A Healthcare Real Estate Success Story

Posted on April 1, 2012 by MREA

Given economic and regulatory uncertainties, a provider of healthcare services retains our firm to improve relationships with the physician practices that occupy several medical office properties around their hospital campuses. This essentially enables the provider with an opportunity to obtain positive economic outcomes such as tenant retention, property referral, good will and financial clemency.

Additionally, the provider wants to measure its own operations through the simple method of acquiring physician input regarding service delivery, as well as report on the present adequacies when compared to other like providers so as to audit possible tenant separation.

MREA collaborates with the client to coordinate a proprietary satisfaction assessment specifically geared towards to medical tenants. This includes:

Tenant survey of satisfaction with building services, property management performance and lease renewal intentions
Action planning reports for each hospital campus, region, service provider and the national portfolio, highlighting performance trends, strengths and weaknesses
Comparative performance analysis of year-over-year results and versus report
In-depth, statistical analysis of property and tenant characteristics influencing satisfaction, retention and relationships
Recommendations for the enterprise and each service provider to improve customer service delivery, strengthen relationships and boost retention
Customized presentation of the results and recommendations to each service provider’s national account management personnel and property management teams

While we will keep our results confidential, based on assessment the client:

Targets improvement initiatives toward highly influential property management practices, such as frequency of proactive communication with tenants
Requests action plans for improvement from each hospital campus and service provider
Increases tenants’ satisfaction with management by 10% to exceed benchmarks
Improves tenants’ likelihood of renewal rate by 5%
Identifies “at-risk” tenants whose lower satisfaction level and higher likelihood of defection warrants immediate property management follow-up
Strengthen physician relationships with property management and hospitals

We are proud to offer this service as part of a growing list of healthcare real estate competencies located here.

5 Healthcare Real Estate Recommendations From MREA

Posted on March 5, 2012 by 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.

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Will Lease Accounting Changes Affect Healthcare Providers?

Posted on February 28, 2012 by MREA

Just when our clients were becoming comfortable with the general premise of healthcare reform and the likelihood of declining medical reimbursements for years to come, enter the August 2010 Financial Accounting Standards Board proposed accounting rules for real estate and equipment. These changes have the potential of tremendous impact on equipment and real estate via the composition, execution and implementation of leases. In its current form, and depending on the breadth of an organization’s lease commitments, this has the effect of throwing tens of thousands to millions of dollars of lease commitments onto each balance sheet.

Speaking specifically to the healthcare industry, real estate and equipment leasing has been utilized extensively to assist with several business pressures, whether it be administrative, technological, competitive or regarding growth plans. This has been the preferred method, and a substitute to purchasing which requires significant cash outlays, among other prohibitive items.

Lease Accounting Changes

To explain where we are potentially going, we should address where we are currently. The Generally Accepted Accounting Principles (GAAP), which is code for how CPAs and businesses prepare financial statements for income and expenses, assets and liabilities, draws a line between an operating lease and a capital lease. Under the new guidelines, the difference in classification will be deserted.

It might surprise you, but, according to several sources within the accounting industry, the distinction should be abandoned. This is because the current trend has been where businesses place lease commitments off of the balance sheet, whereby financing new transactions without recording existing lease commitments as liabilities.

It has been suggested that the effect of adoption will add an estimated $1.3 Trillion onto balance sheets of businesses, significantly impacting both assets and liabilities of companies, which is to include private and non-profit organizations. Under the proposed standards, long-term real estate and equipment leases will be required to be disclosed, similar to that of a purchase.

The greatest impact would be that of dumping your equipment and real estate onto the balance sheet, but, even more complicated is that it would be necessary for lessees to calculate what is known as an ‘expected outcome analysis’. This can be defined as the present value of future lease payments. As each lease seems to differ from one other, under the rules it will be required by the lessee to determine potential financial outcomes within leases, including extensions, CPI adjustments and expense reimbursement items such as improvement amortization.

The new measures would require revisions at each reporting period. For each period, the changes stipulate that the income statement be revised to reflect the interest expense component, as well as losses to the asset.

Concerns are certainly mounting. Many are not sure how dramatic of an impact the shift will be, as well as their difficulty in determination of long-term forecasting models for relatively unpredictable financial outcomes. This uncertainty would create a deterioration of the use of lease term variables, to be explained further. Other criticisms include that of the time and costs transferred to real estate owners and businesses to implement such change.

As for impacts of leasing changes with regards to the healthcare industry, there are several as well. As was evident by medical real estate development growth that has occurred on and off the hospital campus, leasing has been a very effective tool for hospitals, now referred to as medical centers. These systems developed facilities to provide for favorable referral situations with physician groups to provide for and offset the enormous costs associated with operating a hospital. As for equipment leasing, most of these institutions have levered improving medical and technological advances by leasing equipment, so as to not become tied to the purchase of vital items, essential in patient satisfaction, that may become extinct within a short period of time.

