Tag Archives: physicians

The Leasing Process: Medical Office Building

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Of utmost importance to a medical building’s ultimate success is the recruitment of physicians. For medical office projects, our group will complement management, administration or business development to embrace and add value to the overall objectives of each project. Because we are acquainted with physicians, to which we have lent our professional lives, MREA maintains a vast working knowledge of how each medical business is positioned within Texas’ commercial real estate landscape.

Along with dedicated research, our leasing unit has developed a proprietary leasing program that connects physician specialties, their locations, potential hospital affiliations to assist in determining the size, location and ideal tenant mix within medical office buildings. Furthermore, our medical real estate leasing specialists are actively engaged in the process. We take note of the objectives for each MOB project and tailor marketing strategies, advertising, and public relations campaigns to champion physician prospects for each available space.

Our healthcare real estate group begins each assignment with purpose and direction which involves:

    • A thorough understanding of the medical office market which includes competing hospitals, physicians, medical services, rents, operating expenses, improvement allowance, concessions and limitations.
    • A firm comprehension of hospital healthcare delivery objectives such as use restrictions and tenant mix to determine how a medical office will meet the needs of the prospect with respect to the competitive landscape.
    • Developing a plan of action based on a set of facts, assumptions and the objectives of stakeholders and comparing those to present market conditions.

This exhaustive analysis is essential to the most successful medical office projects. Our healthcare leasing unit’s preliminary due diligence enables our organization to properly position any property in the market to meet client objectives, as well as physician needs, all while preparing for future negotiations that will exist.

Because there are several parties involved in a successful medical office leasing program, communication is of vital importance. Our communication process involves frequent gatherings with key management, administration or business development executives and a detailed format for briefing on the status of our progress. This proprietary medical office leasing and communications process enables us to track tenant leasing progress, summarize the status of each prospect, provide next steps and assign responsibility. Our reports will provide a snapshot of the available square feet and that which is leased at any given point in time.

MREA is very open and considerate to incoming calls regarding medical office lease projects and would certainly appreciate the opportunity to vie for your existing, future development or acquisition projects.

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Medical Office Buildings: A Class Of Its Own

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Ninety-nine percent of real estate service platforms consider office and medical office one in the same. They are not. There are numerous differences between medical office space and standard office space. The most obvious are rental rates, expenses, tenant mix, construction costs, tenant improvement allowance, and building features such as elevators and parking. In addition, the proximity and the financial condition of an adjoining hospital should be examined. These examples do not even begin to touch upon the intricacies within the healthcare system itself, which is of unique consideration when purchasing a medical office building.

Medical office buildings (MOBs) are deemed “specialty use” real estate. From our perspective, many lenders will consider financing MOBs, but most lack the experience in transactions or simple dealings. Thus, identifying capable players within this asset class is critical. Whether traditional debt, fully amortized structures or even shorter term, higher leverage deals, the MOB is becoming a greater diversification tool for lenders and investors alike.

While government involvement has had a tremendous impact on the past, present and future of the healthcare industry, demographic changes that include an aging population and a increasingly informed and health conscious society is guaranteed to increase demand for years to come. Consolidation will remain a continuing trend for practice groups that lack association with stronger, more diverse physician networks and/or hospital systems. This will have a negative impact on buildings with small, not very well connected and/or aging physician groups.

As for funding, financial sponsorship remains essential to MOB transactions, especially off-campus assets. Here, owner-occupied doctor groups or hospitals themselves receive favorable underwriting treatment. The commitment to their investments and their businesses will be of tremendous importance. Of greater impact is sponsorship that features a commercial real estate firm or private equity company who joint ventures with tenants. Some of the most aggressive lending structures are dedicated to this type of partnership.

Lenders prefer on-campus MOBs, however locating and underwriting these investments can become complicated due to bond financing or land lease issues. Thus, finding the medical office property within the tight radius of the hospital might just be as easy to work, if not easier.

In terms of the lender’s perception of the development and ownership of real estate, a lot has changed after a strong run in the middle of the last decade. Healthcare is no longer deemed recession-proof and, without government support (loose term), it instead operates like the majority of for-profit businesses which became severely impacted by the credit crisis of 2008/09.

While this distinct type of investment is certainly not immune to the juggling act that is supply and demand in a highly levered world, as the economy rehabilitates, the medical office building is becoming one of the most aggressively sought after asset types within the healthcare real estate sector. Call 713-701-7900 to request assistance with one of our several MOB opportunities.

