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Healthcare Real Estate Transactions: A Few Considerations

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Healthcare is real estate heavy. Not until healthcare reform was formally introduced were the majority of private and public healthcare providers scrutinizing their swelling real estate portfolios with similar risk assessments and accountability measures as their employee-dense corporate industry peers.

Over the past decade, healthcare providers have increased outpatient care, both close to hospital campuses and, more recently, in retail settings. Inevitably, the growth will have to continue to accommodate the transfer of patients into more efficient care settings. Yet with statistics such as: 1/3 of all hospitals will need to find alternate use, healthcare costs and infections are at an all-time high, and technology rapidly reducing redundancies, any new or adaptive real estate use will certainly be scrutinized.

Given the tremendous task of analyzing a property or portfolio in today’s capital complacent, regulation rich healthcare real estate environment, it is important to note that the potential buyers and sellers of these transactions take note of the following:

Real estate, which may consume up to 50% of providers’ balance sheets, is valued at book value. So, determining the fair market value (FMV) of a portfolio may be difficult without true comparisons especially noting the separate and distinctive build-outs in the field. This lack of transparency typically favors the seller, especially in locations where a lack of supply and pent-up demand exists.

Currently, hospitals with whom we are speaking are more interested in monetization now, than possibly any time in the last decade. Determining what to keep and what to sell is commonplace. With regards to a future merger, the real estate assets are being used as a source of financing for the transaction. Thus, determining the hierarchical distribution of assets as they pertain to compensatory value is necessary. We are noticing that most providers typically sell their weakest ancillary units first. Some buyers may look past their first few purchases for future consideration of a larger portfolio.

Healthcare is very attractive as it holds a high barrier to entry. Large amounts of capital have been raised over the last few years all the while interest rates have been moving lower. This allows providers that are seeking to sell real estate the opportunity of selecting several long term capital partners or buyers at attractive prices, especially when given the credit of the provider is strong. EBITDA’s are certainly shrinking for all medical real estate deals.

To grasp what is moving and why -or- to request a proposal for a property or portfolio, please contact MREA for one of our experienced medical real estate advisors.

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10 Reasons To Utilize a Healthcare Real Estate Provider

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Call MREA to promote your property offering directly to active medical professionals and qualified healthcare real estate investors!

Top Ten Reasons Our Clients Like Our Platform (as surveyed by MREA):

  1. Reduce Closing Costs
  2. Slash Days on Market (DOM)
  3. Receive Qualified Tenants or Buyers
  4. Increase Showings
  5. Eliminate Unsophisticated Brokers and Offers
  6. Improve Confidentiality
  7. Access Capital for Projects
  8. Joint Venture with ‘Like’ Interests
  9. Initiate Strategy for Reform
  10. Access Knowledgeable Vendors

The most comprehensive healthcare database of real estate solutions belongs to MREA and our talented medical real estate advisory. Call us at 713-701-7900!

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.

Surgery Centers: From Concept to Completion (1 of 2)

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Surgery Centers are once again in the forefront of healthcare real estate investment discussions.  The reason can be viewed simply.  Investments from hospitals and fully leased medical facilities did not come to market as originally thought when the recession and health care reform were making everyday headlines and curtailing growth plans for the entire sector.  So, as shareholder interest began to subside, and as capital burns holes, investment interest is moving back into this unique sector of real estate.

Thus, developers are actively searching for physician-investors to initiate (or complete) their thoughts of participating in a surgery center investment.  This is exciting news for the building industry, most of which have gone unnoticed for a several years.  But issues are still abound, especially with building costs relatively unchanged since 2008. So, the costs of building are still somewhat prohibitive and have been one of several factors that have kept some on the sidelines.  But, with investors willing to pay a greater amount than the structure is worth, some looking for strategic partnerships prior to building, this sector is receiving a great deal of interest from investors.

Cost Breakdown

A surgery center, shell and interior, can be between $150 per square foot to as much as $300 per square foot, let alone land costs.  Any addition or reduction from the initial construction estimate could severely impact physician interest.  For example, if 1,000 square feet was necessary for an additional operating room to assist a few physicians, $150,000 to $300,000 in additional construction costs would be necessary, not to mention additional operating costs. Designs have been going back to the drawing board in many situations and any addition or reduction in square footage could cause a change in the function of the building, especially for a fragile physician base that is concerned about future business profits.

