Medical office buildings are a distinct commercial real estate category that attracts both specialized lenders and general commercial lenders comfortable with healthcare tenancy. The category outperformed standard office through recent market cycles because medical tenants rarely vacate due to the enormous cost of their specialized buildouts. Understanding how MOB financing works helps MLOs serve clients who own or want to acquire these properties.
What Makes MOB Financing Different
Medical office space requires specialized infrastructure: enhanced plumbing for exam rooms, increased electrical capacity, specialized HVAC for infection control, lead-lined walls for radiology suites, and waiting room configurations that comply with health code requirements. These tenant improvements can cost $100 to $300 per square foot or more, depending on the specialty. Tenants who have completed a buildout almost never leave voluntarily, which creates long effective lease terms and stable income streams that lenders value highly.
Financing Options for Owner-Occupants
Medical professionals who want to own their office space have strong options through SBA programs. SBA 7(a) loans provide up to $5,000,000 with the full amount eligible for real estate and leasehold improvements. SBA 504 provides two-loan financing: a conventional first mortgage at approximately 50% of project cost plus an SBA debenture at up to 40% of project cost, allowing 90% total financing with only 10% equity. The SBA 504 real estate debenture carries a 25-year term at a below-market fixed rate.
- ✦SBA 504: 90% financing available for owner-occupied; 25-year fixed-rate debenture; no balloon
- ✦SBA 7(a): up to $5M; more flexible use of proceeds including working capital alongside real estate
- ✦Conventional commercial: 70-75% LTV for investment MOB; 25-year amortization; typically 5 to 10-year term
- ✦CMBS: available for larger stabilized MOB assets; non-recourse structure
Key Underwriting Factors
For investment MOBs, lenders focus heavily on tenant credit quality and lease term. A 10-year lease with a hospital system as the anchor tenant commands more aggressive terms than a 3-year lease with a solo practitioner. Single-tenant MOBs versus multi-tenant MOBs also affect lender appetite: single-tenant concentration risk is higher but offset by credit quality if the tenant is strong.
Aria can walk through SBA 504 and 7(a) requirements for medical office acquisitions and identify which lenders specialize in MOB financing. Ask at vicariointel.com.
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