landlord somewhere. And those landlords don’t have a lot of responsibilities.

because it’s a single tenant building occupied by just one business, the tenant really takes care of everything. So that’s something called a triple net lease. And so with a triple net lease, it’s generally a good position for a landlord because unlike a shopping center where you have to manage the parking lot and make sure the roof’s not leaking and make sure there’s no trash, whatever, in a single tenant building, most of those responsibilities are borne by the tenant.

Right? So if you’re a landlord, you can kind of own those properties anywhere in the United States. And you have one job, which is to collect rent or receive rent payments. So it’s a pretty good setup for a landlord. And so we were in Florida and we bought properties all over the United States. So it was a great learning experience. And in that process of doing it for many years, I started to realize like, hey, I’m working here and we’re buying all these properties.

but I’m never really going to own any of this. So I better keep forging my path, keep learning. And so I left that family office and I moved to a private REIT or real estate investment trust where we bought the same kinds of properties. So we bought fast food restaurants, drug stores, auto parts, gas stations, but we also bought a lot of industrial. We bought a lot of medical. And so in the year that I was with that REIT, we bought about $300 million worth of real estate just in a year.

And so it’s a lot different than just working for a family office. Now we were more on the institutional side. We were doing a lot bigger deals. We were doing a lot more deals and it allowed me to see and learn a lot more, which was an awesome experience. And so it was about a third, a third, third. So a third retail, a third medical and a third industrial. And so what I started to notice is that we were always getting the best deals on medical buildings. And it was because we were buying them from physicians or doctors.

and they didn’t always have good advice. So you know, physicians are great people. They obviously, you know, build their whole career around helping people. And many of them are business people, but they aren’t necessarily trained in business. So, you know, they’ve developed their practice and grown their practice. They bought or built their building as a way to control the destiny of their practice and invest in real estate. But they don’t always have the best advice. You know, they’re kind of maybe flying by the seat of their pants in terms of.

you know, buying a building or leasing a building. And so because of that, and because it’s kind of a niche world, we found like we were getting the best deals because they just didn’t have good representation or good advice. So in 2016, I co-founded ERE Healthcare Real Estate. And so what we do is we focus on working with doctors all over the country to help strategize on their real estate. And so we make money selling buildings, but we do a lot of work to get to that point, whether it’s

helping them negotiate a lease or helping them think about their long-term plan or what’s their succession plan, what’s their partnership structure look like. And so we get really in the weeds on helping, you know, just establish what are the goals for that investment and then what is the eventual exit strategy of that investment. Does that make sense?

Cody Crabb (07:46)
Yeah it does yeah and I think it kind of it sounds like you kind of had to go through all the beginning part to even get a chance to kind of do this medical world I mean at what point did you realize it was different enough to be like I could actually specialize in this or

Collin Hart (07:55)
For sure.

Yeah. So, I think it wasn’t that it was different enough. was just that it was underrepresented or less known. I would say, you know, even when we started the podcast, you said, Hey, this is like a pretty nichey area. you know, I haven’t really heard of people working in medical real estate, but it’s huge. Right? So if you think about it, anytime you go to the doctor, whether it’s just for a checkup or you have to go in for a surgery or procedure, or you go to the dentist or, know, you even have to go to the hospital.

Those are generally in buildings. so somebody owns that building, right? So.

Cody Crabb (08:32)
Well, yeah, I’m thinking about

my time. I I live in a city called West Jordan, Utah. It is not a particularly large city in Utah, but I’m thinking about the sheer volume of buildings that are all medical. it’s, they’re everywhere. And it’s when you think, when you think about it like that, it’s like, actually that does seem kind of like there’s, there’s something there. Yeah.

Collin Hart (08:43)
right. Agreed.

