Carried Interest Rears Its Head, Again
WASHINGTON DC—As far as recent Washington
crises go, President Obama’s proposed budget for the fiscal year was, on one hand, a
yawner. No looming deadline is on the horizon; the US credit rating is secure, at least
from this particular event; no tsunami of tax
increases is coming down the pike. Further,
the proposed budget must wend its way
through a bitterly divided Congress. The
chances of the budget as currently proposed
emerging intact are close to nil.
On the other hand, the budget is a statement of sorts by the Administration of its
goals and views and hoped-for direction for
the country and economy. In that respect, it
is quite a serious event.
Understandably, the CRE industry was
dismayed, although not at all surprised, by
the proposed measure to recharacterize car-
ried interest. Again. To be sure, most see the
need for change. The Institute of Real Estate
Management’s chief legislative officer,
Chuck Achilles, notes that even if sequestra-
tion stays in place, the resulting savings are a
drop in the budget against the federal debt.
This is the case, he says, even if sequestration
stays in place the entire 10 years.
Hospital Campus MOBs Need Special Handling
Medical office buildings have performed well as a sector, and are
poised for more growth through development due to demographics, the Affordable Care Act and other market factors. Many
MOBs have been and will continue to be located on hospital campuses (or otherwise affiliated with hospitals) due, in part, to continuing consolidation of smaller doctor practices into larger
groups. The involvement of the hospital differentiates a campus
MOB transaction from the unaffiliated MOB transaction or ordinary commercial real
Typically, the hospital
will be the landlord under
a ground lease or, in the
By Andrew M. Chonoles,
Ross Yustein and Jason Polevoy
event of the acquisition of a fee interest by the MOB owner, the
beneficiary under restrictive covenants of record (recorded documents). The hospital may also be an anchor tenant in the MOB.
When entering into MOB transactions, hospitals face the conflicting interests of providing doctors with offices close to the
facility and preventing competition with the hospital. Hospitals
will attempt to restrict uses in the MOB that compete with services
(current or future) provided by the hospital. The MOB owner
must ensure that these restrictions do not prohibit those ancillary
services that doctor tenants would expect to perform. The more
overreaching the restrictions, the more difficult it will likely be
for the owner to lease up the MOB.
Further, especially with religiously affiliated hospitals, uses will
be restricted that would violate the hospital’s operating mandate.
Finally, the MOB owner likely will be restricted from leasing to
doctors not affiliated with the hospital. Thus, MOB space leases
must include covenants to protect the MOB owner from violating
such restrictions, and provisions addressing a tenant’s loss of hos-
pital affiliation. Further, in many cases, if a doctor tenant violates
a use restriction, the MOB owner will not be in default under the
ground lease as long as it takes affirmative steps to enforce its
rights and remedies.
Andrew M. Chonoles is the managing partner of Kleinberg, Kaplan, Wolff &
Cohen PC and a member of the firm’s real estate department. Ross Yustein is
chair of the real estate department, and Jason Polevoy is a partner in the department. They may be contacted at firstname.lastname@example.org, email@example.com
and firstname.lastname@example.org, respectively. The views expressed here are the
Vital Signs...Office led the way in Q1 CMBS loan defaults, with 55% of the total.—Fitch Ratings