Lease Renewals for Medical Professionals

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.

About these ads

Ground Lease Structures, Motivations

A land owner typically has one of several motivations for choosing to implement a ground lease instead of an outright sale for a parcel of land. The most common motivation is to preserve the opportunity to participate in the appreciation in land value over the term of a ground lease without the financial risks of developing.

Other examples exist for the owner where the:

  1. Land has a low basis for tax purposes and owner receives rental payments without having to pay capital gains for the appreciation in value of the property.
  2. Property is encumbered in debt in excess of the tax basis. The owner may want to avoid a sale where such a large portion of the sale proceeds, if not all, will satisfy the debt that the taxes payable will require of the net cash.
  3. Tenant is of quality credit; the owner may encumber the interest in the land to secure a loan to be amortized by the rent payments under a ground lease. This would allow the owner to realize a large percentage of a sale or refinance for liquidity purposes without experiencing adverse tax consequences.
  4. Land owner (i.e. hospital systems), may have concerns over how nearby tracts will be built in the future. Utilizing a ground lease can exert more control over the development than through the use of restrictive covenants through outright sale of a tract.
  5. Land owner may not want to be associated with the development risks of improving the land and, rather, may defer these risks but remain a participant in future income.

The tenant usually has a select few reasons to ground lease.

The most frequent reason for ground lease is not having to obtain the cash for the purchase price of land. This motivation is to avoid having to relinquish the resources necessary for day-to-day business operations within the property. Essentially, the tenant is amortizing the cost of improvements and land payments over a period of time. But, ultimately, the aggregate amount of ground lease rentals will exceed the total of interest and principal payments required to pay for the outright purchase.

As for the structure and motivation, the landlord wants:

  1. Tenant to occupy and pay rent for a long initial term;
  2. To limit the tenant’s renewal options;
  3. Rent payments to be adjusted frequently;
  4. Rent payments to be fair market value (or higher).

The tenant wants:

  1. Obligations for occupancy and rent for a short period of time;
  2. Wants numerous options to renew at rates already negotiated;
  3. No adjustments to rent.

Outside of the healthcare arena, the future of the ground lease and its success in matching interested parties are highly dependent the banking system, who can marry multiple components; land, tenants and developers. Within the healthcare transactional market, we expect that the ground lease will remain a source of control, and competition, for location-centric healthcare providers.

For historical healthcare real estate examples, studies, additional structures or request for attorney assistance, please contact Robert S. “Bob” Lowery at 713.701.7900.

Easements Explained

Easements are complicated. The law of easements has its own unique language, and being privy to the terms will provide a foundation for understanding the how your building arrived onto the property.

The top 10 most commonly used easement terms are:

  1. Easement: A legal interest or right which one party has over the land of another.
  2. Affirmative Easement: An easement that allows the holder to perform certain actions on the land of another.
  3. Negative Easement: An easement that allows the holder to prevent the owner from performing certain actions on his own land.
  4. Easement Appurtenant: An easement that attaches benefits the property owner, rather than the individual.
  5. Easement In Gross: An easement that benefits an individual, rather than the property.
  6. Prescriptive Easement: An easement acquired through continuous and open use over a period of time.
  7. Easement By Necessity: An easement that is necessary for access to the dominant estate after it has been created out of the servient estate.
  8. Easement By Implication: An easement that is necessary for the reasonable enjoyment of the dominant estate after it has been created out of the servient estate.
  9. Dominant Tenement: Land that is benefited by an easement.
  10. Servient Tenement: Land that is burdened by an easement.

There are a certain ways by which easement rights arise. For a few examples, easements can be acquired: 1) by an express grant; 2) by prescription; 3) by necessity; 4) by implication; and 5) by condemnation.

  1. An express grant refers to the granting of permission by the owner of the land where the easement would lie.
  2. A prescriptive easement arises if someone uses a portion of another’s property without his or her permission for a statutory period of time.
  3. An easement by necessity arises when a property is landlocked and the easement over the servient estate is necessary because the dominant estate is not accessible by other means.
  4. An easement by implication is be necessary for access, but arises when an existing, open, and continuous use of one parcel is necessary for the reasonable enjoyment of the other parcel.
  5. An easement by condemnation arises when it is taken by the government or an entity with condemnation authority that has exercised its right under eminent domain.

Most often an attorney will be asked to draft an easement into a deed or instrument that will be recorded in the applicable registry of deeds. The registry of deeds is the appropriate place for recording an interest in real property.

If you require assistance for an easement pertaining to healthcare real estate related issue, please contact MREA either for past reference or recommendations to counsel.

