Tag Archives: surgery

Leasing Vs. Owning a Medical Facility

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While opinions widely differ among the ranks of healthcare providers, most would agree that the financial ramifications of long term commitments for medical real estate space will continue to weigh heavily on growth in people or technology. Some see real estate as a cost of doing business, yet, we attempt to dispute this notion and advise that it can be a tremendous avenue for personal wealth if performed with diligence and comprehension. The leasing vs. ownership model for a medical building still significantly benefits the providers seeking to purchase or development. That said, is the advantage of real estate ownership appropriate for you and your organization?

Providers, especially small to mid-size physician practices, need to answer several questions in order to determine if ownership is the right strategy going forward.

  • Will the provider own the building alone or should a joint venture with other practices be considered?
  • Will partnering with a hospital be considered?
  • Will a third-party developer or investment partner be considered to help guide the practice through the development process?
  • What are the front-end cash requirements?
  • What is the tolerance for debt guarantees?
  • How does ownership align with long-term practice strategies or goals?
  • What is a viable exit strategy?

The answers to these questions will help guide the physician group (and broker/developer/investor) to the right decision regarding equity participation in a medical office project. In today’s tight lending environment, the more cash invested, the better the borrowing terms available. Although borrowing for commercial real estate today has become increasing more challenging, especially compared to residential, we routinely take calls from lenders who will fund medical single and multi-tenant buildings by qualified buyers that will use the space.

How will the provider’s occupancy help to determine the cost of the building? Follow me here, as this is difficult for medical tenants to grasp. Rents are based on the cost of the entire project and cost of borrowed funds along with the return on cash investment desired, rather than the availability of space. In today’s medical real estate investment climate, the typical cash on annual return ranges from 9% to 15% per year based on a fully occupied building. As time lapses and rents improve, two favorable investment events happen: The cash return increases on an annual basis, and the market value of the property increases. Both of these events create increased value and wealth for their owners.

The inherent risk is the inability to maintain building occupancy with a practice group or medical rent-paying tenants. Empty buildings are extremely volatile and difficult to price. Prices parallel the availability of space coupled with the absorption of space in the regional and local marketplace. Rarely do vacant buildings increase in value unless the land underneath appreciates in value.

If you have a question regarding leasing, ownership, or simple investment into a medical building, please contact MREA at 713.701.7900.

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Motivation Is Moving Medical Sublease Space

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It is no secret, physicians are looking for ways to reduce expenses. Fueled by declining revenues, insurance reimbursement issues and a multitude of uncertainty, most are either downsizing their practice space or joining larger groups or systems in order to reduce the effects of less revenue and greater liabilities. If you are in a long term lease for more space than you currently require and would like to reduce your liability, then subleasing space may be the right option.

Subleasing by physicians to physicians where referral is obtained is common. In most cases, medical providers may decide to lease more space than what is needed to sublease additional space to medical providers.

It is important to note though, all subleases must independently qualify for an exception or safe harbor to Healthcare Referral Laws. The Office of Inspector General (OIG), which identifies and eliminates fraud, abuse and waste in programs administered by the Department of Health and Human Services, has issued a fraud alert which pertains to subleasing arrangements between medical providers where referral is made. Thus, it is imperative that the parties to a sublease carefully analyze and document the process by which they negotiated the rent and obtain outside support, such as rent comparables for general and sublease space in the immediate area that support the rent being charged to the sublessee.
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Subleasing can be a challenging process if motivation is not present. Thus, it is important to stay focused on the objective and be competitive to achieve that objective.
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In general terms, a sublease will be considered competitive if:
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  • Two years or more remain on the lease (the shorter the term, the harder it will be to sublease without a large discount to the rent);
  • Space offered on a shared basis includes prime space (windows) in conjunction with less desirable space (interior);
  • Tenant is willing to be flexible with concessions (i.e., free rent, improvements to the space, rental abatement, furniture, equipment or shared resources in the event of shared sublease);
  • The space is presentable. If not, improvement allowances or, if shell, the ability to ‘turnkey’ a space should be ample and performed quickly.

Once you have determined that a medical space can be competitive, a proper determination of pricing should be undertaken. The pricing structure for subleasing the entire space will be different from the structure for subleasing a few offices within your space.

To price a space typically these general factors are considered:

  • The condition of the overall medical and office market;
  • Length of the remaining lease term;
  • The condition of the space (need for improvements);
  • The current lease rent and how it compares with the market;
  • Understand what the direct rents are in the building and what other sublease rents are for comparable sublease space;
  • Understand who will be in your pool of potential subtenants.
  • And, most importantly, have a qualified representative review the lease for language that may be conducive or restrictive to subleasing.