Medical Office Performance Update

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Understanding the advantages of a medical office property can provide stability to an otherwise risky real estate investment portfolio. The uniqueness of this commercial property type makes it a favorable investment, especially throughout ‘down’ economic cycles when stability, rather than overexposure, is sought to balance a portfolio. This, as evidenced by investments in 2008 and 2009, a few of the strongest years for medical office investment in decades and, notably, the worst for other commercial sectors happens to be the most recent phenomenon.

As for today, when greater threats appear to loom on the horizon and political strife sits at its highest plateau, and as office and industrial properties attract greater attention due to an improved economic position in the U.S., the healthcare sector’s investment has seen a moderate decline in volume of transactions. Most experts suggest that early-to-mid 2013 will see a resurgence of capital into the medical office property as hospitals seek to monetize real estate to offset costs associated with administrative growth, a precursor to healthcare reform.

So, depending on the current status of the property, and given a 12-month window with which to lease, redevelop or stabilize the property, the direction chosen today will likely determine if the property has the potential of resale during the next cycle.

What should you be familiar?

It starts with our research. Keen insight begins with dedicated research resources that provide for the persistent investigation into changes in physical relocation and current and future regulatory implementation. Our employed fact-finding & intelligence unit corroborates their mined data with paid, less reliable online resources and government data. While the cost of obtaining information remains high when paired to its return on investment, the overall collaboration of multiple data channels remains essential for the specialist whose clients require the most candid data for appurtenant decision-making.  So, investigation into your premises is a first step to understanding potential referral patterns and tenant mix to maximize valuation.

Second, and of greater importance to sale of the asset, the medical office opportunity should have a hospital nearby that demonstrates economic strength mainly through specialized services that provide for in-house referrals, physician growth and collaboration. Orthopedic, Cardiology, Women’s Services and Gamma Knife procedures have been lucrative hospital services and, in turn, have provided for higher effective rental structures throughout these medical office buildings. While a property will fluctuate in transacted sales price, such services attract higher capital investment because of hospital’s strength from physician services and specialties. Thus, you can see where healthcare reform, and its proposed focus on volume, rather than profitability, has the potential to water down hospital revenues and, ultimately, potential sales prices.

Another factor to consider is the area’s residential growth of the 3-mile radius. What is the rent to own ratio? Younger or older demographics? Household income? Over the past few years, investment has sought properties that provide for economic stability through employment and demographic growth. This trend will continue until it is known whether healthcare reform provides to be a viable investment alternative or an epic failure in a time of the state’s and nation’s budgetary complications. Remember, older and wealthier populations still utilize the majority of healthcare services and are more likely to see a physician out of want, rather than need, which will continue to guide investment.

When analyzing how a medical office property will/can perform, it is essential to seek guidance from a qualified professional team dedicated to the industry.  Our associates maintain years of exceptional, professional service to the Texas medical communities and with an expansive proprietary database, widely recognized as the best in the business, we hope you will seek out our firm for your medical office building needs.

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

Will Lease Accounting Changes Affect Healthcare Providers?

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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.

Why Our Clients Are Saying “No” To Hospital Systems

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Several years ago, a partner and I undertook a major leap of faith to become exclusively intertwined with the medical industry.  With over 40 years of combined commercial real estate experience, looking back, we took some bold steps to immerse ourselves into this growing healthcare provider network.

In the beginning, we were witnessing tremendous demand from every medical network to expand ancillary service types and locales, and imaginations were certainly running wild.  We became instant beneficiaries of this growth spurt and soaked up transactional experience and a command of the tenant mix and business components that were successful for a given medical office building or hospital system.

In just a few years, with changes occurring so rapidly, so dramatically, it is now difficult to talk ‘expansion’ with using the term ‘consolidation’ in the same sentence. This is not to say that medical groups are not expanding, it continues.   As to where, you would not be surprised.

But this time, several hospital systems have been kind enough to request our perspective on the physician marketplace and their specific growth opportunities.  Ultimately, these calls begin, and circle back to, our long standing commitment to physician groups, whereby equipping them with best potential business and real estate options in the marketplace.

But, recent dialogue suggests that hospitals are having a difficult time inducing established physician groups to become part of their system.  There are several reasons, most of which revolve around healthcare reform as a general theme, but others tend to be more specific to the physicians’ professional future and their general discontent of employment.