Outpatient Facilities: Growth On The Horizon

The weak economy, political debate and subsequent challenge in Supreme Court prompted a period of reflection for healthcare providers to reevaluate their growth strategies. While most provider-speculators who sought poor guidance or partnerships, loopholes, or weak financial or competitive analysis’ will continue to run into complications, the majority of medical professionals now have the green light to further their entrepreneurial pursuits by expanding financial and real estate footprints in hospital and physician-collaborative outpatient settings.

The health reform initiative and advancements in care and treatment will not only allow ambulatory services the opportunity to grow, but this strategy will begin to even the distribution of care from the heavier weighted inpatient model. Currently, outpatient services serve as a complement to the inpatient hospital.

Outpatient settings will become the central location for the sophisticated array of specialized services delivered in an integrated environment to ensure a high quality of care and positive patient outcomes.

The majority of the healthcare law includes features aimed at reducing the number of uninsured patients, which will increase demand for outpatient services (especially in underserved areas) and require hospitals and health systems to become more efficient in order to accommodate the improved volume.

Healthcare reform also will reward providers that can coordinate services in a cost effective manner while improving quality of care. The focus on primary and preventive care will push providers to expand services to include a wider range of outpatient services to ensure integrity of care.

As payment reform moves away from fee-for-service reimbursement to outcomes-oriented reimbursement (e.g., bundled payments, pay-for-performance), this incentive-based legislation focuses on preventive and coordinated care to encourage greater collaboration with physicians, demonstrable quality of care and outcomes and more efficient operations. The development and implementation of patient-centered medical homes (PCMHs) and accountable care organization models (ACOs), improved management of chronic diseases, and focus on preventive services and healthy behaviors will accelerate the shift of traditional hospital care to more integrated, coordinated, and outpatient-oriented care delivery systems.

As ambulatory care services become a larger part of healthcare delivery, hospitals and healthcare systems should ensure that services are positioned to maximize both patient and financial benefits. An ambulatory care services strategy and plan is increasingly critical and should outline five important strategies.

For these strategies, please contact Robert S. “Bob” Lowery, Managing Partner of MREA at 713.701.7900 or email us at office@mreausa.com.

5 Healthcare Real Estate Recommendations From MREA

The most comprehensive weekly market report is specifically designed for healthcare providers, owners and investors. Our research staff is professionally dedicated to providing the most accurate summary of the week’s events. We are excited to say that over 11,000 readers have personally subscribed! Sign up here.

Continue reading

Bifurcating Commercial Real Estate…

…could get worse (or better). This truly depends on which camp you associate with regarding the economic divide that is now a larger topic of debate in our country.  As for policy that is directed towards a remedy, both political parties could not be wider opposed to proposed solutions from the other, which is certainly indicative of our political and economic divorce.

The dichotomy is evident throughout the consumer world. For an example, high end retailers such as Nordstrom are recording excellent profit, and the low end, Dollar Stores, is doing great volume.  As for the middle, JCPenney is laying off.

Apple has the highest market capitalization for a technology company (or any company for that matter) with continued pricing power, yet products and inexpensive technological innovations from Google continue to see enormous, reliable volume.  Yahoo and Blackberry are getting slaughtered.

From a real estate perspective, multi-family is witnessing increasing occupancy levels from above normal rental activity and, on the opposite end, high end homes are picking back up once again as salaries, stock market and stable investments are paying greater tangible and mental dividends.

Farm and shale land are all the buzz, with prices quadrupling during a recessionary period, yet large tracts of land unloaded by lenders are dirt cheap.  Midsize land tract owners and developers have had no place to hide, with speculative plays now in another’s coffers.

This all said, there remains activity in the middle and it is improving, which is absolutely essential for commercial real estate to fully function as a healthy investment consideration.  When the headlines such as ‘commercial real estate is gradually improving’ echo throughout, it is the middle where analysts tend to concentrate.  As for the high end, which I consider to be strategically located, newly developed, and freshly tenanted, it is going up, while the low end is dissolving.  The middle (aka. the fence) is falling on one side or the other.

As for our firm, we are well positioned to guide and administer needs of the small (combining forces), middle (established, seeking to compete in other markets or adopt new identity) and large (strengthening and capitalizing on current position); we have solutions for all.

——————————————————————————

8 Brain Benders (from easy to more difficult):

Property sales prices may be $600 per square-foot tenanted and will likely continue higher.  What could change this trend?  Stronger Dollar.

Property sale prices may be $6 per square foot vacant and will continue lower. What could stop this trend?  Lower Oil Prices.

Lease Rates will continue improving.  What will change this trend?  More Problem Banks.