Yeah, the more you learn, it kind of changes the lens that you start to look through. And so you start to notice those buildings everywhere. Right. And so a lot of buildings like that are owned by hospitals. A lot of buildings like that are owned by REITs or family offices or private investors. But a lot of those buildings are owned by doctors. And so that is the area that we specialize in. And again, the niche isn’t just medical real estate. It’s working with physicians because we try to differentiate ourselves by

really understanding and trying to get inside the brain of the doctors and knowing all the challenges or opportunities that present themselves in the medical world. And so that’s really given us a leg up or advantage. When I first started it in 2016, you know, I was kind of just a real estate guy, right? To be honest with you. And over the years, over the last decade, we’ve become friends with so many doctors and learned so much about their business that it really positions us more as like a strategic advisor. And yes, we happen to be focused on real estate.

but we’re not just like typical real estate folks. And so that’s been something that’s really awesome and rewarding. I think a lot of physicians really appreciate that. But really what I think we’re here today to talk about is the opportunity in medical real estate, because to your point, it’s something that a lot of folks don’t think about or talk about even as an investment class.

Cody Crabb (10:44)
Is medical real estate something that someone could kind of inch their way into? sounds like something, I want to hear about that because it sounds, from your experience, it sounds like you really had to build up to get to the point where that was even a possibility.

Collin Hart (10:49)
Undoubtedly, yeah. Yeah.

It’s

true, but just from a knowledge perspective, right? So, you know, it’s easy to think about like multifamily, right? I think the common thing you hear is, well, everybody needs somewhere to live, right? Like that’s a multifamily kind of sales pitch, right? And I don’t disagree with that, although there’s obviously challenges in the multifamily market right now. In medical real estate, everybody gets sick, everybody needs healthcare. You can’t buy healthcare online.

Right? If you need to go to the doctor, yeah, you can do telehealth and that’s fine. But usually the result of telehealth is, hey, why don’t you come into the office? Right? Or, hey, let’s schedule you for a consult so that you can prepare for a procedure. And so…

Cody Crabb (11:29)
Yeah.

Yeah, as I always say,

telehealth is like, telehealth is to make sure you’re not gonna die and you can stay home and not have to go to the ER. That’s pretty much it. Yeah, exactly, yeah.

Collin Hart (11:39)
Exactly. Yeah, it’s like a triage. Let’s see you really quick and then we’re done with this, right?

And so it quickly escalates to you being, you know, in a clinical environment and seeing a doctor in person. So is it easy to get into? Well, I would say just the same as it’s easy to get into multifamily, right? Like you can buy a duplex or a quadplex and you can kind of, you know, invest your way up like that in healthcare real estate.

Cody Crabb (11:47)
Yeah.

Collin Hart (12:03)
You know, Cody, you’re probably thinking of all the buildings you drive by that are huge buildings, right? Like you think about the hospital. Obviously you remember that. Or there’s a building on the hospital campus. In the medical world, there’s all kinds of points of care or points of delivery of care. So like when you go to the dentist office, it’s not always in a big building, right? There are plenty of standalone dentist offices. you think. There you go, exactly. Yeah, if you think about even in health care, let’s think about like veterinary care.

Cody Crabb (12:23)
mine’s in a grocery store complex. Like, it’s, yeah.

Collin Hart (12:32)
So a veterinary building, it’s usually a standalone building often, and that might be like a 4,000 square foot building. It might be a 10,000 square foot building. So those are not always multimillion dollar investments. It could be half a million bucks, right? And so is there opportunity there? Yeah, absolutely. And really what I would liken it back to is that it’s a single tenant property, right? A lot of the medical buildings are single tenant properties. And so just like you might have to think about buying a Burger King.

you would have to think about buying a dentist office. And so is it easy to get into that? Well, you need to learn about it and know about it so that you’re making a prudent investment. But at the end of the day, there are deals that are $500,000 and $500 million, right? So it just, you have to start somewhere, right?

Cody Crabb (13:16)
Yeah.

