Tag Archives: medical

Evaluating Real Estate Financing Options for Physicians

Posted on by
Reply

We are evaluating more medical office building loans today than ever before, which may shed light on the need for the health care sector.  The finance options and potential deal structures vary greatly based on such factors as loan amount, owner occupied or investment, strength of owner, cash flow, liquidity, etc. In addition, the type of structure, and the property it sits, dictates available options as well.

Other than in 2009, our findings in loan to value restrictions range widely for medical professionals, from 50% to 120%.  For example, conventional loans (bank loans not backed by the government) are normally capped at 75% on a rate and term refinances and 65% loan to value on cash out refinances.  With the backing of government programs such as the SBA, 90% financing is available on refinances.  It is no doubt that we all have to become experienced in working with SBA loans as well as the USDA B & I loan program.

We are becoming more aware that several lenders are back in lending business and will bring finance level above that of a traditional real estate/purchase prices. These programs are only available to medical practitioners.

As for physician loans, the debt service coverage ratio (DSCR) restrictions are typically set at 1.2 for doctors. To explain what this means, for every $1.20 of net income (income after all expenses, taxes, insurance, miscellaneous fees) that the property and/or practice produces, the mortgage payment may not exceed $1.00.  So, after all expenses and the mortgage has been paid, the owner will need to net $.20 over the mortgage amount to qualify.

Many exceptions can be made with this rule for medical professionals.  For example, projection loans are common within this sector, which can offset any negative trends or lack of current cash-flow.   Also note that SBA 7a loans will allow projections as well as DSCR as low as .8 for every $1.00, a riskier loan (through the government).

The market value of a medical office building is very important and will be evaluated and compared to similar properties in the area and sector.  Age, appearance, location, accessibility, and local market conditions, as well as other factors are considered.

As for physician creditworthiness, everything about the borrower will be scrutinized.  680 credit score is normally the minimum for the best physician loan programs.  Exceptions can be made on this as well with some conventional lenders considering scores as low as 640.  SBA loans can go below 600 as well.  The overall strength of the borrower, cash flow, liquidity, and LTV can offset concerns on low credit scores.

As stated before, we have never been so diligent in working with financing for this sector’s need.  Please contact us for direction.  We are also open to other financing alternatives, with necessary history for our clients, and loan packages that will be highly scrutinized.

Planning for Success Despite Uncertainty

Posted on by
Reply

These are certainly uncertain times in the health care arena. Under the potential threat of major Medicare reimbursement cuts, rising operating costs and an increasingly complex regulatory environment, many of the physicians that we speak are candid in their confinement within their profession. They are having difficulty making significant capital investments in equipment or technology.  They want to recruit new physicians to expand their practices, but fear at any time that government policy and/or insurance could turn the industry on its head. Most private practice physicians are desperate to change their current situation because they are unable to see a clear path forward.

Given this predicament, we wanted to assist in providing a few simple options that our group considered when the commercial real estate industry was hamstrung by our own significant downturn.  These are considered positive approaches to some unfamiliar issues.  One remedy to overcome the uncertainties in medicine is to develop a strategic plan for the practice. Developing a strategic plan requires that you to examine where your medical practice is today as well as for the future.

At a starting point, a strategic plan should answer the following these questions:

1. Where are you now?

2. Where do you want to be?

3. How will you get there?

The greater the specificity in the answers, the greater the success in developing and implementing a strategic plan. Moreover, the plan does not need to be concrete. Rather, you may find it necessary to modify your plan from time to time and, in fact, you should revisit the plan on a regular basis to chart the progress. A medical practice strategic plan should address at least the following key issues:

1. Geographic service area;

2. Scope of clinical services;

3. Physician staffing;

4. A managed care strategy; and

5. Strategic relationships and referral sources.

There are certainly many unknowns in the practice of medicine today. One thing we know for sure however is that successful businesses evolve and you cannot get anywhere by standing still.

Reform Providing Opportunities in Healthcare Real Estate

Posted on by
Reply

Earlier this month, the Federal Court of Appeals for the 4th Circuit struck down two challenges to the Affordable Care Act’s “individual mandate,” which requires individuals to purchase health insurance, or they will be forced to pay a monetary penalty.

Needless to say, the individual mandate requirement is by far the most controversial portion of the Affordable Care Act. Thus, it has been challenged in court on five separate occasions only one year after its adoption. Overall, and if I am keeping an accurate tally, three appellate judges have ruled that the minimum coverage requirement is unconstitutional and five have said the requirement is constitutional. It is unclear will occur throughout the appeals process, but it appears that the government and those who oppose the law will eventually argue their cases in front of the Supreme Court.

