Medical Real Estate Development: Location and Site Analysis

Posted on March 11, 2013 by MREA

The analysis for a location and site are two separate parameters for which to search for developable land to hold commercial real estate structure. Each type of commercial use, and each specific user, will make special demands for location and site. Access to main thoroughfares may be important to office, retail usage, while population or housing density for apartment usage, or proximity to rail lines or airports for industrial use. Medical location and site analysis tend to combine several of these factors, while consistently rely on proximity to other physicians, hospitals, surgical centers and ancillary services.

To consider a medical location and site in general terms, without specific medical use in mind, a seasoned developer, or user, will look at the following features and devise a way of rating each.

Features for Location Analysis

Physical

Natural Boundaries and Barriers
Manmade Boundaries and Barriers

Usage Patterns

Growth Areas
Traffic Flows
Regulations and Controls
Incentives
Tax Structures
Community Master Plans

Qualitative

Neighborhood Image
Community Attitude
Location Image
Surrounding Users

Linkages

Employment Centers
Retail / Restaurants
Road Network
Transportation and Shipping
Residential Areas
Labor Pool
Educational Facilities
Recreation
Customers
Municipal Services
Utilities
Competition

Supply and Demand

Population
Employment
Income
Wages
Expenditure Patterns
Absorption/Vacany
Real Estate Prices
Competition
Traffic Count

Features for Site Analysis

Land

Size and Shape
Front Footage
Soil Composition
Topography, Slope and Drainage
Vegetation
Buildable Sites
Engineering Requirements

Access

Side of Street
Medians and Curbs
Turn Lanes
Deceleration in Acceleration Lanes
Traffic Controls

Economic Factors

Price and Acquisition Costs
Development Costs
Taxes
Development Fees to Community
Municipal Services

Regulatory Factors

Zoning
Maximum Building Area
Required Parking
Environmental Issues
Permits and Licenses
Applicable Building Codes
Special Requirements (Buffers, Retention, Etc.)

Qualitative

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Building a Medical Facility

Posted on November 14, 2012 by MREA

Building a healthcare facility from scratch, similar to modeling a custom home, offers an opportunity to control the entire design to fit the particular needs of the medical provider. While the list of preparatory items is long and requires adequate time allotment and abundant resources to carry out, the opportunity, as part of a rebranding strategy is tremendous.

First, we suggest engaging a firm that is focused on relationships within the healthcare real estate sector. No, this does not entitle a medical professional to utilize a proprietary database to forge relationships independently for purposes of pitting one qualified real estate service provider against another. Rather, it allows for the opportunity to streamline the development process for the purposes of time expediency and future financial gain.

For small to mid-size healthcare providers that are initiating contact with real estate developers, it is vital to seek a real estate group that is knowledgeable in land management. Issues such as utility needs, zoning restrictions, detention requirements, along with developer demands and building or regulatory stipulations can quickly overwhelm these providers, especially if exhaustive planning was not prerequisite. Other items such as locale, comparable developments, leases or sales should be documented, and client, whether specialist group or primary care, should be made aware.

For most specialist physician groups, geographic awareness is an integral part of the entire value equation. The need to be within close proximity to a hospital or medical center is routinely the highest priority. Certain specialties will seek companionship with the hospital for benefits that are simply too costly for stand alone facilities that do not experience a high volume of patient care. Thus, seeking land or redevelopment opportunities that are well situated near hospital system is imperative.

As for primary care, locating within, or contiguous to, a hospital is not as important, especially if access is provided to hospitalists. Family practice organizations, which are now in highest demand by patients, specialists and large healthcare systems, are realigning themselves within medical centers for physician growth, referral and patient demand. This, especially as the financial incentives are too lucrative to ignore. To remain independent, some family practice physicians are seeking space in alternative uses such as retail centers or condominiums.

A unique development opportunity for healthcare providers is that of medical condominiums. This assemblage, or community, of buildings offers healthcare providers an opportunity to realize the equity and tax benefits of real estate ownership. The demand by physicians seeking such opportunities outweigh those pursuing traditional medical office space 2 to 1 these days; convenience taking precedence over compartment.