The potential effects on real estate could have significant impact for systems and physician practices that have used lease transactions to add assets or expand in geography, now essentially having to make room on the balance sheet for all of it. Quickly, some will find themselves flirting with the line of allowable leverage that demonstrates necessary stability for the purposes of future investment. Arrangements such as ground leases or subleases have the potential to become negative consequences, rather than the opposite. It is no doubt that many healthcare providers are in their respective war rooms developing strategies designed for lease administration changes. MREA is currently working with hospital systems, large and mid-size physician groups to educate about such changes.

As for modifications to these proposed, monumental changes to accounting principals, please contact our firm. A new exposure draft is to be made public in the second quarter of this year.

MREA – Medical Real Estate Advisors was strategically designed to assist healthcare providers via our ‘healthcare business meets real estate’ mission statement. The firm’s owners are actively licensed CPAs, principals and real estate practitioners that, when utilized properly, have the ability to provide streamlined solutions to complicated business and real estate items that otherwise would absorb valuable time, multiple contacts and resources to remedy. Contact your representative today or go to http://mreausa.com.

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.

‘

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.

‘

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.

‘

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.

Why We Perform Our Own Market Research

Posted on January 17, 2012 by MREA

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.

Healthcare Bankruptcy & Receivership – Real Estate Services

Posted on December 28, 2011 by MREA

MREA is dedicated to improving the health and wealth of ita clients through several varying healthcare real estate competencies, many of which are located on our website. Our specialization within this narrow, niche sector provides our physicians, investors, owners and medical center customers with direct exposure to healthcare real estate opportunities. Currently, our firm is fielding a greater number of inquiries for the assistance of distressed real estate property offerings. So, we offer a quick post of our services.

As most are aware, an unfortunate reality exists in today’s real estate marketplace. The financial system is working on ways to deal with those that relied too heavily on leverage and debt instruments to fund real estate purchases during the middle to latter years of last decade. This reality haunts the medical real estate industry that, just 5 to 7 years ago, expanded greatly to accommodate forecasting models that placed significant emphasis on serving a growing, health-conscious population, especially that of the baby boomers.

As the commercial and healthcare real estate industries are in the initial stages of coping with an abundance of over-leveraged property, our firm is well positioned to capture a lion’s share of these opportunities. It is because our firm has developed “across-the-board” relationships within the healthcare real estate sector whereby delivering property offerings (lease, sale, redevelopment) directly to the doorstep of an actively managed database of medical tenants, investors and hospital owners.

MREA Distressed

The Medical Real Estate Advisors (MREA) have the expertise required to effectively manage a variety of distressed situations involving non-performing loans, as well as the management, leasing, disposition and redevelopment of Real Estate Owned (REO) property. Our professionals are actively involved in loan workouts, mortgage possessions and foreclosures and we seek avenues to eliminate overexposure by directing any offerings to a secure database of medical professionals and investors. Along with traditional distressed real estate services, our specialized competencies include judicial and non-judicial foreclosures, court-appointed receiverships, bankruptcies and deed-in-lieus.

Receivership Services

Mr. Robert S. “Bob” Lowery and his team of associates are versed in court proceedings that involve the foreclosure and appointment of a receiver. Our comprehensive real estate solutions for the medical industry play a vital role in the efficient transition of the asset from its current position to that of significant value to the marketplace. Services include:

Strategic Planning – Stabilization of Property — Tenant Retention — Property Management — Marketing & Advertising — Leasing — Exit Strategies

Bankruptcy Services

To complement an expansive list of healthcare real estate services, MREA is involved in working with bankruptcy trustees to assist with businesses that are financially troubled, either directly or indirectly, from their real estate holdings. Our services:

Assisting Turnaround Management Companies — Monetizing Assets — Advising Lender Workouts — Creditor Assignments — Representing Buyers & Sellers — Real Estate & Recapitalizations – Equipment, Furniture, Business Item Liquidations

Robert S. “Bob” Lowery is Managing Partner of MREA | Medical Real Estate Advisors

PWC/ULI: Texas Buoyed by the Three US Employment Drivers

Posted on November 19, 2011 by MREA

One of the most popular reads for the commercial real estate industry, the PWC/ULI Emerging Trends for Real Estate 2012 suggests Houston is very well positioned to capture investment dollars with strong medical, increasing technology sector and high oil prices.

Interesting excerpts:

1. Trophy and Medical Offices. Gateway class A office space always commands attention, but interest flags elsewhere, especially in the suburbs. Expect slim pickings when dipping into second-tier cities, and forget about office parks. Niche-sector, medical office space gains favor: “The tenants are recessionproof,” and “the health care act will help spur demand as more hospital procedures move into doctors’ offices.” Over the longer term, a bulging senior citizen population promises to expand needs for various outpatient facilities and clinics.