However, if you or your practice organization has remained on the sidelines, waiting for a government adopted solution, quietly remaining economically viable in the hopes that the Supreme Court will rule the law unconstitutional, you may have already missed the boat toward a modern and integrated future.

Whether it is “Meaningful Use” requirements, federal or state initiatives urging health care providers to modernize processes such as adopting EMRs or taking steps to avoid unnecessary medical procedures, there is no denying that the health care industry is well on its way to reform. While those in the industry that are not ready or resistant to these measures, they are undoubtedly holding out hope, waiting for a life raft while paying to great attention to the political theater around the Affordable Care Act. They are essentially neglecting to following the growing trends that are utilizing much more sophisticated technological and process advancements that are taking hold of the global economy.

Putting ACOs and “Meaningful Use” aside for a moment — the largest U.S. corporations will save billions in a integrated, efficient health care system that focuses on providing the best possible care for patients. Self-insured employers will save millions in medical bills with a system that can manage chronic diseases, reduce unnecessary procedures and emphasize preventative care.

Unfortunately, as reform of the system becomes a greater reality, corporations that purchase health insurance from outside vendors will continue to pass on a larger percentage of care to their employees; in this economy, employees are beginning to realize that the escalating costs for health benefits are reducing their hard-earned wages, which have remained stagnant for over a decade. See this article which suggests that, after inflation, wages are back to 1996 levels. Thus, we can’t continue to erode individual earnings to the working class without serious backlash — so reform is here to stay.

By adopting a modernization of processes, health care organizations will be able to provide efficient workflows throughout the system and higher quality of care for patients. As for those that remain on the sidelines, whereby suggesting that this movement will pass, I kindly request taking a moment from the busy profession to speak with leaders in your respective fields to see what tomorrow looks like — today.

From a healthcare real estate perspective, locating opportunities is becoming much easier as physicians have and continue to seek a flight to perceived safety (all at once), leaving areas that require the greatest need for their service and saturating others.

REO Properties, Here.

Posted on by
Reply

A select few representatives within our office hold the keys to bank-owned property, otherwise known as an REO.

REO stands for ‘real estate owned’. It is the term used to describe property that is in the possession of a lender by virtue of a foreclosure. That means the foreclosure has already taken place, the bank has the title to the property and the bank can sell it.

As a caveat, when purchasing REO property is is extremely important to have the title examined by a professional title examiner and the title certified by a competent attorney. Many lenders, to save money, have only the present owner checked at the time of the foreclosure.  Due to the professional laxity in purchasing and mortgaging real estate over the past 10-15 years REO properties are fraught with title defects and undisclosed liens and encumbrances that occurred during prior ownerships.

Also, many title companies have been “insuring over” defects rather than resolving them. You need to know if there are any title defects on the property prior to purchase.

As for the locations of such REO’s, Biggerpockets.com has provided this fairly thorough list of websites that host properties for sale.  As it would do myself and my office a disservice to strictly publish commercial opportunities that are solicited by our office, or at our fingertips, this initial offering is a practical starter into bank-owned purchase opportunities.  Please contact Robert S. “Bob” Lowery in Houston, TX for assistance with your REO needs.

Regional REO Banks
Other REO Sites

Even The Match With Tenant Representation

Posted on by
Reply

A business lease is one of the most important documents a company will sign. They set and forecast the obligations that will govern tenancy for a certain time period.

A poorly negotiated lease may result in inconvenience, financial hardship and a disruption to the business. At worst, you could be held captive by a lease if the ownership was not carefully negotiated regarding every facet of its tenancy, starting with the rate calculation.

When searching for office space, the landlord requests a certain asking price per square foot.  After negotiations take place, it is common for a tenant’s psychology to change when the rental rate moves in either direction.  For example, if the tenant has been provided a 20% reduction from the asking rate, it changes for the better. But, what is not widely publicized is that knowledgeable landlords will replace reductions with other items throughout the lease, so as to influence to their favor.  If they do not, well, the asking price was probably too high in the first place.

Are lease negotiations tilted to favor landlords?

Three years ago, we tracked a landlord hoping to lease a building for $18 per square foot and would have provided a tenant with six months of free rent and a generous allowance, if not turn-key the space.  Today, that same landlord wants $24 per square foot with little to no free rent, while offering half of the tenant improvement money. The economics are built-in to favor landlords, especially as ownership becomes a greater luxury.

When does the psychology come into play?