So I’d be curious to know, you said you’ve got experience in the real estate world in general, and then kind of you started to specialize. So I’d be curious to know, like, what advantages are there with medical? I mean, every type of tenant has advantages and disadvantages. I’d just love to hear what are some for this field.

Collin Hart (13:35)
Right?

Yeah. So the advantages are sort of obvious, right? Everybody needs healthcare. And so you need somewhere to go, which we kind of just talked about. In the United States, there’s a real aging population. I mean, there’s a trend that the population is aging more quickly than new babies are born. So on average, we’re just getting older in the United States. As we get older, we get sick or we need care in various avenues. so it’s a very, the demand is there.

⁓ from, from the perspective of captivity or stickiness of tenants. So if you’re renting an apartment, well, you’re going to just move to the next nicest apartment. mean, it’s a pain. don’t, nobody wants to move, but you can move and there’s a lot of product, right? An apartment is an apartment. What differentiates is like the finishes or the location, maybe the amenities, right? in medical, if you think about, go to your dentist’s office, well, it’s usually a nice build out.

Cody Crabb (14:28)
Yeah.

Collin Hart (14:34)
But also they have very specialized equipment that a lot of times is difficult to move or expensive to move or expensive to, you know, replace. And so generally a dentist or a veterinary hospital or any other medical provider, they usually are staying there because it’s difficult to move. So that’s number one, and that’s a real pro. The other piece of that is that if you’re a patient, you don’t like to have to go to different places all the time. You’ve probably been going to that same dentist in the retail shopping center for

five years, 10 years, whatever, right? And if your dentist said, hey, we’re moving, you would say, I don’t know, that’s really kind of outside of the zone that I like to drive or whatever, right? Some silly excuse, but it’s real. Those are the excuses we make.

Cody Crabb (15:11)
Yeah, yeah, yeah. It’s true. So true.

Collin Hart (15:58)
Yeah, and so you would maybe find another dentist. And so because of that, because the demand is there, because it is difficult to move and because patients don’t like to change the office they go to,

It makes for very sticky or captive tenancy, which makes you feel good as a landlord that you’ll retain your tenant and keep getting rent, right? On the flip side, what are the challenges? The challenges are that a lot of times these are small businesses, right? So, you your dentist’s office, I don’t know if it’s owned by the actual practice. I don’t know if it’s owned by a big company or if it’s a guy, right? Yeah, just a dude. And so now you have to say, well, do I want that dude as my tenant, right?

Cody Crabb (16:33)
Yeah, it’s just a dude.

Collin Hart (16:39)
And now it’s not just he’s paying 2000 bucks a month for an apartment. It’s that he’s paying $10,000 a month in rent. So you have to feel really good that that dude is there to stay. Right. And that’s not to say that every medical office that you might buy is just a guy. Right. There’s plenty that are large practices. There’s plenty that are hospital systems. There’s plenty that are like more corporate entities. But that’s something that needs to be known and understood.

Cody Crabb (16:51)
Yeah.

Yeah.

Collin Hart (17:07)
Even

if you’re in a large corporate, you if your tenant is a large corporation, they still have to recruit doctors to work there. So the next challenge in healthcare is that I wouldn’t say there’s a shortage of doctors, but doctors are in high demand. It’s not easy to become a doctor. There’s a lot of education and time and money required to do that. And so they’re just not minting enough doctors.

to keep up with the pace of our aging population. So that is a challenge, but that challenge is somewhat counteracted by the fact that everybody needs healthcare, right? So as long as you’re in a good location and a good market, as long as you have a doctor or some stability of providers in that practice, you should be okay. There’s plenty more and we can go back 10 layers in the onion to learn more about that, but that’s probably not the topic for today.

To your point, there are pros and cons just like any investment.

Cody Crabb (18:07)
Yeah, so I’d be curious to know. So let’s say I buy a building with the intent of this being medical real estate. I’m curious, do you have to go search out specific types of tenants? So I’m just thinking a veterinarian, for example. Do you have to go find a veterinarian to be in this building because I made extra big doors or is there a dermatologist? That’s that kind of stuff.