While this style gained favor in the medical community throughout the last decade, several medical providers have engaged our firm to assist in expansionary endeavors. As condos are built a certain size, the shape typically cannot be reconfigured. Also, condominiums are commonly built with unique features that are non standard. Any proforma sale analysis will have to include a longer sale schedule or reduction in price relative to added, exclusive amenities.

As specialized consultants that are unique to the commercial real estate industry, our assignment is to help chart the course for smooth sailing. We will assist healthcare providers through our unparalleled database of contacts and relationships. By streamlining the development process and assisting with routine financial and market surveys, we will minimize the risk of the provider while adding significant contributory support and value to the final product.

Lease Renewals for Medical Professionals

Posted on October 25, 2012 by MREA

An important clause not to be overlooked within a lease contract is the renewal option. Renewal options pertain to the potential extension(s) of the lease upon the date of lease completion. Renewal options will contain language regarding lease rates going forward, concessions such as free rent and tenant improvement allowances and operating expenses. All of these terms are negotiable and will play an important role in the complete structure of a lease renewal. Renewal options are meant to provide flexibility for the tenant in the future. So, being aware of how to strike the right balance, within the lease as well as the renewal, will grant medical professionals the greatest flexibility and financial outcome for their real estate interests.

One of the most common errors healthcare providers make is negotiating lease renewals without the help of a commercial real estate professional, specifically those who specialize in healthcare lease and renewal transactions. Most healthcare groups tend to be self-reliant and entertain lease interactions from within their office. The reasoning is fairly simple, which real estate investors are aware; the majority of medical providers will rely on referrals by way of other medical providers. So, if location (even space) can be identified by referral patterns, then the use of real estate counsel is unnecessary. Or, if location will remain the same, then negotiations of a renewal may be handled in-house.

But, rather, successful medical groups, large and small, understand that in order to achieve growth, they need leverage. Landlords, especially those that are in the real estate business, negotiate with professional guidance from real estate professionals. For healthcare providers, selecting their own representation, one that has performed the same real estate surgery with multiple instruments time and time over, to advocate their position will assist in influencing the outcome favorably. Furthermore, because landlords authorize a split of the commission between the landlord’s broker AND tenant/buyer broker, providers have the opportunity to receive representation from a healthcare real estate professional at no out-of-pocket cost.

MREA is a full service, healthcare real estate firm headquartered in Houston, TX. MREA provides commercial real estate services to healthcare providers and commercial real estate investors throughout the State of Texas.

Determining A Suitable Medical Location

Posted on September 24, 2012 by MREA

Determination of the ideal, long-term real estate location in the current healthcare environment is challenging because the foundation, where healthcare business and real estate decisions once accumulated, is now shifting. With numerous economic uncertainties on the horizon and questions regarding Medicare and Medicaid coverage and its model of distribution, physician real estate demand is suffering at what is perceived to be a fiscal and legislative bottleneck with a limited few finding fresh strategies for improved long term growth.

With quality, rather than quantity, slowly championing the minds of providers and their patients, increase to a wider range of access and patient referral options are being explored. MREA is at the forefront of these discussions.

For instance, one area that is of key importance to review is the enterprise’s existing referral base. Our brokerage unit tends to visually distribute these referral sources via location map with tiered monetary importance to highlight relocation opportunities that are optimal for existing, as well as future growth. MREA has identified multiple other methods to best suit a referral-based expansion.

Another alternative for consideration is that of weighing leasing and purchasing. If purchasing real estate to locate multiple businesses, MREA provides an income-to-cost analysis, as well as upfront cash commitments, which are transferred into our firm’ proprietary investment proforma model. We work with several models to forecast future years of income, costs and return on investment which compliments a cost and comparable market analysis for each property.

Leasing may be a better option than purchasing, though. The competition for healthcare tenants from owners/landlords translates into better incentives to lease. It is often that a build-out allowance, deferred rent and aggressive long-term package will exist. The management responsibility and liability concerns are also reduced or eliminated in any tenancy.

Besides these two ideas, the third would pertain to the competition of the organization. Establishing goodwill is no longer merely important; it’s vital. The industry is now plugged in and race for market share is fierce. Whether the competition is from a hospital system, a well-established brand, or independent, understanding what they are (or are not) doing in this environment will help to determine where your organization needs to be focused. Our firm maintains a unique database that highlights the top 5-20 competitors within each specialty in a geographical area and performs routine evaluations on their business and real estate modalities.

