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Tenant Needs Within A Medical Office Building

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waiting roomAs a truism, the quality of a medial tenant will have a significant bearing on the process of procurement or assignment of healthcare real estate space. This is especially true when considerations are addressed for a tenant that is renewing, expanding, contracting, or relocating within a medical building.

In each circumstance, the overall design of the facility and potential costs associated will account for whether the leasing process will be simple or challenging, on a relative scale. With this in mind, a healthcare real estate advisor has the ability to influence the process positively due to their unique concentration within health care and commercial real estate.

The Renewal

Upon the majority of renewals, the size and layout of the medical office is not altered and the suite design or reconfiguration is avoided. Other times, tenants will request these or other modifications to their space.

Typically, a broker will request the approval of the landlord to determine how the costs will be distributed and who will be responsible. In some cases, the landlord will have budgeted this expense and can absorb the costs. But, most of the time, they will not. Thus, a certain percentage of the cost will be provided. In other cases, the tenant will be responsible for all modifications.

Rental market conditions should dictate who assumes financial responsibility for alterations. To determine market conditions, a good barometer procure a specialist that is educated on the short term availability and effective price of comparable lease space.

The Expansion

Expansion is typically a costly and difficult undertaking for medical tenants. This, due to the increase in overall space, and consisting of additional construction costs, as well as management and accounting requirements. For a tenant to address an expansion request properly, the expenses need to be determined beforehand to limit the administrative liability associated with the request. Space planners or property advisors are very helpful for this logistic exercise. Again, and similar to renewal, the determination of costs should be based on comparable rental market conditions.

One of the main reasons tenants relocate is because their existing floor plan no longer meets the functional needs of the user. Thus, the requirement of expansion should be addressed prior to conclusion of lease. Running up against deadlines will not expedite or provide leverage for expansionary discussions.

If expansion is required in the midst of tenancy, commonly, the lease term will be extended for additional years. Under this circumstances, the costs will be attached to an amended lease and rate will be blended. Another potential outcome may be the continuation of the existing lease and expansionary space rental separated. The former homogenized term typically will favor the landlord, but is generally accepted in investment real estate.

The Contraction

A healthcare space contraction may become necessary because of several factors. Most commonly, it occurs with reorganization, subsidiary or referral base relocating, financial constraint, or regulatory requirement. While this pressure creates an uneasy position for the tenant, the landlord has the potential to react positively through status review.

If contraction request is made by the tenant during the midst of the lease term, a subletting consideration should be addressed via all parties to the original lease. Alternatively, if the contraction request is made towards the end of tenancy, the tenant’s advisors should be aware of the potential re-use of space, any limitations in plumbing or electrical, and costs associated with construction. An expert opinion for the effective contraction of space should be sought.

The Relocation

Too often a medical tenant will need to expand but the adjoining spaces will be occupied. Within most leases, a relocation clause exists that allows the landlord to, essentially, move a tenant into an alternate space. For expansionary needs, this clause may be utilized effectively by the landlord, while hesitantly by the expansionary tenant. To alleviate tenant concerns, the expansion space may include space planning costs, moving expenses, additional rent, and tenant improvements with above standard features.

Customarily, relocating within the building has challenges, but specialized relocation experts can be of considerable service to a landlord or tenant within medical space. The impact of change, via relocation, within or away from a desirable situation, has unique ramifications to both parties to the lease agreement. Understanding the advantages and disadvantages of relocation within a building will provide confidence when addressing landlord/tenant responsibilities.

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How Will Healthcare Facilities Evolve?

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A healthcare facility can embody a large selection of property, from simple medical condominiums and clinics to large, more complex, time-consuming and costly teaching and research centers. Large hospitals tend to have all of the diverse health care types that are often found in free-standing facilities. So, it is important for smaller facilities to send the proper message to its visitors, vendors, patients and staff. It is commonly overlooked, but the appearance of a medical facility provides insight about the organization, as well as the level of care that is administered. Evidence about the level of care begins at the entrance of the facility, the unloading zone, parking areas and direction signs. In most situations, the message sent is one of compassion towards the people who enter. This, and most tend to forget, is also for the employees who service the patients as attitude and behavior will cater respect and goodwill.  As for particulars, to name just a few, the finish, signage, entrance and hallway adornments should be coordinated and security features, visible yet not intimidating. Collective, thoughtful design from third-party may help to ensure the proper first impression is created and sustained.

The design of health care facilities is governed by several regulations and special requirements. It is also affected by lesser publicized circumstances and pressures. The most common of these are workforce shortages, reimbursements, malpractice insurance, physician-hospital relations, capacity, care for the uninsured, patient safety, advances in technology, and patient satisfaction.

Currently, the entire health care system is under enormous pressure to reduce costs AND become more responsive to its patients. The aging population consumes the greatest use of health care services, and, it is well documented that the percentage of the aging population is increasing significantly. At the same time, rapid technological advances, often involving very sophisticated electronic platforms and equipment, make more diagnostic and treatment procedures available to the public, more rapidly than in the not-so-distant past. From a layman’s perspective, information alone should assist to decrease health care costs, yet it is not.  Thus, medical facility designers are under pressure to reduce both construction costs and the costs of their design services, while compressing construction schedules AND still meet the highest quality standards. Not an easy job by any stretch of the imagination.

As cost pressures continue, health care facilities will find themselves in increasing competition for both patients and staff primarily due to a leaner budget. Yet, and it is widely recognized, the facility is one of the top requirements when attracting and retaining the best doctors and nurses, the most successful HMOs and insurance plans, and the most patients. Consumer buying decisions are based on cost, accessibility, quality of service, and, in terms of healthcare, quality of care provided. An aesthetically pleasing facility is a key aspect of the perceived quality of care.

Health care is a labor-intensive industry, and much of its labor is highly skilled and highly paid. Since 60 to 75% of a hospital’s expenses are from labor costs, a design that increases operational productivity or efficiency and reduces staffing needs can have a major impact on the bottom line.

Now, more than ever, the flexibility within a facility is key to keeping it from functional obsolescence in the face of changing needs and technologies. Healthcare facility needs are evolving rapidly, and the direction is difficult to forecast with any certainty. New equipment technologies, new treatment methodologies, changes in diseases, and changes in the patient population base all impact the facilities that house them. Inpatient care is steadily being reduced while outpatient services are growing. There is increasing emphasis on specialize care units and smaller satellite facilities rather than large, centralized facilities.

In the past, communicable diseases were the major health problem, and sanitation or cleanliness was the main characteristic of a healing or therapeutic environment. Cleanliness remains extremely important, but there is increasing recognition of the value of a pleasant, easily-understood, and non-threatening environment for patient recovery.  Good design in the health care setting starts by recognizing the basic functional needs, but does not end there—it must also meet the emotional needs of those who use such facilities at times of uncertainty, dependency, and stress.

The HIPAA regulations address security and privacy of “protected health information” (PHI). These regulations put emphasis on acoustic and visual privacy. While HIPAA does not regulate facilities design, its implications for healthcare facilities may affect location and layout of workstations that handle medical records and other patient information, paper and electronic, as well as patient accommodations. As of April 2012, a cardiology practice agreed to a settlement of $100,000 for HIPAA violation for posting patient scheduling on a public internet calendar (more info here).

As the movement continues from hospital-based acute care to outpatient care that embodies more holistic, preventative, and continuous care items for health and wellness, MREA is uniquely positioned to offer professional, experienced guidance for healthcare providers and lend its vast network of working relationships and real estate opportunities for administrative and investment interest.