2. If real estate is “all about jobs,” then head to the few cities where employment growth actually occurs. Besides the gateways, the current front-runners rely on energy, high tech,
and health care–related industries, as well as universities and government offices. Austin becomes a current favorite because it claims all these attributes. Bigger Texas cities—Houston and Dallas—also sustain investor interest because of their energy backbones.

3. Pockets of hiring occur in certain industries and parts of the country:

The strong energy sector, driven by current ■■ high oil prices, helps Texas cities and some out-of-the-way places like NorthDakota (“not exactly a happening real estate market,” says an interviewee).

■■ Technology boosts northern California, the Seattle area, Boston, and smaller high-tech markets like Austin and Raleigh-Durham.

■■ Health care expands everywhere. The steadily graying population needs more medical attention, but work skews to lower-paid aides or highly skilled doctors, nurses, and
technicians.

4. Until recent energy industry gains, hot growth cities Dallas and Houston consistently registered lagging investment ratings. As long as oil and gas prices remain high, these markets will continue to make survey inroads, but investors should remain wary of historic volatility resulting from a lack of geographic and zoning barriers to restrain development.

5. Health care trends—rising older demographics and skyrocketing costs—make medical office space a logical play, but this niche sector with limited opportunities investing
in smaller buildings could easily be overwhelmed by capital.

Alternative Ways of Purchasing Medical Real Estate

Posted on October 31, 2011 by MREA

The most common ways of purchasing medical real estate is through direct purchase, participation in a real estate partnership vehicle with other investors [such as general partnerships, limited partnerships, various corporate entities, and, in Texas, limited liability companies (LLCs), as well as investments in real estate securities such as Real Estate Investment Trusts (REITs).

Alternative Ways of Purchasing Medical Real Estate

Section 1031

Real estate can be acquired via tax-deferred exchanges under Section 1031 of the IRS Code, in which a client “trades” one investment property for another, deferring the taxes due on the sale of the exchanged property. This allows the doctor to reinvest “pre-tax” dollars in another real estate investment, potentially benefiting from appreciation on the larger investment. The physician may also exchange one larger property into two or several smaller properties and pay tax consequences for each one as those properties are sold as cash is needed.

Tax and Risk Management

The way a physician takes ownership of real estate will affect the tax treatment of income and profit. For example, having an LLC-owned investment property will provide him/her with the same protection from individual liability as a corporation, while allowing him/her to have much more favorable tax treatment. Real estate can be bought directly by purchasing it in the following manners:

1. Paying cash,

2. Paying a cash down payment and acquiring a loan,

3. Paying cash to the seller who is financing, or

4. Financing the purchase by using either new real estate financing, seller financing, or credit borrowing when a lender is willing to loan solely on the strength of, and the financial statement of, the borrower, or a combination of these.

Trading and Secured Loans

Real estate also can be acquired by trading other valuable assets, sometimes in combination with financing. A client can obtain interests in real estate by making loans on real estate assets that are secured by a deed of trust or a mortgage. Another method is to invest as a participating lender. In such an instance the borrower needs to agree to provide equity kickers or participation in cash flow whereby the lender (doctor) can benefit directly from the real estate performance.

Equity Participation Plans

With an equity participation, the physician-investor can profit or gain from the sale of the property, sometimes in a preferential manner (i.e., the money the doctor loaned is returned, with interest, and a predetermined percentage or portion of the gain is given to the owner/borrower before distribution of the sales proceeds). Similarly, the doctor can participate in annual cash flow, giving a fixed or a fluctuating amount depending on the performance of the investment. As a lender, many of the benefits of ownership of real estate are not available to the MD, but the doctor should have a security interest in the property and no direct responsibility for operation of the real estate investment. Also, if possible, the borrower should provide additional guarantees of performance. The borrower could do this by providing additional security, such as the deeds of trust on the borrower’s house, other real-estate, and the acquired property; bank letters of credit; or guarantees of performance from people other than the party to whom the money is originally loaned.

Assessment

If a physician-investor is considering acquiring or lending on real estate, s/he should check with his professional advisors, including accountants and attorneys, before proceeding. The doctor’s attorney should review any contracts or agreements before the client signs anything. The physician also will need a due diligence review to ascertain both the relative values of the real estate on which money is being loaned and the borrower’s track record and background.

Why You Should Require a Real Estate Specialist…

Posted on October 18, 2011 by MREA

…Whether Retail (2 Main Types), Self Storage, Multi-Family, Industrial (2 Main Types), Office (2 or 3 Main Types, one of which includes Healthcare)?