These select few location reminders highlight the need for quality healthcare real estate representation. Please contact MREA at 713-701-7900 for all of your medical real estate needs.

Medical Office Performance Update

Posted on March 13, 2012 by MREA

Understanding the advantages of a medical office property can provide stability to an otherwise risky real estate investment portfolio. The uniqueness of this commercial property type makes it a favorable investment, especially throughout ‘down’ economic cycles when stability, rather than overexposure, is sought to balance a portfolio. This, as evidenced by investments in 2008 and 2009, a few of the strongest years for medical office investment in decades and, notably, the worst for other commercial sectors happens to be the most recent phenomenon.

As for today, when greater threats appear to loom on the horizon and political strife sits at its highest plateau, and as office and industrial properties attract greater attention due to an improved economic position in the U.S., the healthcare sector’s investment has seen a moderate decline in volume of transactions. Most experts suggest that early-to-mid 2013 will see a resurgence of capital into the medical office property as hospitals seek to monetize real estate to offset costs associated with administrative growth, a precursor to healthcare reform.

So, depending on the current status of the property, and given a 12-month window with which to lease, redevelop or stabilize the property, the direction chosen today will likely determine if the property has the potential of resale during the next cycle.

What should you be familiar?

It starts with our research. Keen insight begins with dedicated research resources that provide for the persistent investigation into changes in physical relocation and current and future regulatory implementation. Our employed fact-finding & intelligence unit corroborates their mined data with paid, less reliable online resources and government data. While the cost of obtaining information remains high when paired to its return on investment, the overall collaboration of multiple data channels remains essential for the specialist whose clients require the most candid data for appurtenant decision-making. So, investigation into your premises is a first step to understanding potential referral patterns and tenant mix to maximize valuation.

Second, and of greater importance to sale of the asset, the medical office opportunity should have a hospital nearby that demonstrates economic strength mainly through specialized services that provide for in-house referrals, physician growth and collaboration. Orthopedic, Cardiology, Women’s Services and Gamma Knife procedures have been lucrative hospital services and, in turn, have provided for higher effective rental structures throughout these medical office buildings. While a property will fluctuate in transacted sales price, such services attract higher capital investment because of hospital’s strength from physician services and specialties. Thus, you can see where healthcare reform, and its proposed focus on volume, rather than profitability, has the potential to water down hospital revenues and, ultimately, potential sales prices.

Another factor to consider is the area’s residential growth of the 3-mile radius. What is the rent to own ratio? Younger or older demographics? Household income? Over the past few years, investment has sought properties that provide for economic stability through employment and demographic growth. This trend will continue until it is known whether healthcare reform provides to be a viable investment alternative or an epic failure in a time of the state’s and nation’s budgetary complications. Remember, older and wealthier populations still utilize the majority of healthcare services and are more likely to see a physician out of want, rather than need, which will continue to guide investment.

When analyzing how a medical office property will/can perform, it is essential to seek guidance from a qualified professional team dedicated to the industry. Our associates maintain years of exceptional, professional service to the Texas medical communities and with an expansive proprietary database, widely recognized as the best in the business, we hope you will seek out our firm for your medical office building needs.

This post was written by Robert S. “Bob” Lowery, Managing Partner of MREA | Medical Real Estate Advisors.

Hospitals Employing Physicians: Is It Different This Time?

Posted on January 24, 2012 by MREA

Around 15 years ago, physician practices were purchased by hospitals at compellingly high prices. Unfortunately for these hospital systems, within a matter of just a few years, the physicians were re-injected back into the community, largely because the hospital systems had not realized a return on investment. Fast forward to 2012, we hear similar stories about physicians becoming incorporated into a hospital’s network.

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The reasons for hospital systems obtaining physician groups may be many. But, most conversations boil down to either a specialty or geographic play, whereby hospitals seek entrance or command of certain designated fields or locales. Also, with the establishment of healthcare reform, and impetus from both hospital and physicians for greater reimbursements, as well as a movement to adopt a more streamlined, technologically advanced care distribution model — we think this time may be different.

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Based on casual conversations, the motivations to join a hospital from a physician perspective is appearing much greater today than it was in the mid-90′s. A weakened economy, high employment or practice costs, entry barriers, a more savvy-consumer, and the potential for declining reimbursements, are among the top justifications that we hear from physician groups.