Thus, we want to highlight the reasons some physician groups are saying “no” to hospital employment.

1. Some hospitals are at significant risk of hiring too many doctors.  With too many doctors come too many competitive pressures for doctors to perform comfortably.

a. Doctors will need to prove their worth during the contract, especially if new groups are absorbed.  The thought alone may jeopardize physician commitment.

b. Hospitals may struggle with financial issues relative to their business plans in the mid-2000’s, or with future obligations of regulatory nature.

c. Contracts may include, sometimes discreetly, clauses that pertain to early termination.

d. Sometimes Hospitals go through mergers or acquisitions of another that has the ability to affect physician relations with one or all.

2. The intricacies of how employees should be compensated by hospital systems creates an unfair advantage from one to another.

a. Hospitals have the advantage when implementing metrics to determine the highest profitability within practice endeavors.

b. RVU methods can be abruptly changed when given the uncertainty of less or greater government support.

c. Patient increases have the ability to overwhelm certain pratice areas, such as family practice, without compensation measures that adequately provide for such increases.

3. Seniority is perceived not to be an attribute within the hospital system.

a. Hospitalists have assisted in call duty challenges, but more often than not, the younger physician population is not enthusiastic about taking a tremendous call load and are voicing their concerns.

b. Hospital systems may not provide adequate measures to control call duty and patient volume, where private practices may employ these actions.

4. Physicians are accustomed to being in control of outcomes under their supervision.

a. Physician groups are quickly implemented into system and can become disenchanted in how their doctors, or staff, are being utilized.

b. Ancillary services may be a large component of a practice’s income, in which most are absorbed or non-negotiable when entering into a hospital contract.

c. With the advent of electronic health records, comes the hospital systems consumption of physician data into the coffers of a strategic, web-based marketing and patient assimilation network.

5. Non-compete clauses could take the most highly informed physician groups by surprise, especially if contracts are for a limited period of time.

a. A Hospital system made have affiliates, or may merge or acquire another hospital or network of physicians which effectively places additional limits on where a physician, or practice, may perform.

b. Upon the conclusion of a contract or severe downturn in economy, non-compete clauses can interfere with a physician, or practice group, whereas services are no longer needed and physicians may not partner or practice where they choose.

These are just a few of basic issues that come to our attention regularly within physician discussions of Hospital employment.  Hospital systems have been fairly reactive and are tailoring their contracts to remedy such objections, but a certain stigma permeates throughout the physician public which has kept most conversations mute or placed to sidelines…for now.

Healthcare Bankruptcy & Receivership – Real Estate Services

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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

Ambulatory Care Centers: Growth in 2012?

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With 2011 coming to a close and the healthcare building boom in a second year of cautious or tabled expansion plans, we want to highlight a growth model that will hold a significantly greater amount of real estate discussions in 2012, especially from community hospitals:

Ambulatory Care Centers.

Ambulatory Care Centers, by our definition, are locations that provide personal consultation, treatment or intervention through medical technology or physician procedures that occur all in the same day. Medical treatments for illnesses, including surgical and medical procedures such as dental, dermatological and diagnostic, emergency and rehabilitation occur in ASCs. These centers are cost-effectively and beneficial towards performance, patient reliability and satisfaction.

From the hospital’s perspective, ambulatory care centers can be highly lucrative, allow it to differentiate from its competition, improve patient satisfaction through proximity and preventative measures, as well as align physicians with hospitals (especially in areas where physicians live).

And reform, if implemented, should accelerate the growth of ambulatory care services and the need for more integrated care hubs.  While a city such as Houston, where our firm is headquartered, has witnessed expansive growth in the ASC model and may not see as large of an impact, other cities where the population is shifting to, not away, with competing hospital systems should be beneficiaries of the expansion of Ambulatory Care Centers.

Reasons: As patients are forced to become more aware of their health, and physician incomes continue to decline, the need for hospitals to offer more localized and convenient care will be essential for the hospital’s long term growth. The ambulatory care system can accomplish this by shortening ambulance and patient travel times, preventing hospital overcrowding, providing same day care and increasing patient & physician convenience and satisfaction.

The strategy should be well organized to include service line analysis and strategy.  This will evaluate the services presently offered with the services that expand screening, prevention and care management.  Also, and along the same line, a comprehension of how changing technology, reimbursement and regulation affect future services at the ambulatory care center will be essential to creating a successful center.

