Is Your Aging Medical Facility Still Relevant?

Over the last decade, new design and construction has altered the physical characteristics and functionality of the medical building. From a healthcare systems standpoint, the motivation to renovate or build new facilities has been attributed to increased patient demand, technological advances, renewed branding efforts and access to inexpensive capital.

From a small to mid-size provider standpoint, the location attributes have been the greatest influence for continued patient demand and satisfaction. Now, larger, better capitalized systems and retailers have entered the marketplace to capture greater share of the patient marketplace.

To remain competitive, a medical facility owner and/or operator will be required to renovate or be faced with reduced patient volume within the building. Less rent, weaker leases and hemorraghing property values will be exacerbated by relentless commercial real estate up and down cycles.

In this article, we drive the debate for medical tenants and landlords to address their compelling inquires of whether to RENOVATE OR RELOCATE. Below is a progression of helpful tips that gain momentum towards relocating as the reader moves down the list.

  1. Existing structure(s) are less than 25 years old with several years of additional life remaining.
  2. The building engineering and technology infrastructure is functional with space and capacity to upgrade.
  3. Administrative and clinical space supports efficient and cost-effective operations and modern standards.
  4. There is room to increase the square footage of the user, either horizontallyBlog pic or vertically.
  5. Supportive partners or referral affiliates remain in place.
  6. The present facility offers greater opportunity than space located elsewhere.
  7. The facility is significantly dated and requires excessive capital to modernize with marginal potential return.
  8. Floor-to-ceiling heights are inadequate for modern ventilation requirements.
  9. Column spacing is too tight and inflexible for efficient space planning, particularly with planning of large diagnostic and treatment departments like imaging and surgery.
  10. Building systems such as HVAC and power are insufficient to support modern health care spaces with increased air changes and advanced imaging modalities.
  11. The facility has already been structurally maximized to remove inefficiencies. 
  12. No contiguous real estate is available for key tenants expansion.
  13. The incremental growth of old business functions causes functional inefficiencies for coordination of new programs. 
  14. Access to capital, rebranding initiatives, technology and/or increased market share will forward income generation.

For a dedicated list of factors for repurpose, redevelopment, renovation, relocation, replacement, expansion, purchase and lease representation of a medical building, contact MREA at 713.701.7900.

Health Providers: Create Wealth Through Real Estate

chainsReal estate is the number one long-term, wealth-building vehicle available to an established healthcare syndicate. Yet, more often than not, many organizations resort to paying into long-term variable rent models in new developments or improve existing buildings that offer small allowances for reconstruction.

As an example, one function of our comprehensive real estate service package includes that of development, in which we continue to field inquiries from well capitalized healthcare organizations that would rather turn over their keys to us and lease, than partner in the development of healthcare real estate. Yet, and as any lender will tell you, any associated risk in buying a medical building or performing a development is negated by the relative stability and/or strength of the organization. And in this environment, where capital is inexpensive and abundant, those organizations that utilize developers’ capital exclusively for building a medical project are simply not willing to accept the long term risk of their own business decisions. In other words, they should not be expanding. 

As real estate advisors to health professionals, we believe in a partnership-oriented approach to further strategic financial objectives through real estate holdings. And, indeed, your organization should view itself as a source for wealth creation outside of the traditional models of revenue production. In certain respects, this requires a paradigm shift in the way a healthcare organization views growth in revenue. It is clear that the majority of independent physicians just want to work, treat patients and arrive home at a decent hour. However, in a loose monetary economic environment, even these physicians are realizing the potential for inflation diluting their work earnings.

Over several years, we have heard a variety of misconceptions from medical professionals about why they do not participate in real estate ventures. Accordingly, let us help to disprove some of these arguments.

Real estate is too expensive. This has to be the largest misconception. As an example, how many times have you said, “If I bought that building or property 10 years ago, I would have 3X, 4X, 5X, 10X my original cash investment?” The truth is that money is relative and determining an entry in real estate usually occurs upon purchase or development a piece of property. Trust real estate counsel that can provide thorough comparable sales information, by area and product type. All information should be used to benchmark an investment when locating a property to develop or purchase.

Real estate requires too much money . After several years, one of our clients came back to us regarding his 15,000-square-foot medical office building that we assisted in site selection and development. Their total cash investment on this project was approximately $325,000, split evenly, and the remaining was financed through bank debt of $2 million + $75,000 interest for a total cost of $2.4 million, mi. After 5 1/2 years, the building appraised at $3.4 million and our client was able to refinance this building and receive triple their original investment.  And, to conclude, we are now responsible for the off-market disposition of the facility at a price that exceeds the refinanced amount with multiple bidders.