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There seems to be a greater number of differences in how the hospital systems are purchasing medical practices today, though, when compared to that of years past. Mainly, hospital systems are not offering to pay exorbitant prices, likely as a result of previous miscalculations. As for those that we speak with, many are not seeking to purchase practices outright (staff, equipment, management, real estate, in some cases). Instead, the hospital is offering employment compensation, with greater emphasis on incentives for productivity, to a select group of physicians for a number of years. Also, because reform will include greater regulatory oversight of physician purchases, this may be an incentive for hospitals to complete acquisitions prior to 2014, when the majority of reform’s initiatives take effect.

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The most common way that a physician practice group is absorbed by a hospital is through a method where physician owners and practice administrators keep an ongoing operation in place, essentially subjecting to less guidelines and oversight, but to assume some naming rights, some jurisdiction, as well as partnership for likely for potential future transaction.

As for the outright sale of a practice to a hospital, it may be achieved in several different ways. A hospital may purchase a practice’s tangible assets with physicians and staff as employees of the practice, whereby the unit is obtained as a separate entity. In another instance, the hospital may acquire the assets, physicians and staff to become employees of the hospital, in which the practice discontinues. As for unique circumstances, the staff becomes employees of the hospital, but the physicians remain separate.

A certain consideration should be made by physician groups as to the value of their practice to the hospital system. Because anti-kickback laws exist, the hospital cannot pay a physician group more than ‘fair value’ for their practice. Any payment that is beyond a certain amount could be considered a ‘kickback’ for services provided to the hospital. Also, keep in mind, the revenue generated by physicians for referrals outside of the practice itself are not considered in the valuation.

Another issue that comes from a practice purchase is that physicians are not relieved of their responsibilities. This is because the acquisition is commonly considered a separate operating division or profit center of the hospital. Consequently, the physicians compensation is still tied to the profitability of their previous medical practice. This provides troublesome if physicians are nearing retirement.

One last reminder, and a stark reminder of how this time may be different, is how the practice’s patients now can easily become part of hospital’s affiliated practice, especially with the advent of electronic medical records. In essence, the hospital now owns and operates all patient lists and records that have been accumulated by the practice group.

While I will leave you with the determination of whether it is better to sell, partner or lease with a hospital, MREA has established healthcare real estate professionals, accountants and attorneys to whom you have access. Contact us for our wide range of client responsibilities that incorporate business strategies with extensive real estate capabilities.

Lease Vs. Buy Vs. Sale Leaseback

Posted on July 17, 2011 by MREA

ADA: What Does It Represent? Requirements?

Posted on May 23, 2011 by MREA

First, what does the ADA stand for and what does it represent?

The Americans with Disabilities Act (ADA) provides that all public services and facilities grant full access to individuals with disabilities so that they can lead full and productive lives. In order to accomplish this goal, the ADA contains requirements and responsibilities for medical practices in the areas of employment, physical access to facilities, and modification of policies and practices to eliminate barriers to effective health care.

The ADA provides rights and protections to individuals who have physical or mental impairments that “substantially limit major life activities.” Recent amendments to the statute require that the definition of who is disabled and therefore eligible to receive the ADA’s protections must be construed broadly. Although the statute and proposed revisions to its regulations list some impairments as examples of covered conditions, including those substantially limiting mobility, vision, hearing, speech and thinking. Also physiological diseases and other non-minor ailments with lasting impact, other conditions may also be covered.

Title I of the ADA prohibits medical practices with 15 or more employees from discriminating against individuals with disabilities in employment matters. In other words, if job applicants or employees are otherwise qualified for a job, their disability may not be used as a basis for adverse action in hiring, promotions, working conditions, compensation, or other aspects of their employment.

Moreover, ADA Title I requires medical practices to reasonably accommodate disabilities, by adjusting policies, providing assistive devices, removing barriers, and otherwise assisting the employee to perform the job. However, the medical practice is not required to make accommodations that would place an undue burden on the business and its staff.

Title III of the ADA places responsibility on places of public accommodation, including medical practices to ensure that patients, clients or visitors with disabilities have full access to their facilities and services. Medical practices should ensure their policies and procedures provide unfettered access to their services and take into account the needs of people with disabilities.

