Tag Archives: physician

Building a Medical Facility

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Building a healthcare facility from scratch, similar to modeling a custom home, offers an opportunity to control the entire design to fit the particular needs of the medical provider. While the list of preparatory items is long and requires adequate time allotment and abundant resources to carry out, the opportunity, as part of a rebranding strategy is tremendous.

First, we suggest engaging a firm that is focused on relationships within the healthcare real estate sector. No, this does not entitle a medical professional to utilize a proprietary database to forge relationships independently for purposes of pitting one qualified real estate service provider against another. Rather, it allows for the opportunity to streamline the development process for the purposes of time expediency and future financial gain.

For small to mid-size healthcare providers that are initiating contact with real estate developers, it is vital to seek a real estate group that is knowledgeable in land management. Issues such as utility needs, zoning restrictions, detention requirements, along with developer demands and building or regulatory stipulations can quickly overwhelm these providers, especially if exhaustive planning was not prerequisite. Other items such as locale, comparable developments, leases or sales should be documented, and client, whether specialist group or primary care, should be made aware.

For most specialist physician groups, geographic awareness is an integral part of the entire value equation. The need to be within close proximity to a hospital or medical center is routinely the highest priority. Certain specialties will seek companionship with the hospital for benefits that are simply too costly for stand alone facilities that do not experience a high volume of patient care. Thus, seeking land or redevelopment opportunities that are well situated near hospital system is imperative.

As for primary care, locating within, or contiguous to, a hospital is not as important, especially if access is provided to hospitalists. Family practice organizations, which are now in highest demand by patients, specialists and large healthcare systems, are realigning themselves within medical centers for physician growth, referral and patient demand. This, especially as the financial incentives are too lucrative to ignore. To remain independent, some family practice physicians are seeking space in alternative uses such as retail centers or condominiums.

A unique development opportunity for healthcare providers is that of medical condominiums. This assemblage, or community, of buildings offers healthcare providers an opportunity to realize the equity and tax benefits of real estate ownership. The demand by physicians seeking such opportunities outweigh those pursuing traditional medical office space 2 to 1 these days; convenience taking precedence over compartment.

While this style gained favor in the medical community throughout the last decade, several medical providers have engaged our firm to assist in expansionary endeavors. As condos are built a certain size, the shape typically cannot be reconfigured. Also, condominiums are commonly built with unique features that are non standard. Any proforma sale analysis will have to include a longer sale schedule or reduction in price relative to added, exclusive amenities.

As specialized consultants that are unique to the commercial real estate industry, our assignment is to help chart the course for smooth sailing. We will assist healthcare providers through our unparalleled database of contacts and relationships. By streamlining the development process and assisting with routine financial and market surveys, we will minimize the risk of the provider while adding significant contributory support and value to the final product.

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Overlooked Items in a Medical Office Lease

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As tenants of medical office buildings, medical users create unique leasing issues. They handle hazardous materials, produce biomedical waste, require confidentiality in patient recording, and are in the watchful eye of safety/regulatory bodies. While medical professionals are familiar with these inevitabilities, most of what makes their business unique are rarely found on a medical office lease.

After location identification, the majority of our time is spent negotiating the lease. It has been our observation that many physicians will negotiate and sign lease agreements without the benefit of educated real estate advisory or legal counsel. Commonly, this medical tenant is simply concerned with the general business terms (including the term of lease, rental rate and commencement date) and rarely gives the lengthy document  a second look.

While it is tempting to sign the lease to reduce the amount of time spent towards negotiating or communicating real estate interests, a few select studies have documented that tenants who solicit real estate advisors for their business negotiations tend to have greater business longevity. Because a medical office lease is an expense that often requires a multi-year commitment, tenants should not want to be party to any agreement that is not reflective of their own interests. Below are a few examples of where real estate advisors or legal counsel may be requested:

  • Medical office leases typically offer one of two approaches in which a physician can make improvements or alterations to the rented space. Either the tenant is required to remove all improvements installed during the lease term or all improvements simply become part of the property. While the lease may variably contain language that references one of these two approaches, the fact is, knowing additional expenses are tucked within the lease is unsettling to our clients.
  • Too often, physicians assume that a landlord will provide certain basic services for their tenancy. It should be known that landlords only provide the services that are expressly stipulated within the lease. Often, for example, landlords turn off a building’s air conditioning “after hours”, designated as evenings and weekends. If a medical tenant requires extended evening or weekend hours, advisors may assist, in the very least, by educating the tenant on what can be done to facilitate this request. Similarly, medical practices rely on certain types of equipment that consume significant electrical resources. In this case, an advisor should be able to make certain whether the landlord will furnish the necessary amount of electricity or will charge separately for such extensive use.
  • As a tenant, you want clarity for all financial obligations. Some medical office leases require you to simply pay the established monthly rental rate. Others require pro rata payments of some, or all, of the landlord’s operating expenses and real estate taxes associated with the property, in addition to the monthly base rent. In the past, we have noticed where operating expenses have been interpreted loosely by landlords, which may come as a shock to some. Overall, though, the majority of medical office landlords will adhere to the strict guidelines as set forth by educational bodies that attempt govern building use metrics. But, without proper advisory payment, especially the fluctuated amount, may easily become misrepresented. In order to minimize the financial responsibility for operating expenses, tenants should verify that the landlord’s operating expense calculations are correct and not being overcharged. If the operating expenses include real estate taxes, tenants should request an annual copy of the tax bill. In addition, within the lease, tenants may have the opportunity to verify that the operating expense charges have been accurately calculated.
  • Lastly, while you may think you will never default on your lease, it is hard to ignore default provisions. Remember, defaults may not necessarily be the result of bad faith or bad action. A non-monetary default may include failing to maintain the premises or violation of one specific clause within the complete document as written by the landlord’s counsel. Some leases provide a certain time period to “cure” the default, but some do not. It is necessary to identify the potential for violations or default and discuss each one.

It is of great importance to seek the guidance of experienced healthcare real estate advisors or counselors to negotiate the lease in an effort to meet the tenant’s professional needs and insure the continued health of their medical business.

Joint Ventures for Outpatient Facilities

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Historically, hospitals have entertained reliable income streams from the their surgical and diagnostic imaging components. Now, because patients have greater access to physician-owned surgery centers, coupled with advancements in imaging technology, it is increasingly difficult for hospitals to have income certainty from these procedures within a hospital setting.

On the other hand, proposed and already implemented changes to the Medicare payment system suggest that physician providers face the threat of losing a greater percentage of revenue. Thus, many are seeking partners with hospital systems from a joint venture perspective.

1. The most common form of joint venture is the division of ownership between the hospital and physicians. In this agreement, the hospital and participating physicians form a new entity and each contribute funds or lender approved interest equal to their pro rata ownership in the new entity. The equity investment model has proved to be a “win-win” situation for both the hospital and the participating physicians. The hospital better secures a long-term relationship with referring physicians, builds loyalty and trust, and recaptures a lost revenue stream. The physicians are better positioned for a positive ROI and can focus on patient care rather than highly detail-oriented tasks and risks that exist in real estate ownership and management. A potential drawback under the surgery center setting is that the payment received under this form of joint venture can be significantly less than what the hospital would receive for the same procedures performed on a hospital inpatient basis.

2. The healthcare industry has seen more “under hospital arrangements” over the past decade, although many have been recently banished from hospital settings. While this model can take on many variations, several characteristics are in common. The participating physicians provide to the hospital a certain ancillary service (from the use of primary equipment to turn-key management).The hospital purchases that service on a “per-click” or “per-use” basis. The hospital is the billing entity and is paid under the hospital ambulatory payment classification codes. The primary advantage of an under arrangements model is the higher payment received by the hospital as a result of the hospital billing under the hospital payment system. Moreover, the hospital bills under its managed care contracts, which commonly provide for higher payment than what is received by freestanding outpatient facilities. A few potential drawbacks to the under arrangements model are the increasing regulatory scrutiny of hospital and physicians transactions. Also, because the hospital performs the billing of the surgical procedures, the Stark law is in effect.

3. A standard block lease is where the hospital leases ancillary equipment or management responsibilities to participating physicians in return for a fair market value lease. Each participating practice bills under its own group number. The primary advantage of a block lease arrangement is its ease to initiate and terminate. Since a participating practice does not have ownership of the equipment or facility, the hospital or physician practice can quickly terminate the relationship. One major disadvantage to block leasing arrangements is that the physicians do not feel like ownerHistorically, hospitals have entertained reliable income streams from the their surgical and diagnostic imaging components. Now, because patients have greater access to physician-owned surgery centers, coupled with advancements in imaging technology, it is increasingly difficult for hospitals to exercise income certainty from these procedures within a hospital setting.

