Terms of the Deal
A long-term acute care hospital specializes in treating critically ill patients who require extended treatment in hospitals. This can include patients who are on ventilators, have multiple organ system failure, or who have complex wounds.
Common in commercial real estate, a triple net lease is an agreement in which the tenant pays taxes, insurance, and maintenance along with the rent and utilities. The landlord has no responsibilities for expenses; the rent is net income, says Cesar Cepeda.
The North Jackson Road property in McAllen had been vacant for 18 months by the time Cesar Cepeda got involved. The former tenant had vacated the premises before the triple net lease expired.
“I explained to the owners that when you sell a vacant building, the buyer will pay for the bricks and the land. If you want to sell the business, you need to create an income,” Cepeda says. “So my strategy was to lease the property to follow with a sale. And that’s exactly what we did.”
The RE/MAX Associates broker associate went looking for another medical provider to lease the long-term acute care hospital. Instead, he found a federal contractor that provides services to underprivileged children. Retrofitting the hospital presented new challenges and complex negotiations.
So began a months-in-the-making deal that earned Cepeda the 2021 William C. Jennings Award for commercial transaction of the year. Today, the facility is currently leased by the contractor and has a new owner committed to leasing the property.
In Search of a New Provider
“Right away, they were excited about the possibility to go back to getting income from this property,” Cepeda says. “The first day, I told them, ‘I don’t do miracles. I do my job to the best of my ability. This is going to be a very long process and very complicated. If you expect something else, I thank you for your time.’”
The hospital had been a long-term acute care hospital since it was built in 2006. Continuing that use seemed a natural fit. Cepeda sent roughly 430 personalized letters to every long-term acute care hospital in the country asking if they wanted to expand to South Texas. Two responded but nothing happened, he says.
News of the vacancy spread by word of mouth and reached a prospective tenant—a federal contractor that provides services to underprivileged children. The contractor submitted a letter of intent.
The contractor provides shelter and medical services, educational classes, and counseling. It also offers healthy meals, clothing and laundry, recreational activities and resources, legal representation, and religious services.
“They were looking for a kind of boarding school, which has nothing to do with a hospital. But if you think in terms of the facility, it works well because it has private rooms where you can host the children. It has a cafeteria and medical services and security. With some creativity, it was the right place,” Cepeda says.
Cepeda met with the tenant to determine its exact needs and then met with city and state officials to discuss requirements and alternatives. Retrofitting the hospital would cost hundreds of thousands of dollars and include adding room divisions, a new laundry facility, and safety upgrades. Half of the cost was for new HVAC units for the 30,000-plus-square-foot building.
Through negotiations, the parties reached an agreement: the tenant signed the triple net lease with a yearlong warranty on mechanical and structural systems.
The owners did not have the time to supervise every aspect of the permitting and contracting process. Cepeda helped out by occasionally communicating and coordinating with vendors. Eventually, the parties received a certificate of occupancy, completed inspections, and gained state approval so the tenant could start operating the facility.
Once the lease was signed, everybody was happy, Cepeda says. The facility was producing rental income again, and the owners were no longer paying the mortgage out-of-pocket. The tenant began operations with 105 children and 80 staffers.
Going Forward with a New Buyer
With the leasing complete, Cepeda could begin marketing the property for sale. A private equity fund from Florida submitted a letter of intent, which was accepted after some negotiations. The property went under contract.
“The buyer had the right to conduct feasibility and inspections, only to find that a property hosting minors is not open to the public, contractors, and inspectors,” Cepeda says. “I intervened and participated in monitored inspections guided by the tenant’s personnel and conducted numerous visits with contractors in order to complete any requested repairs or services required in the purchase agreement.”
During the visits, Cepeda saw the children who were now living in the building he was representing. He didn’t know what circumstances brought each child to the North Jackson Road site. He didn’t want to know—“I am very weak when it comes to children’s issues,” he explains.
He saw children taking steps toward a better life, taking classes, and meeting with counselors. He saw their potential and thought, Who knows who they will become or what they will accomplish when they grow up?
Cepeda was surprised and proud when he learned he had won the Jennings award. Sure, he considers himself a competitive Type-A personality and enjoyed closing the deal. But at the end of the day, the only accomplishments that really matter are the ones you do in the service of others, he says.
“These children don’t know what I did. They will never know. But I was there. I was an important part of the process to achieve something for the better. Every single one of us in this industry face opportunities every day. Sometimes we think it’s just another deal, but it’s an opportunity to be in the right place at the right time to change someone’s life.”