It can be mentally satisfying when anything is purchased at a discount. Getting a deal is one of our greatest pleasures in life. But some landlord markups are done with the sole intention of ending up at the ‘discounted’ rent price. Knowing this, does it still make you feel good?
For instance, the landlord is asking $18 per square foot for a space and settles at $15 per square foot, which was anticipated all along. Or think of it another way: Does it make you feel better to know that most of the landlord spaces that you are interested are working under the same philosophy?

Doing business with honest, reputable professionals who are problem solvers rather than problem makers is definitely worth a premium. But what if your organization chooses to work without this kind of counsel, rather, you may be working with a problem-maker, one who also provides poor property management and packs operating expense pass-throughs?

What is the basis for rent escalations?

While most people understand inflation, they cannot comprehend the annual inflation levels that commercial property owners incorporate into their rental increases. The U.S. inflation for the last 10 years has averaged less than 4 percent compounded, yet commercial owners have increased rents greater than 12 percent compounded per year.

These extravagant inflation averages make sense to landlords because their math has been reverse-engineered. The landlords pay whatever they need to in order to secure the purchase of the property, then they look back into the rental rates required in order to support the purchase price. Supply and demand, positive or negative net absorption, job gains or losses, those notions don’t have one iota of influence over this rent calculation. These landlords are operating in a vacuum, so why should they be concerned about universal issues like employment data?

You certainly do not have the advantage…

The negotiations favor the house or, in this case, the building and its owner. Not unlike Las Vegas, the house wins far more than it loses.

It’s very important for tenants to play the game with all of the advantages available. This is where hiring a tenant representative becomes invaluable. While most of the tenant reps in the Greater Houston area do not have aces up their sleeve, they are able to see the cards being held by the landlord. For consideration, regardless of how much a landlord is asking in rent, it is important to know how long the space in question has been vacant. Additionally, is the building well run, and will the tenant actually enjoy being in the building in several years? Or worse yet, does the landlord in question nickel-and-dime tenants to death in order to work their income statement to their direction, sacrificing the landlord/tenant relationship for a hopeful sale of the property?

The way to combat this growing problem called ‘arbitrary landlord markups’ is to be represented. An office lease is certainly a maze, requiring an expert advocate to protect tenants from being skewered with myriad hidden costs. Tenants are not prepared with the proper questions to ask, and NOT to ask, much less the answers they should be prepared.

Especially now, representation requests for real estate leasing, purchasing and selling is at all-time high; a premium, due to the fanciful mistakes that have been made in years past.  If you do not believe it, on your next commute, take a look at all of the real estate signs that litter the roadways.  Which one and why is the question you should be asking?

We can help.

How Pocket Listings Are Utilized

Posted on by
Reply

We realize that everyone is ‘looking for a deal’ in today’s marketplace.  For an example, we have access to a list of investors, developers and JV’s that are searching for opportunities in the market.  This list has been updated quarterly and has changed only slightly over a 5 year period.  So, some qualified investors have remained on the sidelines for 5 years; some longer.  While a few purchase opportunities have presented themselves, to which our clients have been rewarded, as you might imagine most deals have not materialized because of a multitude of regulatory issues.

Over the stretch of 2011, the majority of property transactions that have been sold through our Houston office have been issued directly from the bank.  The secondary source for transactions have been generated via listings/contracts kept off the open market, otherwise known as pocket listings.

Pocket listings happen to be one of the most highly scrutinized, yet secretive avenues for obtaining deals in the commercial real estate industry.  In order to understand pocket listings and how they allow commercial real estate professionals, and their clients, to have the upper hand in the industry, it is important to know what a pocket listing is when compared to a marketed listing.

First, let’s review marketed listings and the internet marketplace.   Dot.coms, such as Loopnet and Costar, offer huge databases of all of the properties that are for sale, as well as information regarding these properties.  Once the property has been made available for sale, it most often is made public on these various internet channels, available for all commercial real estate professionals to participate in and view information.  Once the property has been sold, or disposed, the listing is removed from these networks.

Pocket listings differ in that the commercial real estate broker holds a signed contract or a listing with narrow price negotiation range off of the market.  Most of the time, these agreements limit the amount of advertising that can be done on the listing or the type of access that others are given to the listing.  This listing type is often utilized by the large brokerage investment firms that control their certain investor market, essentially creating their own in-house auction for the strongest, most qualified buyers to bid.

On the flip side, marketed listings are such that the commercial real estate broker makes the listing available to any and all prospective buyers, per the agreement that they signed with the seller in the first place.  Any commercial real estate professional that is interested in showing or buying the property is able to so and is therefore entitled to any commissions that are made off of the final sale of the property.