4. The shared expense model is a variation of the block lease model, except that instead of each practice leasing blocks of time, it would assume a commercially reasonable proportion of the costs of the diagnostic business and utilize the imaging equipment on a first-scheduled, first-served basis. From a regulatory perspective, the shared expense arrangement may be considered more aggressive than a block lease arrangement because it will not qualify for safe harbor protection under the Anti-Kickback Statute. However, many physician practices may still prefer this type of an arrangement due to its added flexibility of being able to schedule patients on a first-scheduled/first served basis and paying expenses in a manner that more closely reflects the actual use of the imaging equipment.

MREA is a truly comprehensive medical real estate platform that plugs the gaps from that of traditional buy-sell-lease-manage commercial real estate companies. To receive a complete package of our healthcare services, real estate offerings, consulting assignments, or merger/acquisition successes, please contact Robert S. “Bob” Lowery at 713-701-7900.

A Healthcare Real Estate Success Story

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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:

  1. Tenant survey of satisfaction with building services, property management performance and lease renewal intentions
  2. Action planning reports for each hospital campus, region, service provider and the national portfolio, highlighting performance trends, strengths and weaknesses
  3. Comparative performance analysis of year-over-year results and versus report
  4. In-depth, statistical analysis of property and tenant characteristics influencing satisfaction, retention and relationships
  5. Recommendations for the enterprise and each service provider to improve customer service delivery, strengthen relationships and boost retention
  6. 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:

  1. Targets improvement initiatives toward highly influential property management practices, such as frequency of proactive communication with tenants
  2. Requests action plans for improvement from each hospital campus and service provider
  3. Increases tenants’ satisfaction with management by 10% to exceed benchmarks
  4. Improves tenants’ likelihood of renewal rate by 5%
  5. Identifies “at-risk” tenants whose lower satisfaction level and higher likelihood of defection warrants immediate property management follow-up
  6. 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

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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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Healthcare Facility Leasing FAQs

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We are commonly asked questions that pertain to concerns which are healthcare industry-specific, yet we can always find a way these issues relate back to the contractual obligations of real estate commitments.  As a courtesy to those that are seeking guidance explicitly for when the rubber meets the road (real estate meets healthcare), we have provided some fairly uncomplicated scenarios that will likely exist in a health facility lease transaction.

Landlord Vs. HIPAA
Commonly, a lease agreement will allow the landlord entry onto the premises for the purposes of inspections and repairs.  HIPAA provides guidelines to protect medical records and personal health information.  A lease within a medical facility will typically provide that the landlord may not enter an exam room with patients present.  Further, most leases will indicate that any location within the spatial premises leased by the tenant, if entered, will have the potential to breach privacy or confidentiality of patients or medical records.

Tenant Vs. Medical Waste
A medical lease agreement will typically include a provision that prohibits a tenant from using or storing any hazardous materials on the property without the consent of the landlord.  If the tenant will require the use of such materials, the lease will commonly indicate that the materials commonly used in concert with the permitted use of the leased premises will be allowed, as long as the materials are stored in compliance with strict regulatory commitments.

As for the disposal of hazardous waste, leases commonly provide that the landlord will be responsible for janitorial services, but will require the tenant to arrange for its own disposal of medical waste.

Stark Law Vs. Landlord/Tenant
It is important to consider if a relationship exists that has the ability to breach Stark laws, or potentially, Texas law.  The Anti-Kickback Statute deems it a felony to offer, tender or receive fee, or compensation, if the payment is determined to influence referrals for patients.  So, it is important for a lease to exist and to comply with the following:

  1. Be in Writing
  2. Identify the Premises
  3. Term of Lease at Least 1 Year
  4. If Interval (Time Share, etc), Lease to Specify Schedule and Rent for Interval
  5. Rent must be Fair Market Value

Permitted Use Vs. Technology
A lease agreement will include a permitted use provision that restricts the use of the space to certain business operations.  Yet, a tenant wants to maintain flexibility, especially with the newly minted technological changes that are required to adapt and compete within a specialty.  So, a tenant wants the provision to be as broad as possible, while a landlord seeks to restrict the use to improve tenant mix and provide other tenants with exclusive rights.  While a rare bone of contention today, technology will eventually force tenants to seek very general, or highly specific opportunities.