Under reform, it will be very interesting to see how a potential influx of new money, and new regulations, will affect the medical and healthcare real estate industry’s growth as medical service providers. With a US economic climate that will remain fragile in 2012, to which we expect greater job losses, private and government, an injection of capital into the healthcare sector should present some opportunities across the board, instead of a tapered decline in the sector.  One thing is for certain, investors will be hungry for government-backed healthcare real estate…just take a look at how US Treasuries have performed.

13 Real Estate Investment Strategies

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We have outlined some real estate investment strategies that are “outside of the box” when contemplating how to participate in a commercial real estate investment.  When reviewing any of the options below, we feel that it is important to seek the guidance of an experienced CPA or real estate attorney, as per our obligations to our state licensing entity.

1. Find, Purchase, Hold

This strategy is designed to create long-term, residual wealth.  A certain emphasis is placed on identifying and locating the resources necessary to make a deal successful and to protect future interests.  In this situation, it is important to analyze closing and any financing fees, as well as adopt strategies that may reduce or eliminate operating expenses and maximize cash flow.

2. Fix it, Flip it

Most investors that entered within the last decade have relied on property prices rising year-over-year.  Today’s investors are more apt to turn properties quick for cash.  Get in, Get out. The anatomy of a flip is determined by how clear the objective is and able the budget, as well as how clean the marketing plan when solicited to the public.

3. Pre-Foreclosures, Foreclosures

This method has not been an excellent source of opportunities, although it is in its infancy in today’s marketplace.  Acquiring foreclosed properties through two methods, auction and bank REOs, may provide the buyer with aggressive prices and terms that tend to be more favorable.  It is important to understand that a certain level of preparation is required prior to bidding at auction. You will need to become a strong participant, or procure a broker that is proficient in the auction process.  How you should approach banks for REOs is another consideration.

4. Tax Lien Certificates

Secured by real estate and guaranteed by the government, tax-defaulted paper is another investment vehicle that is used by keen investors.  Delinquent taxes of others can in return yield a handsome interest rate as well as the possibility to obtain the property itself, free and clear. Understanding the differences between tax lien certificates and tax deeds, how to research properties online and hedge against certain risk factors associated with tax foreclosures is paramount.

5. Lease Options

Leasing the property today for purchase tomorrow is a creative acquisition strategy for those with limited available funds. We recommend learning how options differ from that of a standard lease, as well as the ways to create options, the proper method of transferring title and the differences between certain options. There are many legal aspects of options and we recommend sitting with a real estate attorney to discuss.

6. Probate Purchases

A strategy for obtaining leads to purchase real property that is for sale, but has not yet been exposed to the market. Probate refers to the transfer of (in this case) real estate when people die, with and without a will.  It is important to understand the differences between probate and non-probate, as well as where the property will be sold.

7. Subject-to Purchases

This is a method of buying property that is subject to the seller’s existing financing.  You may present offers to motivated sellers to gain ownership of property without qualifying for new financing.   Down payments and interest rates are the real motivators as it may be significantly less than from a traditional lender.  In addition to analyzing the property, it is important to evaluate the existing financing, the sellers position in the property, and the market.

8. Wholesaling

A wholesaler places a property, typically distressed, under contract and assigns or resells the property to another investor.  The investors a wholesaler sells to either use cash, lines of credit, or hard money loans to obtain the property.  This is a great low risk way of inviting investors to your party.  If a property is priced low enough, someone will buy it.

9. Rehabs

There are many facets of running a successful rehabilitation project, including the analysis of repair options and cost factors.  Understanding the benefits as well as the pitfalls of rehabs is essential.  Also, locating economically feasible properties, based on an understanding of cost estimations is key.

10. Short Sales

This is the investment into purchasing pre-foreclosure properties by discounting existing mortgages. The critical keys to success in the short sale process are through the conversations that take place between sellers, loss mitigation specialists, and other professionals who determine property value.  Analyzing the components of a successful offer and learn the secrets of handling second mortgages, judgments, liens, and other title issues are of importance.