Building New or Existing

There are some advantages and some disadvantages when building on a completely new construction site. For example, if you select a previously constructed building, the architect will have existing structures which may somewhat limit the facility design, but, conversely, all site development work will have been done and paid for, and construction time may be substantially reduced.  In the flip side, retrofitting existing structures can reduce construction costs but prove devastating if due diligence and architectural redesign are not performed properly.

Standards of Construction

Those who have not previously developed Ambulatory Surgery Centers typically will find that ASC construction is the not the same as medical office building construction.  In fact, the two types of structures are fundamentally and structurally different. And, because of the potential life-safety concerns, a single city inspection is becoming replaced by multiple inspections at the city, state, and federal levels.

Federal Regulation

On the federal level, a limited amount of construction data may be found in the Code of Federal Regulations-Ambulatory Surgical Services.  We find that most consider the “Guidelines for Design and Construction of Hospital and Health Care Facilities,” produced by the American Institute of Architects, the standard-bearer for construction of ASCs.

State Regulation

When a layman performs an online research on construction standards for Ambulatory Surgery Centers, unfortunately, they will find little uniformity among the states. Some states have no regulations regarding Ambulatory Surgery Centers, while other states have quite lengthy regulations which include facility standards. Some states have adopted national construction codes and include a virtual itinerary of codes for ambulatory surgery center construction.

Construction Team

Often we tend to think of a construction team simply, beginning with a general contractor, when in fact the surgery center team consists of several more contributing members. The architect, the engineer, and on occasion, structural and civil engineers will play a role in surgery center development. The cost for each of these team members may increase the overall construction costs, but is likely necessary component to a fully functional facility.  An ASC is a complex facility which requires special attention and experience on the part of the entire design team.

General Contractor

When selecting a contractor, always search for one who has performed similar medical projects, preferably Ambulatory Surgery Centers. It is essential to verify the references of your general contractor, AND that of the proposed subcontractors to ensure they meet healthcare requirements. The construction process can be a lengthy process, and at times uncomfortable, so be careful when selecting a relative or acquaintance as your contractor.  The point person on your project should be the construction superintendent and not necessarily a good friend.

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This post is an abbreviated version of an entire article written by Robert S. “Bob” Lowery.  For the complete article, please contact our office or your local Texas MREA representative.

Comprehension of a Medical Lease Contract

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

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

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

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

Now, for the really bad news.

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

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

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

MREA Sets Sights on Houston’s Medical Real Estate Market

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Houston, TX (WiredPRNews.com) — MREA | Medical Real Estate Advisors (www.MREAusa.com) has announced the launch of MREA – a healthcare real estate advisory focused on leasing, management, acquisition, disposition and development. MREA is a strategic initiative within the medical arena and will consist of a team of healthcare facility managers and commercial real estate professionals exclusively dedicated to representing customers and clients for their medical real estate needs.

MREA will offer clients strategic guidance, powerful research and detailed consulting in determining real estate opportunities within the most profitable and populous medical locations in the Greater Houston area. As healthcare real estate service providers, MREA will represent their clients by facilitating the special requirements of each particular medical assignment with creativity, sincerity and professionalism.

MREA will offer the following real estate services:

Site Selection
Acquisition
Leasing
Brokerage
Development
Financing
Asset Management
Property Management
Consulting

MREA is currently the only healthcare real estate boutique firm in the Houston area that offers a full-service model to its clients. Robert S. “Bob” Lowery, Managing Partner, assisted in formation of the firm and currently maintains over 5,000 physician, investor and hospital connections. Also, with Mr. Lowery’s leadership that spans two decades in the Houston community and years of experience assisting a broad range of investment capital seeking both commercial and healthcare real estate properties throughout Texas, MREA is a highly-connected, high-powered member of healthcare investment and owner-occupied real estate.

“After performing a thorough historical analysis of healthcare real estate leases and sales, we determined that the medical community, from physicians to investment, was not represented in a way that promotes the competitive spirit which is evident in other commercial real estate asset classes. Because the majority of the growth in the sector’s balance sheets and real estate occurred during the last decade, we think Greater Houston’s supply is ample to cover its demand. Thus, there is little concern for rental rate growth in the near term,” says Robert Lowery.