Building Vs. Equipment
The medical industry has some of the most cumbersome and demanding equipment.  It requires specific attention when placing on the premises of a multi-story structure.  Thus, some buildings have special provisions for weight distribution or electrical capacity.  The location and installation of necessary landlord and tenant is commonly addressed in lease.

Improvements Vs Landlord/Tenant
The lease agreement will provide how each party will become responsible for design, materials and installation of the tenant’s improvements.  While a highly negotiable item within the lease, it should determine the control of implementation and ownership of improvements.

Lease Vs. Physician Practice
A greater number of leases are requiring personal guaranties from key members within a physician group for the purposes of adherence to contractual obligations.  With more physicians defecting to hospitals, merging practices, or even leaving certain jurisdictions, we are noticing considerations for physicians to be released from guaranty if the leave the practice, while including those that enter.  Other limits include guaranty amounts proportionate to ownership share of practice.

These are abbreviated responses to a few common inquiries pertaining to medical real estate, none of which constitute legal advice.  Please make sure to contact Robert S. “Bob” Lowery for guidance with your healthcare real estate decisions.

Hospitals Employing Physicians: Is It Different This Time?

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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.
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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.
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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.
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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.

Valuing Medical Real Estate on Cap Rates…Fuggedaboutit!

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Physician and investor ownership of medical income property still sits as a relative newcomer on the expansive list of commercial real estate investments, which includes office, retail, industrial, among several others.  All-in-all, there may be over 100 specialty and categorical types of commercial real estate investments if broken down by industry and tenancy (single, multiple).

Commercial real estate brokers typically will arrange all investments alike, utilizing a simple formula known as cap rate pricing so as not to confuse or curtail into any real estate investment type.  But, every commercial property user (from Fortune 500 company to auto repair franchise) and investment (fully-leased hospital medical office building to empty warehouse) is uniquely, comparatively different.  So, to achieve proper valuation the asset needs to be compared directly to those of competitive properties with a percentage emphasis on who transacted, why and how, as well as economic conditions within the submarket, city and national economy.  It is our experience that most buyers and sellers will place a greater weight on certain factors when transacting, especially when motivated by a needs or capital availability basis.  This is botched recipe that has led to the relative uncertainty for our sector as a whole.

So, it takes a skilled eye and real-time comprehension of certain functionality of business and investment types, as well as a wide array of financial and economic data points to properly price and transact in the commercial real estate marketplace.   Unfortunately, just a handful of brokerage platforms adhere to a heightened sense of knowledge and disclosure when advising their clients, primarily due to inefficient formulas for pricing commercial property.  While this is certainly not a testament against commercial real estate brokerage platforms, it is a testament about a vast investment class that in some conversations remains broken based on inefficient pricing mechanisms, one of which includes cap rate pricing.

Example.

A cardiovascular care facility has a Net Operating Income of $100,000, and the sales price for the property is $1,000,000, therefore the cap rate is 10%.  Most property investors, and now physician investors, are becoming more comfortable with this simple strategy of valuing a property for the purposes of an exit basis.

But, what does a cap rate of 10% tell you?  Let’s first discuss what it does not tell you.

A cap rate does not tell you what your return will be if the property requires financing.  With an overwhelming majority of property requiring financing and terms changing daily, what are the costs of capital? Nor, does it appropriately account for tax and interest calculations either. It cannot pit an apples to apples comparison of unique property characteristics.  It does not tell you who, what, why, how or where.  Prior to contracting on a needs or investment basis, it is very important to know the competition in the market and how, why they can transact at certain levels.  Simply doing some quick math to obtain a cap rate does not accomplish this.

If not healthcare real estate, we will be happy to direct you to advisors with a keen eye on the rolling ball.  If your physician, user or investment group needs to determine the price of which to contract in the today’s commercial real estate market, please contact us for a proven transactional formula that may lead to a higher or lower price dependent on a variety of factors.  

Alternative Ways of Purchasing Medical Real Estate

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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.