By no means, do organizations need excess capital to own real estate, especially within the medical arena. A good credit score, a successful care syndicate and a solid reputation in the community are the right ingredients for any institution to finance your investing activities in real estate.

Real estate is too risky. This may be more of a generational problem than anything and the risk averse tend not to be invested in real estate at all, rather recounting one person’s story.

For an example, if real estate is so risky, why are banks willing to give you 80 to 90 percent of a building’s value to buy or build your own medical office building or invest in healthcare real estate? Would they provide you with 80 percent of the value of a stock in the stock market? Likely not.

Banks inherently comprehend the value of real estate and are currently willing to lend to healthcare professionals. They know that as an industry care organizations work very hard to keep up with demand, rarely goes out of business and do not tend to transfer locations once established in a referral base and/or community.

Debt is too risky. There is good debt and there is bad debt. Good debt is used to accrue assets that generate income, appreciate in value and provide passive income. Bad debt is tied up in assets that do not generate income and depreciate in value over time.

Personal bad debt is another thing. It needs to be said that members of high stress, high reward work environments are notorious for spending their earned income on frivolous, short term items that depreciate upon purchase or soon thereafter. With inexpensive debt funding collateral (real estate), which will remain in place for decades, it is possible to create true wealth through real estate investment in a reasonable time period.

To conclude, contact MREA for all your healthcare real estate questions or concerns. Pair our knowledge of the real estate industry with your care organization’s spatial needs to start or further your personal wealth.

Key Considerations When Purchasing a Vacant Surgical Center

3 keysA surgical entity’s real estate is of paramount importance to its success because, without it, surgeries will not be performed, patients will not be administered treatment and business not conducted. So, when a medical property such as a surgery center becomes vacant for one reason or another, it is necessary that a tenant or buyer formulate a creative new strategy similar to that of when the surgery center was realized.

To ensure that a strategic initiative pertaining to the entire property occurs, a healthcare real estate professional experienced in design and surgery center facility construction will review the plans and inspect the facility as built. Commonly, it will be necessary to include space planners or medical facility contractors to verify the adequacy of the spatial, mechanical, plumbing and electrical systems.

MREA has collaborated with design and construction professionals in an effort to provide several key facility issues that may be considered when purchasing a surgery center.

Updating the Facility

From a buyer’s perspective, a first step is to determine if design regulations have been amended by the accrediting body after the facility was constructed, or, whether the facility will receive exemption under the original approvals. Depending on the property’s location, you may have to update the facility to meet current regulatory standards. Bear in mind, there is a greater likelihood of a requirement to update the center if it discontinued operation -prior- to facility changing hands. Additionally, if you will be seeking accreditation, the requirements of the accrediting agency should be addressed.

More often than not, the updates necessary for a surgical facility to gain accreditation are the leading cause for properties to fall out of favor and remain on the market for a considerable period of time. If considering a vacant surgery center for purchase, a plan will need to be exposed to all principals to assist in dissemination and implementation of such regulatory alterations for the consideration of time and money.

Patient Satisfaction & Safety 

If updating is not mandatory, patient safety and satisfaction should be considered when deciding whether or not to upgrade a facility. Whether or not it has been accepted by local authorities, if the emergency power system is overloaded and does not function properly during a power failure, patient safety may be compromised.

The design and condition of the mechanical, plumbing and electrical systems should be evaluated by knowledgeable engineers. HVAC systems can be particularly problematic with respect to regulatory compliance, infection control, patient safety, and physician comfort. Backup power systems should meet code requirements in accordance to regulations.

A common item that is ignored is the continuity of fire and smoke partitions, particularly in concealed locations like above ceilings. These are common targets in life safety inspections and often are the source of deficiencies, especially in aging facilities.

In addition to design issues, the condition of major building components should be evaluated. HVAC equipment, emergency generators, and roofing have finite lives and can be costly to replace. A healthcare real estate consultant will be able to comment on this matter, and may recommend inspections by local maintenance contractors.

Case Volume

A surgery center is designed to serve the capacity of an anticipated case volume. It is necessary to review the plans to determine if the internal facility components such as pre-op stations, ORs, procedure rooms or post-op beds are adequate to support these anticipated figures. Each ratio will differ based on the specialty served at the location.

The average size surgical center is currently around 12,500 square feet and the trend is that they will become more efficiently utilized in the future. As an example, if a medical organization is doing 100 cases a month, more than one operating room (OR) is likely not necessary.

CONTACT US

If you should have any questions regarding this material or are interested in leasing or purchasing a surgical center for use or investment, contact MREA at 713.701.7900.

10 Reasons To Utilize a Healthcare Real Estate Provider

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!

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

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.