Why?

Information (aka abstracts, circumstances, compilations, conclusions, details, documentation, dossier, evidence, facts, figures, input, knowledge, material, measurements, notes, proof, reporting, results, scoop, score, testimony, the whole story)!

Why is information so important? Technology experts and bloggers have made it practically free via the internet. Not the case for commercial real estate. Below are the fundamental reasons why enlisting a specialist with expert information regarding your product type is absolutely necessary.

Upon effective transaction:

Brokers and developers are not required to provide data for leases or sales to governing sources (so, why should they?);
Corporate, owner, user and investment companies are not required to provide exact data for the brokered leases or sales (why should they?);
Lenders, mortgage companies and appraisal firms are not required to provide thoroughly investigated data that is verified by all sources (why should they?);
States are not required to provide exact data for leases or sales back to the public (why should they?);
Even the exclusive commercial real estate information providers are not required to publish data that is entirely accurate, how could they (See 1 through 4)?

And on and on (CMBS, Wall Street, International Investment,etc.).

But, before you find yourself disgusted with the lack of reliable measures to ensure proper data is reported and recorded so that bubbles aren’t blown to exponentially larger sizes, consider the fact that everything was going up. Needless to say, when everything is going up, where is the need for investigative oversight? Simply put — Everyone is happy!

Which leads me back to the origin of this article to which I speak with valuable insight that the public needs to be aware. All general commercial real estate practitioners, and the firms that they operate within, are facing dire straits simply because of their lack of quality data and/or control of a sector type which is essential to influencing a buyer and seller in today’s marketplace.

And, because transaction volumes remain low and overhead for commercial real estate firms is peaking, this vital component to facilitating transactions is being cut to reduce company overhead. The most poignant phrase I have heard regarding this strategy is from a fellow mentoring subject who said that, “they are cutting off their nose to spite their face”.

Speaking from keen insight and background, general commercial real estate firms have been hemorrhaging every day over the latter part of the last decade. This, while specialist organizations have continued to gain market share due to their unrelinquishing control of the items that are absolutely essential to transaction confidence (buyers/landlords, sellers/tenants and information).

This article was written by Robert S. “Bob” Lowery, Managing Partner of MREA, a healthcare real estate firm headquartered in Houston, TX.

Comprehension of a Medical Lease Contract

Posted on October 13, 2011 by MREA

Statement: After auditing countless medical leases through our firm, its CPA and attorney partners, we want to make fully aware the consequences of any real estate agreement that is executed (signed).

On behalf of the associates of this firm, the declaration above is about as harsh and opinionated that we, as advisors, can be without crossing the line whereby disassociating ourselves in our mission to coordinate the healthcare real estate markets; physician, hospital, investor, owners.

But, speaking from the perspective of a landlord (lessor), the largest impediment that a landlord sees is the lack of commitment and foresight from the lessee’s principal founders with regards to their own organization’s goals and objectives. The landlord has to take into account that the necessary financial due diligence has been performed and the organization is prepared for the legal ramifications if ANY PART of the contract is broken. Thus, it is essential when provided any document that requires signature that it is taken to someone else for further review. Take it to your spouse, your associates, your financial partners, your attorney, your accountant, your shareholders. If your firm is fortunate enough to have real estate representation that will not charge you an arm or leg, take it to your broker.

Typically, the mistakes that we see from physicians (especially independents) is that of discounting the lease instrument and the level of sophistication and comprehension necessary to interpret this contractually-binding obligation effectively. As an example, if there are 10 items that are conveniently written to control one party of a transaction, does the other party know all 10, or just 5, or 2? Remember, it is already popular culture that a physician is not a savvy businessperson, which does not speak of their collaborative efforts. All kidding aside, it is of paramount importance to fully comprehending any contract or, at the least, obtain verbal or written interpretation through fiduciary relationships.

Now, for the really bad news.

The field of experts that truly understand medical contracts and can convey its purpose, as well as its fine print requirements to your organization, are few. Because most healthcare real estate real estate experts understand this, they will typically work for a 5 to 10 percentage premium over the traditional brokerage firm’s marketed commission or consulting fee. You may be fortunate to locate a highly skilled healthcare unit, but beware the temptation to accept their services for both sides of any transaction for reasons that I do not need to explain further.

To summarize, our readers should be acutely aware of the needs of their organization first, prior to contracting with any commercial or medical real estate agreement. They should also make sure they have brokerage or counsel that can perform the necessary tasks associated with YOUR transaction, which should be compensated by their firm. Until then, we can keep combing over the mistakes, some of which will cost our clients bankruptcy, until lessens are learned.

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

MREA | Medical Real Estate Advisors

Precision Guidance for Healthcare Real Estate

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