How did we enter this closed market?

Being in command of our sector type is the best way to get in, as far as pocket listings go.  For example, our group will attend networking, trade, bank and large conventions to access individuals who control information.  Not only does this allow us to build solid, positive relationships with medical and business professionals, it also put us allows us to be in the know of such opportunities.  Prior to the property coming to market, we offer to eliminate the marketing process, whereby providing a ‘qualified buyer’ directly.  In addition, we have determined that physician functions, economic planning committees or zoning and planning committees are a great way to obtain information for land / medical development, selling, planning and other things related.  By attending these meetings, we put ourselves at the forefront of any marketing process.

Pocket listings have their naysayers, though.  Many listing brokers and brokerage houses have labeled them as detrimental to an efficient marketplace.  Their reason, as legitimate as it sounds, has serious holes.  Their rebuttal is that if every investor was given the opportunity to bid on a property listing, the highest bidder wins.  This is far from realistic.  For one, they are assuming that their personal marketing campaign will provide the most optimal coverage possible for the property.  The response from the pocket listing broker tends to always be that the strongest bidder wins.

Unfortunately, brokers and investors became accustomed to internet solicitations as their main source for information, especially during the mid 2000′s when anyone could qualify for a commercial real estate loan.  During this time, investors became more apathetic, never setting foot on the the real estate that they ultimately purchased.  Brokers sat idly by their computers for a property, price or deal to flash onto their screen or sought listings to place them on the these vehicles.  Those days are long gone and so is the internet marketplace as a source of trustworthy information.

For those that utilize pockets listings, we encourage direct communication with the owner, as this strategy must be disclosed properly.  If the owner wants to risk taking his/her property to market in order to obtain multiple offers, qualified or unqualified, or advertise a listing on several marketing channels, then they might want to consider slipping into an exclusive, marketed broker listing format.  In essence, it is not the best practice for commercial real estate practitioners to request that listings be pocketed to them.

It takes experience, know-how and above all, HARD WORK!

Leasing Vs. Owning

Posted on by
Reply

Given my history, whereby I have reaped greater financial reward by representing buyers and sellers,  in my honest opinion, leasing is typically a better option for most business owners – rather than owning. Sometimes, local situations may justify owning commercial real estate. We all know stories about the business owner/operator whose real estate was in the path of growth and was bought out by a developer for substantial profit. We also know the purchaser who ran into a very timely deal when competition in the marketplace was thin.  The romance of owning real estate can be compelling and hindsight is 20-20. But, in other circumstances, real estate proves cumbersome and has inhibited the growth of many core business models. A lesson can be learned from large corporations who rarely choose to own their buildings. Often they sell, or sell and leaseback their real estate to get it off their books. Here are a few reasons why leasing is typically better than owning:

  1. Leasing affords more flexibility to expand or contract. It’s a less complicated to renegotiate lease terms than have to dispose of a building in a soft market.
  2. Buying and selling commercial real estate is a matter of market timing that professionals are better than any novices. As we have witnessed, those new to the game often buy at the top of the market or sell at the bottom.
  3. Business owners often make commercial real estate buying or selling decisions based upon the needs of their business rather than the real estate market. One of the two will suffer.
  4. The business may be neglected because of real estate management distractions. Real estate management is best performed by professionals.
  5. Selling a business may be more difficult if the buyer is required to buy the real estate as part of the transaction. The seller is negotiating on two fronts and one will have a diminished outcome.
  6. Precious working capital is tied up in financing the real estate.
  7. You can only write off interest expense (not amortization) on a mortgage while lease payments are 100% deductible.
  8. You can end up with phantom, taxable income when selling a depreciated building.
  9. You should be spending your time shaping your business and not dealing with the day-to-day maintenance and management headaches of owning a building. Let the landlord do it.
  10. Income-to-asset based ratios are improved by not owning real estate, which may help public companies compare better to others in the same industry.

As a reminder, whether leasing, buying or performing a sale-leaseback, our team services office and medical real estate owners and users in the Greater Houston area.  At your convenience, please provide a simple phone call to our office to determine how we may improve your position in the local marketplace.

The ideas and opinions discussed in this article are subject to change, especially given the proposed FASB/IASB rules.

Refinancing Medical Real Estate Through the SBA

Posted on by
Reply

You may or may not be privy to the changes that were made to U.S. Small Business Administration (SBA) loan programs with the passage of the Small Business Jobs and Credit Act late last year. One of the most significant changes is the two-year provision that allows small business owners to use SBA 504 loans to refinance commercial real estate and other eligible fixed assets, and has provides tremendous support to physicians who own their commercial property.