Rental concessions will likely continue to increase.  What will change this trend?  Mortgage Rates Moving Higher.

Tenants will begin to purchase buildings.  It is going to happen.   As for cautions, several purchases on high end will eventually suffer due to current and future price speculation and a small percentage on the low end with sacrifice their business principles for a real estate play that will weaken their competitive position in the long run.

CPI will likely remain steady.  What will change this outcome?   Stock market decreases significantly.

Buildout costs will continue higher.  What will change this trend?  Fannie and Freddie are officially taken over.

Eyesore buildings will continue to worsen.  What could change this trend?  REIT prices continue higher.

Why We Perform Our Own Market Research

In light of recent articles regarding the largest commercial real estate brokerage firm in the world NOT providing data to the largest online commercial real estate data provider, we thought we would make our viewers aware of the positive and negative of seeking commercial real estate information online.

Having spent considerable time with a few of the largest commercial real estate platforms in the country, I can attest that commercial real estate dealings are kept sacred, some having bound agreements as to non-disclosure among all parties involved, and rightfully so.  These are business engagements that involve competitive people, seeking a competitive advantage in their respective competitive markets. Mirroring the administrative behaviors of everyday business affairs within other industries, commercial real estate is, and should be treated, no different.

Which brings me back to the first line of this article to which I may provide an analogous, hypothetical point.  In general, should businesses voluntarily engage in providing market data to third parties so that they can republish, or repurpose the data to fit their own needs?  Further, should we provide privileged information from a competitive business landscape to online platforms that are controlled by competitive businesspersons that sell this data to our competitors, and worse yet, may sell this to a purchasing entity to be taken private or sent overseas?  Well, it appears that the largest commercial real estate firm in the world thinks not.

So, given the fact that not all commercial real estate listings, transactional activity or data is secured by online platforms, and, in all actuality, less than 50% is captured, it is certainly questionable as to why users seek such data or trends to influence their financial decisions.  Given the certainty now, that some, or most, commercial real estate transactional activity goes unreported, or underreported, to online platforms, why are individuals, owners, investors, businesses or hospital systems relying on this information for a perceived advantage in real estate negotiations. It just proves wasteful, ill-informed and, dare I say, lazy.  Given the fact that state politicians and regulatory authorities largely determine how much information a business should share to the public, it is in our belief that the commercial real estate industry should rely on such data, as well as their own best efforts to influence decision-making in the sector.  This promotes competition where, eventually, the creme rises to the top.

As for commercial real estate listing or transactional reporting right now, most will say that ‘it is the best we got”, to which I disagree. This suggests that anything is better than nothing and proves why it is imperative to seek qualified professionals that specialize, who become proficient within a certain sector, or area, of their market.  The greater the specialization within a segment, the more efficient the data. The businesses that capture this data then hold the advantage to whom it should be shared, which will lead to a competitive advantage for themselves and their clients.  See, the industry does not need underutilized, poorly informed, general salespeople seeking to sidle up to every potential transaction by distributing data that appears convincing in the hopes that an unjustified reward will find its way in their direction.  Rather, we need, and deserve, active, intelligent leaders who comprehend that a high level of command, or mastery, within any endeavor, is the greatest path to long-term financial reward.

Stop, Go, Stop, Go, Stop…Go!

2012 is shaping up to be a good year for commercial real estate practitioners with a recession now becoming less of a reality.  By simply observing search queries that funnel to this blog (by no means an economic indicator), it would appear that we will see steeper interest in the consummation of land purchases for proposed developments, as well as the disconnection of locked down building construction plans.

It is our responsibility to observe and record trends on how the money migrates within commercial real estate sectors to properly advise our clients within health care.  And, over the past few years, we have remained exceedingly cautious in advocating large, speculative investments into the sector.  As my financial advisors always remind me, the trend is your friend and the trend remains down.

But, as the stock market has remained trapped in a trading range for more than a year, coupled with a stable outlook for real estate investment trusts (REITS), where pent up demand has the potential to make a bold re-emergence, our interest, as well as our clients, is certainly improving.

As for a simple analysis on capital migration, the last year+ has witnessed investor interest rocket higher in areas such multifamily and farmland with, and without, fundamental, long-term supportive cases for upside to continue within the either sector.  See, one investment type can be characterized as deflationary and the other inflationary, and both are highly speculative with the potential be burned if the glut of homes is efficiently dealt with and economy/dollar stabilizes.

This type of investment activity implies that money is burning holes in the wealthiest of investment capital and/or non-domestic capital is playing a larger role than is being reported.  In any case, this risky capital allocation suggests that once a firmer footing in the economy is gained, the beaten down sectors within commercial real estate sectors will see tremendous activity.