“A sure-fire way for owners to protect their healthcare real estate assets is through the services of a specialized firm that can facilitate the needs of both the medical sector and its real estate, not necessarily one of the other. Our grassroots efforts to obtain and secure relationships with physician groups and medical organizations along with our comprehension of the intricacies of the asset will allow MREA to grow rapidly as stability within the overall commercial real estate sector is found,” adds Mr. Lowery.

MREA is a full-service capable, medical focused real estate company that works with healthcare providers to augment existing business plans and strategies for growth, stability or consolidation of their real estate portfolio. The firm will provide comprehensive real estate solutions.

The Stark Law and Healthcare Real Estate

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Everyone working in the healthcare real estate sector should have some basic knowledge of the Physician Self-Referral Act, otherwise known as the Stark Law. In a nutshell, the Stark Law prohibits a healthcare service provider, such as a hospital or outpatient facility, from submitting claims for Medicare/Medicaid reimbursement for services rendered to a patient referred by a doctor with whom the service provider has a financial relationship unless the relationship fits within certain exceptions. The public policy rationale was to discourage physicians from allowing financial considerations to influence their professional judgment.

How does Stark impact medical office building leasing and development? When a physician leases office space from a hospital to which he refers patients or when a hospital leases space in a building owned by a referring doctor, the lease is considered a financial arrangement subject to Stark restrictions. As long as a specific lease transaction between a hospital and a physician continues to satisfy a few conditions, no Stark violation will result. These lease exception criteria include: a written lease that is signed by both parties that adequately describes the leased premises; a term of at least 1 year; premises that are commercially reasonable for the intended purpose (the intended purpose must be legitimate from a business standpoint).

Unfortunately under Stark there is no such thing as a permissible “technical violation,” that is, any violation, however insignificant or inadvertent, is a violation of a federal statute that carries stout sanctions imposed by the Centers for Medicare/Medicaid Services. These Stark sanctions include civil monetary penalties (up to $15,000 per claim submitted to CMS while the violation existed), exclusion from the federal Medicare/Medicaid programs, and exposure to whistleblower lawsuits. The reality is that most hospitals and hospital systems that own physician office space likely have dozens if not hundreds of technical, inadvertent violations of the Stark Law related to their leases with physicians or other referral sources. Until now, hospitals have dealt with this potentially serious situation by correcting any violations and moving on. The correction might take the form of executing a lease amendment extending a term, obtaining a missing signature or attempting to collect back rent.

The impact from the new Stark self-disclosure rules could be significant. From the perspective of a hospital buyer, there may be a dampened enthusiasm for new transactions involving the purchase of MOBs, especially where the seller is an asset-challenged, not-for-profit system whose offer of  indemnification against Stark liability is not exactly gold plated. It is not unusual for Stark violations, both technical and substantive in nature, to be discovered during the due diligence phase of such transactions.  Potential hospital buyers will be less willing than ever to pull the trigger. From the hospitals’ standpoint, however, the changes could enhance the motivation to monetize their MOB portfolios. Monetization could accelerate in an effort by these service providers to shield themselves from the perceived arbitrary nature of CMS-enforced settlements following the now mandatory self-disclosure laws and the obligation to refund payments to CMS.

Time will tell with regard to the approach CMS decides to take, but in the interim, the name of the game should be reducing exposure to risk. This desire to reduce risk will have ripple effects through the healthcare real estate sector of the market.

