March 28, 2019
John B. Mugford

A Value-add, Repurposing MOB Project with Plenty of Entitlement Risk Looks to be Paying off for Longtime Sector Investor Seavest

SAN FRANCISCO– Every medical office building (MOB) development project comes with some risk.

But for the first time in its history, White Plains, N.Y.-based Seavest Healthcare Properties LLC took on what can be considered a very big risk concerning a city’s entitlement, or land use approval, process in order to repurpose an existing building to medical.

There is probably no place in the country where the entitlement process risk is as acute as in San Francisco, a high-barrier-to-entry market for any type of project and where neighborhood activists scrutinize almost every proposal. The process – if successful – can take many months or even years to complete, while land and building costs continue to rise.

A company proposing a project in San Francisco must do a thorough job of underwriting and due diligence up front, and it must have the capabilities and persistence needed to see the process through.

It sure looks as if that’s what White Plains, N.Y.-based Seavest Healthcare Properties LLC has accomplished with its first-ever project in San Francisco: a repurposing and rebranding of an older, seven-story, 119,262 square foot office building at 939 Ellis St. into a modernized outpatient medical facility.

“I would say this is the first time we’ve really taken ‘real’ entitlement risk on a project,” said David Braunstein, VP of acquisitions for Seavest in an interview.

But it was a calculated risk and the company’s subsequent nine months of hard work has paid off. The San Francisco

Planning Commission voted unanimously on March 7 to approve Seavest’s application for a health services conditional use authorization for the building, clearing with way for the medical conversion.

At a time when competing for acquisitions of high-quality, stabilized MOBs is so pricy that many traditional sector buyers are looking for value-add and/or repurposing projects instead, Seavest took the entitlement risk by acquiring the 939 Ellis building in San Francisco’s desirable Cathedral Hill area in June 2018. It did so after learning about the property’s availability from San Ramon, Calif.-based Meridian, a healthcare developer.

Seavest is now moving forward with its plan to make $1.8 million in upgrades and attracting tenants to its repurposed MOB. The previous owner had already pumped $10.8 million into the facility, which had sat vacant for a couple of years after being home to a quasi-government agency.

With the go-ahead in the high-barrier-to-entry market, where medical space is extremely tight, Seavest is now in conversations with what it calls “the highest-quality healthcare” systems and providers.

Although company officials are confident they and their local leasing representatives – Sid Ewing of Colliers International and Angie Weber of CBRE Group Inc. (NYSE: CBG) — can fill the building, Seavest does have the luxury of having a strong anchor tenant already signed to a long-term lease for nearly half of the MOB’s rentable space. That anchor is Oakland, Calif.-based Kaiser Permanente, which plans to operate what Mr. Braunstein calls a “holistic wellness center.”

Jonathon L. “John” Winer, senior managing director and chief investment officer for Seavest, said in a news release, “There is strong interest in the remaining space in the building. We have more than 40,000 square feet of contiguous space available, which is rare in San Francisco.”

As noted, the 939 Ellis project carried plenty of entitlement risk. However, even if converting the project to medical had proven to be too difficult or costly – which was a possibility had city planners demanded more studies – the property’s value in a “red hot” office market helped mitigate that risk.

“We looked long and hard at this and determined the entitlement risk was worth it,” Mr. Braunstein says, “and we were able to structure this project with downside protection in the event we were unsuccessful, which made our investment committee comfortable with the prospect of taking on that entitlement process.”

“As a result of being successful in that process, we now have what we call a very strategic medical asset for best-in-class health systems and providers, which is what Seavest is all about,” he added.

The 939 Ellis building is in what Seavest calls the “emerging Van Ness corridor,” as it is just three or four blocks from Sacramento, Calif.-based Sutter Health’s newly opened, 274-bed, 1 million square foot CPMC Van Ness Campus hospital.

That campus included a new nine-story, 476,000 square foot MOB being developed by San Diego-based PMB.

Seavest believes its project will complement the medical office space being offered at the CPMC campus, providing an alternative location with lower rents for health systems or physician groups, especially those not on staff at the new hospital.

In addition to the proximity to the new hospital, 939 Ellis is surrounded by new high-rise residential complexes, transit, cultural centers, retail stores, restaurants, City Hall and some world-renowned technology companies.