Collin Hart (18:24)
Right.

Yeah. Yeah. Great question.

So typically those listening, the way they’re going to look at an investment like this is they’re not just going to say, there’s a building over there. That looks like it could be a good medical building. Let me see if I can find some doctors that want to work there. That’s generally not how it’s done. Usually what you’ll see, because a lot of physicians are entrepreneurial, is you’ll see that the physicians have bought or built a building at some point in time, and then they’re looking to sell the building.

and then lease it back. So you may have covered in another episode, like what a sale lease back transaction is. And so for a lot of doctors, they own their practice, they own their real estate, and they’re just paying rent from one pocket to another. So at some point in their career, they say, you know what? I don’t want to have all this money locked up in the building. I want to get my money out, but I don’t want to go out of business. I still need somewhere to practice. And so they’ll sell the building, but then simultaneously sign a new lease. And so that is a

common transaction type in our world. So for your listeners, I would not say, hey, you should go speculatively buy a building hoping to recruit a dentist to work there. Generally, you’re going to see some building that’s already has a lease attached to it or that you can buy and then attach a lease to it simultaneously. And so now you have basically a single tenant property. That’s that I would say that’s going to be the more common thing that your listeners would see. Yeah.

Cody Crabb (19:50)
Gotcha. ⁓ So

one question I’d have too is these are not on market deals. This does not sound like, I mean, the way you describe it.

Collin Hart (19:58)
There’s a whole marketplace.

No, actually there’s a whole marketplace of them. And so that is the marketplace. There is, yeah. So that’s the marketplace we work in. So even if you look on like LoopNet or CoStar or Crexie, you will be able to find deals like this if you search veterinary, dental, healthcare, entire marketplace. But to an earlier point, you said, what are the pros and cons? It’s not just, hey, let’s buy a building. There’s all kinds of risks or opportunities.

Cody Crabb (20:03)
Really?

Really? Huh.

Collin Hart (20:27)
that could make something a good or bad investment, just like if you’re buying an industrial building, just like if you’re buying a duplex, right? It’s just that the metrics that you’re looking at or the risk profile that you’re looking at is a little bit different.

Cody Crabb (20:39)
So I’d be curious to know, maybe what are the, I guess a a better question, right? Because like you said, these are actually sometimes there. What does an off-market deal look like in this kind of space? How do you go about finding these if you’re actually interested?

Collin Hart (20:51)
Yeah.

Off-market deals could be great. So we talked about how to find an on-market deal. You can search like LoopNet or something, right? For an off-market deal, a lot of times the way those come about is you know a dentist, right? And I don’t, because your dentist is in a shopping center, perhaps he doesn’t own his building, but there plenty of dentists where you go and it’s just like a walk-up, like single-tenant building, right? So you know your dentist. It looks like your dentist owns his building or her building. It’s a freestanding building.

and you’re talking to your dentist and you say, hey, do you own your building? Have you ever thought about selling your building? And so that could be how an off-market deal comes about. Obviously, you can work through a broker and maybe a broker knows some doctors that are looking to sell their building. But if you’re talking like pure off-market, I’d say that’s where the opportunity is, is hey, if you have the money and you’re looking to place the money into, you know, kind of a smaller dip your toe in medical investment,

It’s talking to your veterinarian or your, or your dentist. mean, kind of, kind of grassroots, you know.

Cody Crabb (21:57)
Yeah, interesting. I was kind of wondering that because when you said talking to physicians and kind of they want to do this, I just kind of find it interesting that some people might not even be thinking about that as some doctors or some practitioners might not even be thinking of this as an option.

Collin Hart (22:14)
I think most do not. In fact, our entire business is built around helping doctors create a succession plan or exit strategy. And so that is the conversation that we have with doctors all day. And many have heard of the idea of a sale lease back, but there’s a lot of nuance to it, as you can imagine, with any investment or any transaction. And so our goal is to educate them on that. So can you find an off-market deal? Yeah, probably. But it’s

complicated. And so it probably makes sense to work through an advisor or broker, somebody that’s done it at least once before, you know.

