Real Estate, Commercial

How to Underwrite a Medical Office Building

Underwrite a medical office building by evaluating tenant credit and stickiness alongside the real estate. Analyze health system affiliation, physician practice financials, lease term, specialized buildout costs and referral proximity to hospitals. Key metrics are WALT, percentage leased to health systems, tenant renewal history, TI cost per square foot and DSCR.

What makes medical office building underwriting different

Medical office buildings are leased to physician groups, health systems, outpatient surgery centers and imaging providers. Tenants tend to stay longer than in general office because they invest heavily in specialized buildouts, need proximity to hospitals and patients, and face high costs to relocate equipment and licenses. That stickiness supports strong renewal rates. However, tenant credit varies widely: a large health system is very different from a small private practice. On-campus buildings may sit on hospital ground leases with use restrictions, while off-campus buildings depend on patient access, parking and demographics.

Lenders focus on tenant mix, health system affiliation, lease term and ground lease terms if on campus. They may give favorable terms when a strong health system leases or guarantees a large share of space. Equity investors focus on stable income, long-term demand from an aging population and the potential to recycle capital through sale-leasebacks with health systems. Both look closely at regulatory considerations, such as Stark Law and anti-kickback rules affecting lease terms with referral sources, and at the cost of re-leasing specialized space if a tenant leaves.

Key metrics

WALT

Shows how long contractual medical tenant income lasts.

Health System Leased Percentage

Space leased to strong health systems is generally more creditworthy than space leased to small practices.

Tenant Retention Rate

Medical tenants are often sticky, and renewal history validates that assumption for this building.

TI Cost per Square Foot

Medical buildouts with plumbing, lead lining and specialized HVAC are costly, affecting re-leasing economics.

Medical TI typically runs higher than general office TI.

DSCR

Confirms in-place NOI covers debt service.

Lenders commonly look for about 1.25x or higher.

Ground Lease Terms

On-campus MOBs often sit on hospital-owned land with use restrictions and rights of first refusal.

How to underwrite it, step by step

Abstract leases for term, rent, options, use restrictions and expense structure.
Identify health system affiliations and guarantees and evaluate tenant financials.
Review renewal history and the specialized improvements each tenant has installed.
Analyze any ground lease, including term, rent, use restrictions and purchase rights.
Assess location relative to hospitals, patient demographics and parking.
Confirm regulatory compliance of leases with referral sources.
Model rollover with renewal probability, downtime and medical TI costs.
Size the loan and set reserves and lease-related covenants.

Due diligence checklist

Leases and amendments
Rent roll and lease abstracts
Tenant estoppel certificates
Tenant financial statements and health system affiliation documentation
Ground lease if on campus
Fair market value opinions for physician leases
T12 and CAM reconciliations
Property condition report including medical systems
Parking analysis
Phase I environmental site assessment
Appraisal

Key risks and mitigants

Physician practice tenant has weak financials.

Review practice financials and guarantees and weight health system tenants more heavily.

Ground lease restricts use or transfer.

Review ground lease terms, obtain ground lessor estoppel and confirm financing provisions.

Health system consolidates and relocates practices.

Assess strategic importance of the location and lease term.

Leases with referral sources violate healthcare regulations.

Require fair market value support and legal review.

Specialized buildouts are costly to re-lease.

Underwrite higher TI costs and longer downtime.

Typical financing and deal structure

Medical office buildings are financed with bank loans, life company loans, CMBS and debt funds, often at terms comparable to or better than general office when leased to strong health systems. On-campus buildings on ground leases require leasehold financing, which depends on ground lease term and lender protections. Physician groups that own their buildings often use SBA 504 or conventional owner-occupied loans. Health systems frequently use sale-leasebacks to monetize real estate, creating long-term net leases attractive to institutional investors. Covenants commonly include TI/LC reserves, cash sweeps tied to major tenant events and ground lease compliance.

Red flags

Major tenant is a physician group with declining revenue or partner departures.
Ground lease expires shortly after loan maturity.
Leases with referral sources at rents without fair market value support.
Health system plans a new competing facility nearby.
Building lacks parking or accessibility for patients.

Frequently asked questions

Why are medical office tenants considered sticky?

Medical tenants invest heavily in specialized buildouts, equipment and patient relationships tied to a location. Moving is expensive and disruptive, and proximity to hospitals matters for referrals and procedures. As a result, many medical tenants renew at expiration, though underwriters still verify renewal history at the specific building.

What is the difference between on-campus and off-campus MOBs?

On-campus MOBs are located on or adjacent to a hospital campus, often on land ground leased from the hospital, and benefit from proximity to hospital services. Off-campus MOBs are standalone buildings in neighborhoods or retail corridors that depend on patient convenience. On-campus buildings may face use restrictions, while off-campus buildings may have broader tenant appeal.

Do healthcare regulations affect MOB underwriting?

Yes. Leases between hospitals and physicians who refer patients must comply with rules such as Stark Law and the anti-kickback statute, which generally require fair market value rent and commercially reasonable terms. Underwriters review lease terms and fair market value support because non-compliant leases can create legal and income risk.

How do lenders size loans on medical office buildings?

Lenders size MOB loans using DSCR, LTV and debt yield on in-place NOI, adjusted for vacancy and re-leasing costs. Buildings leased to strong health systems with long terms generally receive more favorable leverage and pricing. Small practice tenants, short terms or ground lease constraints lead to lower leverage and larger reserves.

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Educational content, not investment, credit, legal or tax advice. Benchmarks are common practitioner rules of thumb and vary by lender, market and cycle.