11. Land Development

Conceptualizing the creation of a project is the best way to significant returns over a period of time, especially if a fee is underwritten.  A step by step process for land identification, procurement, and entitlement are essential.  The development focus is on basic principles and strategies of land location, market needs analysis, project approval, and the decision-making processes involved therein. Comprehension of the viability of a project for potential profitability and marketability while learning the key role that a certain level of knowledge plays in the land development process is important. Developing a feasibility study, to land identification, to plan submittal are all aspects in land development.

12. Seller Financed Notes

This is the ability to generate significant passive income yields when purchasing real estate secured seller-financed notes is attractive to investors.  The idea is to locate and negotiate the purchase of a note, as well as structure and create notes and negotiations that may take place between note holders and investors. The due diligence involved in compiling and verifying the necessary information, calculating an offer based on desired yield, analyzing deal risk factors, and the process of closing and funding a note purchase transaction are important.

13. IRA and Retirement Plan Investing

The benefits of the IRA through real estate investment serves as a vehicle that provides the freedom to invest in what the investor truly wants, instead of what the insurance company or stockbroker is offering.

And, there are more!  Contact us for a thorough review of each investment strategy, with your objective, to best determine an ideal fit.  Then, let us perform the due diligence necessary to uncover the opportunity.

Hospital Real Estate Strategy: 2012 and Beyond

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The following approaches, which are being implemented by hospitals and indicative of the strategies that our firm is undertaking, are beginning to take effect across the nation.

Monetization.

For an example, Baylor Health Care System chose to extract capital from its existing medical real estate portfolio through a real estate monetization process. In addition to generating funds that could be used to support new strategic initiatives, the system’s leaders believed that the proceeds generated from the disposition of to-be-constructed and existing facilities would enable the organization to obtain more favorable debt yields, as the liquidity from the monetization was perceived as a positive offset to the new liabilities it will pose. In this case, the health system started the initiative by identifying and qualifying real estate advisors. The organization selected an advisory group that had the capabilities of analyzing both owned and leased real estate, had access to an extensive database of investors and developers, and was experienced in working with physician real estate owners. After running a competitive bidding process, the health system selected one group to acquire its real estate portfolio. The transaction generated a tremendous amount of liquidity for the health system and created a future real estate partnership. The formal transaction process also served to inform major healthcare real estate investors/developers of the health system’s growth strategy. Doing so has created a potential set of financing options for the organization’s future real estate development capital needs. Any monetization process does not come without its challenges, however, given the fact that several potential parties may become involved (health systems, developers, investors and physician group owners, international, etc) seeking to purchase the facilities, all with separate, unique objectives. Also, the time required for the ideal purchaser to perform due diligence is usually much longer than what is anticipated. However, if the purchaser is knowledgeable about keeping open transparency, it alleviates the concern that may be among the staff and physician groups who have knowledge of the potential transaction.

Renovation.

Another approach that which will save cost and time, one that we will see for years to come, is to renovate existing facilities rather than building new. Clear Lake Hospital recently decided to redevelop/expand the woman’s and children’s units as well as the Heart and Vascular unit. They are incorporating a new 150,000 square-foot facility Patient Tower with state-of-the-art operating rooms, pre-operating and recovery rooms plus a 30-bed adult ICU. As hospitals will continue their growth via acquisition or partnership with physicians, new facilities are necessary in a competitive healthcare arena. As hospitals slow their growth, they will monetize and either pay down debt, growth through outpatient facilities, search for other partnered projects or renovate other existing facilities.

Cost Control.

Materials costs are another area that hospitals will be more aware for expense control. As an example of this approach, a hospital that our firm has negotiated, sought bids for the development of a new satellite medical office building. The process yielded many proposals, but one developer’s proposal to use tilt-wall construction for the building, rather than a more costly method, was deemed more favorable than the others. The developer’s construction budget was approximately a moderate percentage lower than that of other bidders. After careful consideration, the hospital ultimately chose the developer for the project—with favorable results. By keeping the construction costs low, the facility has been able to attract tenants with market-competitive rental rates as well as construct a well built facility that will endure the elements.

Joint ventures.