Cody Crabb (22:48)
Yeah, well, OK, just a couple more questions here as we’re as we’re finishing up. One one thing I’d be curious about is how much of the risk of this depends on your tenant. Like is does. Yeah, that’s I’d be curious to know.

Collin Hart (22:57)
Great question. Yeah.

So I would liken this to any single tenant property, right? So let’s say you buy a Burger King. It’s easy to understand the Burger King business model, right? You sell hamburgers, you make money, you pay your rent, right? So that’s easy to understand. Healthcare is a little bit more complicated than that because now you’re talking about patients and do they run a good business? Does the provider run a good business? So there’s more to it. But just like in a Burger King,

If Burger King goes away and decides they don’t want to sell hamburgers there anymore, what do do?

Cody Crabb (23:31)
yeah, yeah, yeah.

Collin Hart (23:31)
Yeah, it’s hard, right? Yeah,

your investment is binary, right? You either have a tenant or you have no tenant. And so a Burger King, when you drive by it, it’s not a generic building. It’s a Burger King, right? So does McDonald’s want a Burger King building? Maybe, but it’s going to take a lot of spend in order to make that into a McDonald’s instead of a Burger King.

Cody Crabb (23:42)
Yeah.

Yeah, yeah, there’s a reason

there’s so many buildings with Pizza Hut roofs still.

Collin Hart (23:53)
There you go. Exactly. And you notice them, right? Exactly.

So, so I would say that there is some value, some intrinsic value to the real estate. But one of the pros, which is this is a sticky tenant that’s difficult, that has a difficult time moving. That’s also one of the cons, which is this is a specialized building that was made for this dentist and, and, or this dermatologist or ophthalmologist or veterinarian. And hey, if you want to rent it to another one,

I don’t know if it works. It might. It just depends on their preference, you know? And so there is some intrinsic value there, but it’s way different than residential investing, right? It’s not like buying a house. It’s not like buying a duplex or a triplex or a quadplex. It’s a specialized single tenant asset. And I would say, yes, there are risks, but that risk would apply to any single tenant investment. Same kind of risk. So yes, location is important. But I would make the argument that the credit

Cody Crabb (24:22)
Yeah. Yeah.

Collin Hart (24:50)
worthiness of the tenant, the amount of money they make, their standing in the community. Those are things that are equally as equally or more important. And generally when you buy a building like this or any single tenant building, you’re not buying it because you’re thinking, hey, I can’t wait to lease it out to someone else. You’re buying it because you want this stream of steady rental income. And so you better do a great job on the front end, understanding the business, understanding their ability to pay the rent.

because you really don’t want them to leave.

Cody Crabb (25:21)
Yeah, yeah. Well, this has been really fascinating, honestly. So if people want to learn more about this, they want to get in touch with you, want to learn what your company does, how can they do that?

Collin Hart (25:32)
Sure.

Yeah, so you’re welcome to visit our website. So our URL is EREADV.com. And maybe you can put that in the show notes. But we’re on our website. We operate nationally and work on medical real estate investments on a national basis.

Cody Crabb (25:50)
Fantastic, well thank you so much for all this helpful info and this kind of new perspective. We really appreciate your time today and thank you all you listeners for joining us as well. If you liked what you heard today and you learned something, then go ahead and give us a like, subscribe, do all the things, comment, follow, review, and make sure you don’t miss another episode so you can get more great conversations like this one that I had today with Colby. Colby, I’m the worst.

because I am Cody and I get called Colby constantly and I did it to someone else. Collin! Thanks again so much and we’ll catch you next time.

Collin Hart (26:22)
Okay, I’m Collin and it’s great to be here with you today, Cody. I appreciate you.

Thanks, take care.