By refinancing your commercial mortgage with a 504 loan, you may be able to tap the embedded equity in your commercial property, as well as take advantage of historically low interest rates. The SBA 504 loan program may be a well kept secret in commercial property financing, but because it offers the highest cash-on-cash return financing available, as well as below-market, long-term fixed interest rates and longer amortizations, it is essential to for any physician to understand.

As most have become familiar with the new medical landscape that grips most corners in the city of Houston, tremendous growth is also occurring in physician ownership.  Simply, the strategy allowed doctors to turn a monthly lease payment into a mortgage payment which builds equity, and creates wealth.  From the physician’s perspective, these decisions made practical business sense at the time, and most likely, because of the availability of capital, most physicians found it easy to obtaina loan from a commercial bank to finance the project.

Present Day: Similar to so many doctors that we speak to, most are facing a ballooning note payment. If the ability to refinance and take advantage of lower interest rates was available through your bank, the situation would become much more manageable. The difficulty is that it’s tough to find a bank that will do a conventional refinance these days, even for physicians. Today’s tighter underwriting standards have made it increasingly more difficult for borrowers to qualify.

The scenario, to which I have just described may not exactly describe your situation, but if you’ve purchased commercial property in the past 10 years, it is likely that I am not far off. The good news is that the Small Business Administration is providing a second chance by allowing refinancing with 504 loans of up to 90 percent loan-to-value and up to 125-percent with additional collateral pledged. This is a major benefit for medical practices, whether you’re struggling with a tough economy, declining reimbursements or insurance providers.

Eligibility

In January, the SBA announced specific guidelines to determine who qualifies for 504 refinancing. To find out if you’re eligible, answer the following five questions:

1) Does your note to be refinanced have a maturity date on or before 12/31/2012?

2) Has your debt been outstanding for at least two years?

3) Has your practice been in operation for at least two years?

4) Have you been current (no payment deferrals or past dues of more than 30 days) on your note for the past 12 months?

5) Was the debt to be refinanced substantially (85% or more) used for eligible 504 purposes originally (owner-occupied commercial real estate, heavy machinery, equipment, and closing costs related to the project)?

If you can answer “Yes” to all of the above questions, then SBA 504 refinancing is a necessary step for you and you should consider speaking with a SBA specialized lender immediately.

In addition to its beneficial terms for physicans, the SBA 504 program is a zero-subsidy program. In other words, it does not cost taxpayers anything. Program fees have carried it for years without any federal subsidy, and the program has run such a surplus at times that the government redirected some of these funds for entitlement spending a few years ago. In addition, the loan-loss rate is historically about one-third that of the 7(a) program, the SBA’s other flagship loan program, which has allowed refinancing for some time.

From the taxpayer’s perspective, 504 refinancing is a better deal, and you benefit as well. The 7(a) is mostly a floating-rate loan program, which isn’t the best option for long-term, hard assets like commercial property and often requires additional collateral. This additional collateral often takes the form of a second lien on your home or liens against inventory and receivables. This ties up those assets and can ultimately be problematic if you later need a line of credit or other short-term financing. By making 504 refinancing possible, the SBA is doing a world of good for many small medical practices.

Some critics will argue that this provision will only cause business-owners to use their commercial real estate like an ATM, much like homeowners did in the recent credit boom. But that analogy doesn’t apply here. Small businesses historically create the lion’s share of jobs in the U.S. Many small-business owners have cut expenses and have leveraged up to stay in business during an economically difficult period. In addition, entrepreneurial physicians like you typically make decisions to maximize profits and grow your business — not to spend recklessly.

Also…There is one other thing you should know, something that’s an indirect benefit to you. This refinance provision also helps banks. It’s no secret that banks are being forced by their regulators to increase their capital, lower their risks and generally strengthen their balance sheets. In many cases, that means reducing their exposure to commercial real estate. If you approach your bank to refinance your commercial mortgage into a 504 loan, you might just be doing your banker a huge favor. And working with a lender who specializes in 504 lending without requiring any change in your banking relationship will lessen any perceived threat in this situation.

If you’ve purchased commercial property for your practice from 2004-2008, you should consider refinancing with an SBA 504 loan.  Even if you have not purchased property, you are most likely aware of someone that has.  Please, do them a favor and forward this article along as this opportunity may not be around for a while, especially at today’s interest rates and limited equity necessary to qualify.