Real estate owners have enjoyed attractive financing by using sizable portfolios of real estate as collateral for bank loans or lines of credit. Hospitals that partner with a real estate investment trust (REIT) or a private real estate company can also benefit from the partner’s core “real estate competency.” For example, real estate companies are able to bring services such as property management, development, and space planning services to the hospital’s assets. Some also are able to share savings related to the packaging of the medical facilities that they may acquire or develop, creating cost savings opportunities through economies of scale. As is typical of such arrangements, once the medical facility was completed, the real estate owner became the landlord and leases the facility back to the hospital, thereby allowing the hospital to simply play the role of tenant and focus on its core competency: providing healthcare services. This underscores the symbiotic relationship between real estate owners and their healthcare clients which will be more prevalent in the future as hospitals exit the real estate business. The owner-partner will rely on the medical tenants’ present and future credit quality for their own cost of capital, so they have an incentive to align their interests with those of their tenants. This relationship between the hospital and the real estate capital source allows the hospital to focus its funds on its core mission.

Robert S. “Bob” Lowery is Managing Partner with MREA | Medical Real Estate Advisors, a full-service Houston-based healthcare real estate firm.

A Dirty Issue: The Handling of Medical Waste

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The creation and disposal of medical waste should be addressed in a lease for medical office space. Generally, medical waste regulatory acts define what medical waste is and establishes methods for handling and disposing of waste. Each medical entity that is subject to such the act is typically required to register with a state agency, such as the public health department, and have a documented medical waste management plan. These acts contain specific requirements for the packaging, containment, handling, disposal and incineration of medical waste. Regulatory requirements typically treat medical waste differently from that of hazardous wastes.  Accordingly, the types of hazardous wastes provisions in standard office leases usually include a supplement with a provision that specifically addresses medical wastes and the obligations of the landlord and tenant with respect to the disposal of the waste.

Commonly, the tenant that generates the medical waste is also liable for properly handling and disposing of the medical waste.  Careful drafting by an attorney is necessary to ensure that the lease properly delegates the responsibility for disposing of this waste.

Even when the landlord assumes the responsibility for removing the medical waste from the building, the tenant often is required to store the waste it has generated within the premises until the landlord’s medical waste disposal company picks up the waste for the building. These obligations must be carefully detailed. Tenants should consider requiring the landlord to hold the tenant harmless once the landlord takes possession of the waste, such as when the waste is placed in a common area designated by the landlord to receive medical waste.

A very critical aspect of identifying each party’s responsibilities is determining what is meant by “medical waste” or “infectious medical waste” as the obligations for handling each may be somewhat different. Generally, medical waste is a more inclusive than infectious waste.

A lease should require the tenant to immediately separate any medical or infectious medical wastes, upon production or generation, from other types of office waste and place such waste in a container that is marked “biohazard,” “infectious medical waste” or the like. The drafted lease can further specify that the container be leak-proof, moisture-proof, puncture-resistant, or has the strength to resist, tearing, ripping, or bursting in the course of normal usage or handling.

Landlords commonly prefer that the tenant contract directly with an appropriately licensed medical refuse company which operates in compliance with all federal, state and local laws, rules and regulations pertaining to the removal and destruction of medical waste. This limits the liability of the landlord should a tenant fail to remove medical wastes. Our office has seen landlords protect themselves by adding language regarding the failure of a tenant to remove medical waste whereby including a provision that gives the landlord the right to remove the medical waste and then bill the tenant for the costs of removing such waste.

If the landlord agrees to dispose of medical wastes generated by the tenant, then the lease may create liability for the landlord beyond just the care of the medical waste itself. Such liability is based on the landlord’s control over the premises. If the landlord allows medical waste to be stored outside of a tenant’s space, then the landlord assumes liability for the ultimate disposal of such waste. Thus, the landlord needs to give contractual control over the medical waste storage areas to the tenants and prohibit storage of medical waste in common areas or other areas under the landlord’s control.

Additional issues can arise upon termination of a lease if the tenant has not removed all of its medical wastes. Under a nuisance theory, a landlord may be liable for hidden dangers of which a new tenant has not been informed.

If landlord is responsible for disposal, it is imperative that the landlord provide such information to janitorial services in a building. The landlord needs to ensure that these workers are adequately trained to recognize the containers that are marked for medical waste and to avoid handling the containers marked for medical waste. Additionally, such workers should be informed to recognize medical waste that may have been inadvertently left open and how to place such medical waste in an appropriate container or more likely a scenario; notify the tenant to do so. Indemnification provisions should deal with this as well.

Conclusion

Given the danger of medical wastes to the lease space, property and community if improperly disposed by a tenant or landlord, our office recommends working with a knowledgeable medical real estate brokerage and attorney to assist with several strategies of dealing with consequences of medical waste on real estate transactions.