Tag Archives: land

3 Development Strategies for Healthcare Providers

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Hospitals and physician groups are embracing third party ownership, management and development of real estate because it has the ability to preserve capital resources for acute care needs, eliminate the conflicts that arise in the landlord/tenant relationship and minimize the potential legal and regulatory challenges associated with leasing space to referring physicians.

Many partnership synergies and dispositions have been publicized through our organization’s newsletter, but a new trend is occurring in which small providers up to large systems are utilizing third parties to develop and own new medical real estate projects. This trend has the potential to have a significant impact on capital structure decisions for going forward.

The use of outside capital to fund non-core real estate assets has been used with improved adoption in corporate America to facilitate growth and expansion. Retailers such as Wal-Mart, CVS and Walgreens, which are becoming stronger competitors in providing healthcare, have all increased liquidity and implemented cost efficiencies using third party capital and development expertise to fund billions of real estate expansion over the last few decades.

As for the development of medical facilities, healthcare providers may choose a few approaches that have been highly successful.

One. Providers may select to develop a project internally using an owner’s representative in place of the traditional developer. The owner’s rep determines the size and scope of the project and works with architects, engineers and the general contractor to build the facility. The provider is responsible for procuring entitlements and utility easements and covering the costs for the site preparation process. In this scenario, third party consultants may be employed to assist with these individual processes. The hospital is also responsible for the leasing and management of the building, although it may appoint a property management firm.

Two. Another approach is through the use of a third party to develop the medical facility for a fee. The third party will receive a fee for its services. In this case, the provider is contracting the developer’s expertise, which commonly includes feasibility analysis, project guidelines, pre-leasing, management of the entitlement process, value engineering for the project, negotiating the contract with the general contractor, as well as project management.

Three. A third party developer and owner both develops and owns the building through its completion. The developer/owner performs all the same functions as the fee-based developer. The main difference is that the developer assumes all of the risks and benefits of the development process and the ownership. A fee-based developer may have an incentive to reel the project in at a contracted cost and within a specified timeframe. The developer-owner has the same incentive, but is likely to strategize on ways that will lower costs of the long-term ownership, because this will ultimately determine the owner’s total cash flow and return on investment. Furthermore, a developer-owner has an incentive to minimize the size of the building to assure high occupancy rates, which has the ability to create conflict with the providers longing for vacant space to accommodate future needs.

If you should have any questions or require a proposal for a medical development under one of these three proven commercial real estate development strategies, please contact MREA at 713.701.7900.

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Ambulatory Surgery Center: From Concept to Reality

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In our continued expansion throughout the State of Texas, we are regularly posed questions pertaining to financial feasibility and cultivation of an ambulatory surgery center. We would like to respond by providing a few feasibility studies, to include financial summaries, in a later post. This post will be dedicated towards setting up the ASC entity, determining consultants, bidding to preparation for construction.

1.  Once you have determined that it is feasible to build an ASC, you must first consider its legal structure. Will you consider owning the ASC with partners outside of your medical practice? Many physicians adopt others when building an ASC. But, prior to making this decision, it is important to determine the legal risks associated with joint ownership of an ASC. Many are familiar that Stark Law has limited scope for operations within a surgery center, yet several other legal issues such as non-compliant physicians, indirect referrals, and billing matters may arise and should be considered and should be explained to avoid contagion within an ASC.

If the ASC is going to be built on existing land investment, it is important to determine how the land should be owned. Should it be in its own legal entity or part of the ASC entity? Will all of the owners of the ASC own the real estate? Owning the real estate in a separate entity may make the cost of the ASC more affordable for others. Separate ownership of the real estate may also provide an income stream for years to come. If your ASC is owned in a separate entity, you should consider the tax implications with receiving income from more than one employer.

Your legal counsel should review with you the issues surrounding the building of an ASC. They include, at a minimum, HIPAA, Anti-Kickback Statute issues, fraud and abuse issues, and antitrust considerations.

Once you have evaluated the legal considerations and determined the structure of the organization, your legal counsel should prepare a number of organizational documents. Within this packet, you should have an Operating Agreement which details how the business of the ASC will be run. The Operating Agreement will clearly define the initial and supplemental capital contributions of each member of the ASC as well as how contributions will be required. The Operating Agreement may also contain a non-compete provision prohibiting investors in the ASC from owning an investment interest in a competing ASC within a specific geographic area. You should consult with your attorney regarding the enforceability of non-competition covenants. The Operating Agreement will also determine how new partners are admitted, and the buy-out of existing partners. A valuation formula for the Member’s ownership interest should be included in the Operating Agreement. The Operating Agreement should also contain a conflicts of interest provision which requires members of the ASC to disclose potential conflicts or business opportunities to the ASC.

2.  Moving forward, now that a viable project exists, it is time to turn the attention towards the next step, which is to contact the state where the facility will be constructed to determine the steps necessary to complete the project and comply with the necessary state and federal requirements. Texas will send you a packet of information detailing this process and advising you of the significant building requirements.

In conjunction with this, it would be advisable to interview architects. In the process of interviewing candidates, be sure to qualify each one based on their experience designing ASCs within Texas. ASCs can be complex structures with significant engineering involved. Do not proceed without a qualified architect and engineer who commit to providing you with a fully engineered plan. As a caveat, if the architect advises you to proceed on a “design build basis” where the contractor and his subcontractors provide the engineering, you may be inviting delays in getting the center built.

The basic decision of what is to be built is largely based on what procedures will be performed at the ASC. If a constructing a single specialty ASC, it is common for physician to assist in direction for the layout of the ASC. Certain spaces are required inside the ASC to support the surgical procedures you intend to provide. The list of all of this space is called the program. Once a program has been developed, the floor plan layout can be done.

For purposes of certification, Texas requires floor plan review prior to proceeding with formal construction planning. Once the floor plan has been approved, your architect can proceed with the construction drawings. A significant period of time for this should be alotted, as most projects sit in idle during this phase.

Most owners want control of bidding for their projects. However, because the industry is seeing a greater number of projects moving forward, some are being performed within a construction management agreement. The advantage to construction management is that if you have advisory through experienced general contractor, or knowledgeable advisory, the process can ultimately save money within in the design process. The contractor can provide a valuable engineering function by recommending less expensive ways to construct the building or less expensive materials for the project.

3.  If you decide to bid out the ASC project, we recommend you get bids from multiple contractors. Your architect and consultants should make a recommendation as to which bidder wins the contract. Ultimately, it should be the owner’s decision, although the architect and consultant’s recommendations will remain of serious consideration.

Once the contract is awarded, be sure to sign a contract for the construction of the project. Also be sure to set out expectations for payment to the contractor at the start of the project so everyone knows what is expected of them. You should expect multiple requests for payment during the project based on a percentage of the project that is completed.

The architect and consultants should provide regular onsite visits. A report should be available on a bi-weekly basis to keep the owner apprised of the progress being made. Construction meetings with the subcontractors, general contractor and the owner’s representative should be held along these same scheduled intervals.

Please look forward to subsequent posts regarding feasibility studies, equipment, or licensing of an ambulatory surgery center.  Contact Robert S. “Bob” Lowery of MREA for any questions during any part of the planning or implementation process of your Texas ASC.

Highest and Best Use – An Explanation

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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).