What are indicators that suggest money is moving into commercial real estate?  Certainly, studying the largest investment houses is important, but also leasing activity through tenant relocation or expansion is another.  From a middle market perspective, we believe keeping an eye on investment in land by seasoned developers or JV interest in more speculative plays could be the catalyst in determining when to enter the neglected business investment sector.  For instance, if news publications get a hold of large plots of land or large urban infill tracts transferring, it may be time to contact your brokers again.

Until then, we are all running the red light.

Social Media VS. Commercial Real Estate

I remember the day in early 2010 like it was yesterday.   After a horrible year for our industry, the company called in all of the associates to mention that the firm’s corporate marketing platform was shifting to adopt very unique selling strategies incorporated within social media. For the firm, social media would be the horse to pull the cart for the indefinite future.

As an avid participant of social media marketing techniques for several years prior, whereby utilizing it as a defined percentage of my overall personal branding strategy, my reaction was not one of rejoice.  It was not that we were implementing 21st century technology to benefit our organization and its associates; we were.  My discontent was that we would dilute ourselves and our profession by largely incorporating social media’s bold, yet sloppy entrance into the internet as our preferred method of corporate branding and potential client interaction.

Why?  In my mind, social media is, and will always be, in whatever form, utilized as a simpler, more cost-effective alternative to professional corporate public relations and marketing.  Therefore, if I am in the majority on this, which I certainly believe I am, using social media suggests to an educated, informed public, especially within the ranks of healthcare and commercial real estate, that our message, any message, is important.  It is not.

Utilizing a “free” media campaign as a large percentage of the company’s brand and product distribution is simply recipe for disaster.  In business, through education it is realized that just because someone else is, or is not doing it, does not make it a sound business decision (or even profitable). By exclusively implementing social media, simply because it is the easiest way to promote your product or service, or worse, to gather fiduciary relationships, suggests that not everyone should actually be in business. Remember the expression — Talk is cheap, well, social media is essentially cheapening our words with each egregious talking point or reference.  The thought that forwarding material by clicking buttons just because someone else’s story line looks appealing is a good idea, it is not.

So, how can social media work for you?

A few suggestions:  Build a profitable brand prior to implementing social media.  This takes years of effort, but when your brand is ready for mainstream, implement it wisely.  Because, in the end, it truly depends on the time spent utilizing it (or abusing it) and what you are delivering that separates you from the noise. So, if you are in the widget business, you should advertise your widgets or help people understand how your widgets work, or how your widget is worth something over your competitors widgets.  Be realistic though, no one wants to hear your message again and again.  If so, the “any message” just gets lost in a verbal chaos known as social media and time could be wisely spent in more productive, profitable ways for yourself, your company and, especially, your clients.

See, social media is free because it has no direction, no purpose, no unique selling points to deliver to its customers; large or small.  It resembles an enormous disfigured mass of molten hot lava that swallows each unsatisfied marketing campaign or underfunded budget and dilutes it through over absorption.  Using this analogy, the heat eventually cools and turns into a hardened object called igneous rock.  The rock signifies time lost chasing a passing fad.

So, is your time better served Twittering or working?  We think working.  Remember the days when companies told their employees not to use the internet in lieu of working.  Still true today.

By the way, I just missed a potential client’s call writing this post.

This is an educated opinion written by Robert S. “Bob” Lowery.

When Will Liquidity Shift Into Commercial Real Estate?

As most finance professionals will tell you, and ever since 2007, when the liquidity died in failed financial instruments, we remain in a period of high volatility created by tremendous liquidity shifts.  Most of the  liquidity that has been created in the past is now attempting to find yield in hot sectors, with others left abandoned until the appropriate time to jump back in.
The assets that receive attention from the ‘sloshing around of capital’ are very liquid.  Well, they remain liquid until something changes or bubble pops.
The ease of the flow has been interesting to watch, similar to a far reaching fireworks display.   Because capital can flow so freely from market to market, or country to country, and this flow can take place almost immediately, various segments of the capital markets can see enormous activity as sentiment or information changes.  As long as the markets remain liquid, the movements will continue until the volatility is erased.  This would suggest that the global economic environment settles into a more normalized risk assessment model.
But, as most commercial real estate professionals will admit, it is the ease of this flow that creates issues, specifically for our slow moving asset sector.  It is no doubt that more global interconnectivity and less US regulation will need to occur to stifle this increased volatility, but of greater importance to the professionals in the sector, it will remain a wait-and-see time period until this massive fireworks display hovers over the sector.  When it happens — BOOM!