For instance, individuals whose disabilities require them to use assistance animals, such as guide or warning dogs, should be allowed to take their assistance animals with them to medical appointments, to the full extent that it is safe and practicable. Animal allergies of other patients are often not accepted as a valid reason for denying use of an assistance animal when there is any way to keep the animal away from the allergy sufferer.

Additionally, medical practices should develop policies that ensure that individuals with mental health conditions are excluded from service because of their disability-related behavior, when reasonable accommodations can be made. Staff should receive training on accommodation policies and practices.

Buildings that house medical practices and the offices of the practices must comply with the ADA and its accessibility requirements to ensure that individuals with mobility and vision impairments can get around safely. Newly constructed buildings and offices, as well as those that have undergone renovations or major modifications, should be built in compliance with the ADA Accessibility Guidelines, which provide detailed specifications on parking, ramps, door widths, restroom facilities and other features that affect accessibility.

Equipment and furniture should also be selected with the needs of individuals who use wheelchairs and scooters or who have difficulty moving around.

Because clear communication and understanding are essential to effective provision of health care, medical practices must be prepared to provide assistance to individuals who have difficulty with hearing or speaking. The ADA imposes requirements for the provision of assistive communication devices and translation services for patients who need them. Cost and inconvenience to the medical practice are not accepted as excuses for failure to provide these services when requested. Similarly, medical practice staff must provide oral explanation of written materials or forms, large print materials or other methods for ensuring that patients with visual impairments have full access to written information.

Several unique, property-specific ADA requirements are necessary for all commercial and medical real estate practitioners to become aware. If you or an acquaintance require more information to move forward on a real estate decision, please contact us and we will recommend the proper resource.

Office Space Types: Open & Closed

Posted on May 15, 2011 by MREA

Office space can refer to a variety of parts that encompass the whole, of which the the most common are provided here: meeting spaces integrated into the office environment, reception, office support spaces such as work rooms, storage rooms, file rooms, mail rooms, copier areas, service units/coffee bar, and coat storage integrated into the office environment, and telephone and communications equipment rooms located in tenant suites containing tenant equipment.

Spaces and features that may be classified as a separate space type or covered as a special feature include:

Millwork other than service unit/coffee bar and coat storage
Meeting spaces and conference rooms that include special lighting systems, acoustical treatment, moveable partitions, millwork, or A/V systems
Secure storage, strong rooms, vaults, and hardened partitions located within the office suite
Large filing, library, or storage areas with concentrated floor loads
Enclosed spaces requiring acoustical separation higher than 40 STC, partitions to structure with acoustical insulation, and ductwork sound baffling
Specialized window treatments (blackout shades, plantation shutters, motorized fabric draperies, etc.), interior windows, glass block partitions, and glazed doors
Humidity, pathogenic, or hypoallergenic air treatment systems
Upgrade or changes to standard items such as plaster or vaulted ceilings, specialty lighting, or upgraded ceiling tiles
Private toilets, elevators, or staircases

Office space plans can be arranged in several scenarios, including: 100% closed office (fully closed), 80%-20% (open), 20%-80% (closed), and 100% open office (fully open).

Space Attributes

Over 50 percent of workers in the U.S. spend the workday in office buildings and spaces, and employers today are increasingly bearing the responsibility of providing a quality workspace. Thus office space of choice is commonly a flexible environment that integrates technology, comfort and safety, and energy efficiency to provide a productive, cost-effective, and aesthetically pleasing working environment. Typical features of office space types include the list of applicable design objectives elements as outlined below.

Functional / Operational

Integrated Technology: Begin the design process with a thorough understanding of the technological requirements of the space, including anticipated future needs.
Occupancy: Office space types fall into the B2 occupancy classification, with sprinklered construction. The GSA acoustical class is C1 for enclosed offices and Class C2 for open offices.

Productivity

Flexibility: The office space type is durable and adaptable, and will typically include features such as a raised floor system for the distribution of critical services (power, voice, data, and HVAC) and mobile workstations to accommodate changes in employee, equipment, and storage needs over time.

Safety and Security

Comfort and Safety: The health, safety and comfort of employees is of paramount concern to employers. For this reason, the office space type should be designed with increased fresh air ventilation, the specification of non-toxic and low-polluting materials and indoor air quality monitoring. Non-quantifiable benefits such as access to windows and view, and opportunities for interaction should also be taken into account.