CRExtract: 12.29.2010

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Boston Properties Completes $930 Million Purchase of John Hancock Tower - Boston Properties Inc. completed its $930 million acquisition of Boston’s John Hancock Tower, New England’s tallest building, as the biggest U.S. office real estate investment trust expands in its home market. The REIT paid $289.5 million in cash and took over about $640.5 million in debt, according to a statement from the company today. It expects to record about $3 million in costs, with about $1 million to be expensed in the current quarter. Bloomberg

New bill set to cut taxes on foreign REIT investments -  The relaxed tax status of real estate investment trusts is set to become even more relaxed. A new bill awaiting President Obama’s signature would expand tax exemptions for stock in REITs. REITs invest in both commercial and residential real estate and are required to distribute a majority of income to investors. Some of that return is tax-free, based on the IRS code for such real estate trusts. The new legislation would promote foreign money being put into REITs. Housing Wire

CRExtract: 12.15.2010

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Another Close Look at Capital Appreciation in Real Estate Investment – Pension funds and other institutional investors do their real estate investing mainly through private real estate investment funds, but it turns out that private funds have done a pretty terrible job of executing their real estate investment mandate. Income isn’t their problem, though. The problem is that investment managers – on behalf of institutional investors and their pension beneficiaries – basically haven’t produced any increase in property values in 33 years. Seeking Alpha

The Tax Deal and Commercial Real Estate – The implications of this tax deal on the commercial real estate market are not insignificant. Tax benefits for certain real estate developments will remain intact, as the bill extends for two years the special 15-year cost recovery for certain leasehold improvements, restaurant building and improvements and retail improvements. Being able to write off the cost of tenant build-outs over 15 years rather than 39 years is particularly important to commercial property owners who may have negative equity positions. Property devaluation, as well as increased demand for concessions from tenants looking for space, has created a negative feedback loop, where owners can’t afford to build out space, keeping vacancy rates high, which exerts further downward pressure on value. This cost-recovery provision will help owners fighting this negative loop. The proposed deal also calls for a two-year extension of bonus depreciation to incentivize capital investment from business. Through the end of 2011, 100 percent deductibility will be allowed and in 2012, the amount will be 50 percent. The most important impact on the real estate market is that the capital gains rate, under this proposal, would remain at 15 percent for the next two years. History has shown us that when a particular activity becomes more expensive, less of that activity occurs. An increase in the capital gains tax would have reduced building sales volume by a tangible amount. Ironically, the building sales market has been helped by the anticipation of an increase in the capital gains tax rate, as many sellers have decided to sell in 2010, to take advantage of this year’s low rate. The process of selling a property is not something that can be done in a matter of hours or days, so many of the sellers motivated to take advantage of the present capital gains rates elected to place properties on the market in the summer or in the early fall. Many of these properties have already closed or are under contract for sale without an escape clause in the event that capital gains rates do not rise. This externality has provided the marketplace with a shot of adrenaline at a time when it needed one. Another impact this proposed deal has on the real estate market is that it will keep dividend taxes at a 15 percent rate rather than the 39.6 percent one they were scheduled to reach in the absence of an agreement. This is a very positive development for real estate investment trusts looking to continue to access massive amounts of capital from the public markets. One issue affecting mechanisms within the commercial real estate market that has not been addressed in anything reported about the tax proposal is how taxes on carried interests will be treated. Throughout 2010, there was much talk about changing the tax treatment for carried interests from the capital gains rate to an ordinary income rate. This would have significant implications for the way syndication and, particularly, development transactions are structured. The New York Observer

State launches website with locations for business expansion – A new state website will help expanding businesses find suitable locations in New York, officials announced Tuesday. The website, http://NewYorkState.ZoomProspector.com, was developed and hosted by GIS Planning Inc. in conjunction with the Empire State Development Corp. Real estate, demographic and industry breakdowns for all New York cities and counties, along with a database of available properties with images, are available at the site for free, officials said. In addition, ESDC’s 10 regional offices will promote available sites, facilities and communities, officials said. RBJ

HCP to Acquire Assets of HCR ManorCare in $6.1 Billion Buyback -  In one of the largest commercial real estate transactions of the last several years, HCP Inc. (NYSE: HCP), the nation’s largest health-care REIT, said it will buy all the real estate assets of privately owned HCR ManorCare for $6.1 billion, including $3.53 million in cash. In an illustration of the relative ease with which public REITs are able to raise capital in the marketplace, Long Beach, CA-based HCP announced Tuesday it has launched a secondary offering of 31 million shares to help fund the purchase, with an option for underwriters to purchase an another 4.65 million shares for 30 days. Later in the day, HCP upsized the offering to 40 million shares priced at $32 due to “strong investor demand,” for total proceeds of up to $1.28 billion. Costar