Sustainable

Energy Efficiency: As energy costs increase with higher reliance on technology, strategies such as the specification of high-efficiency lighting and lighting controls; the application of daylighting; the use of occupancy sensors; and the installation of high-efficiency HVAC equipment should be considered.

Example Programs

Two sample building programs and plans are provided, for ‘fully closed’ and ‘fully open’ offices. They include minor file and library reference areas, conference space, break space with service unit/coffee bar, and reception area.

“Fully” Closed Office

Description Tenant Occupiable Areas	Qty.	SF Each	Space Req’d.	Sum Actual SF	Tenant Usable Factor	Tenant USF
Office Spaces				12,170
Enclosed Executive Offices	2	225	450
Enclosed Large Offices	52	150	7,800
Enclosed Small Offices	26	120	3,120
Open Large Office	0	140	0
Open Small Office	0	100	0
Open Workstations	9	80	720
Reception Desk	1	80	80
Support Spaces				3,134
Reception Seating	1	200	200
”Unimproved” Conference Large	1	600	600
Conference Small	3	150	450
Informal Breakout Centers	0	80	0
Printer/Copier/Fax Center	3	60	180
Break Room Service Unit	1	340	340
Information Reference Centers	2	150	300
Supply Room	4	40	160
Work Room	1	200	200
File Area	2	144	288
Documents Room	1	240	240
Server Room	1	176	176

Tenant Suite			15,304	15,304	1.35	20,592

“Fully” Open Office

Description Tenant Occupiable Areas	Qty.	SF Each	Space Req’d.	Sum Actual SF	Tenant Usable Factor	Tenant USF
Office Spaces				10,600
Enclosed Executive Offices	0	180	0
Enclosed Large Offices	0	150	0
Enclosed Small Offices	0	120	0
Open Large Office	4	180	720
Open Small Office	15	120	1,800
Open Workstations	100	80	8,000
Reception Desk	1	80	80
Support Spaces	30%			4,614
Reception Seating	1	120	120
”Unimproved” Conference Large	1	600	600
Conference Small	5	150	750
Informal Breakout Centers	12	80	960
Printer/Copier/Fax Center	3	80	240
Break Room Service Unit	1	340	340
Information Reference Centers	3	180	540
Supply Center	4	40	160
Work Center	1	200	200
File Area	2	144	288
Documents Room	1	240	240
Server Room	1	176	176

Tenant Suite			15,214	15,214	1.35	20,572

Highest and Best Use – An Explanation

Posted on May 3, 2011 by MREA

A property must be appraised in terms of its highest and best use. Simply put, the highest and best use of a property is the use that, at a given time, produces the greatest net financial return.

When a site contains improvements, the highest and best use may be different from the existing use. Implied in this statement is that the determination of highest and best use takes into account the contribution of a specific use to the community and community development goals, as well as the benefits of that use by individual property owners. An additional implication is that the determination of highest and best use results from an appraiser’s judgment and analytical skills, which the use determined from analysis represents an opinion, not a fact to be found. In appraisal practice, the concept of highest and best use represents the premise upon which value is based. In the context of most probable selling price, another term to reflect highest and best use would be the most probable use.

A determination of highest and best use also includes identifying the motivations of probable purchasers. The motivations are based on perceptions of benefits that accrue to property ownership. Different motivations influence the highest and best use and are significant to an appraiser’s conclusions about the highest and best use of any parcel of real estate.

The benefits of investment properties that are not owner-occupied relate to net income potential and to eventual resale, or refinancing. The highest and best use decision for investment property is often influenced by the income tax and inflation hedge aspects of the existing or proposed improvements. Determination of the type and intensity of the improvement to be placed on the investor’s land often requires an after-tax return analysis of various alternatives.

Land or improved property that has resale profit as its principal potential benefit is purely speculative. The price such land commands in the market reflects the real motivation of the purchaser/speculator.

This portion of the appraisal process is based on the definition of highest and best use that was mentioned prior. From this definition, it is obvious that market value of the land or site and of an improved property are both estimated under the assumption that potential purchasers will pay prices that reflect their analysis of the most profitable use of both land (as vacant) and property (as improved).

MREA | Medical Real Estate Advisors

Precision Guidance for Healthcare Real Estate

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