In almost all cases in today’s market, medical sublease rental rates are discounted from that of the current lease rate. Subleasing space is also a time sensitive. As time passes, the space may become less desirable and the lost income

Therefore, consider being aggressive and flexible from the outset. Be sure to havea representative price and record activity on the sublease (i.e., number of tours, number of proposals, etc.) every quarter and adjust as needed. Do not let any sublease become stagnant. Whether you are looking to sublease through shared space to vacant space, remember that the goal is to reduce the lease liability, not eliminate it.

We have included an opportunity that is for sublease in Humble, Texas. Humble Medical Office Building (Abbreviated Sublease Package – Contact MREA for Complete Offering Memorandum)

Please let MREA know how we can provide assistance for this or other healthcare real estate opportunities.

Joint Ventures for Outpatient Facilities

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

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

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

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

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

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

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

Medicare and Medicaid (With Some Alarming Statistics)

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Medicare:

  • One of the top 10 Medicare billings, by dollar amount, is for the transport of a patient deemed not to be in a non-emergency situation.
  • One of the top 5 Medicare billings, by dollar amount, is for cataract surgery.
  • The #1 Medicare bill, by dollar amount, is for office visits by patients with medical problems that are considered low to moderate in severity.

Medicare is a federally funded and administered program that provides health insurance for older Americans and those who are disabled. Individuals contribute to Medicare during their working years, just as they do to Social Security. Since Medicare is a federal program, eligibility guidelines and services are much the same all over the country.

People eligible for the program include:

  • most persons over the age of 65,
  • persons with disability status, or
  • persons with irreversible kidney failure.

There are a number of Medicare plan choices. Two of the most widely available plans are Original Medicare and Medicare Advantage.

Medicaid:

Harris County is by far the worst abuser of the Medicaid system in Texas.  And, it does not appear like this will stop soon unless drastic changes take effect.  As of December 2010, more than 80% of those on Medicaid were under the age of 19.  Worse yet, of those children under the age of 19, approximately 50% were 5 years old or less.  So, essentially, of every $1.00 that is allocated toward Medicaid reimbursements, $.40 is for a child not yet enrolled in school.

Medicaid is a health insurance program financed and run jointly by the federal and state governments for low-income people of all ages who do not have the money or insurance to pay for health care. The goal of the program is to provide medical and other health care services to eligible individuals so that they are able to remain as self-sufficient as possible. Medicaid is a state administered program. Each state sets its own guidelines, subject to federal rules and guidelines. Certain services must be covered by the states in order to receive federal funds. Other services are optional and are elected by states.

Services that are often provided are:

  • health screening and services for children,
  • hospital and physician services,
  • laboratory services and X-rays,
  • care in nursing homes or
  • home health care services.

Medicaid eligibility in nearly every state is limited to:

  • low-income children,
  • pregnant women,
  • families with dependent children,
  • persons who are blind or disabled, and
  • persons 65 or older.

Other eligibility requirements must also be met.

Effect on Real Estate

As you hear from so many real estate practitioners, no one is entirely too sure.  It certainly appears both legislative bodies are colliding on the issue, which is where any uncertainty in the sector resides.

Factors To Consider When Selecting a Medical Location

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“Location, location, location…” This wise old real estate adage does not just apply to buying a commercial real estate building, but is also relevant to healthcare groups who are looking to either relocate or expand to a new office. Whether you are moving your practice to another state or just a few blocks away from your current office, choosing the right location will become a vital strategy in the overall success of your organization.

Competition

In the olden days, a doctor might have just placed a sign outside a window and started seeing patients. Nowadays, there’s a doctor on every street corner! How can you possibly position yourself so that patients actually come to you?

An obvious way is to survey the population-to-professional ratio for the specific area in which you are interested. Obviously, the lower the number of competing professionals, the less competition in the market. But, where exactly are your competitors located? How aggressive is their marketing? What kinds of marketing do they do? Is it effective?

This simple analysis may open up some overlooked and exciting opportunities for you. Professionals often overpopulate upscale areas, while rarely considering enormous opportunities that exist a few miles away in middle and even lower income neighborhoods.

Demographics

Research population statistics and determine whether the region of your choice makes practical sense for your organization. Given your profession and specialty, do you want to target men, women, young or old, blue or white collar?

Also consider whether or not the population is growing or declining – it has been easier to break into newer communities than mature ones where you would have to take patients away from practitioners who set up shop many years ago.

If you own an elective or cosmetic practice, you should also consider education and income levels, though be careful about the assumptions you make. For example, we know many highly successful plastic surgeons quietly performing impressive volumes of breast enhancement and liposuction surgeries in low and middle income neighborhoods where their competitors would not consider.

We like to suggest choosing a minimum of at least three submarkets to explore. You can get very detailed demographic research from our brokerage office regarding these potential submarkets.  Also, we will provide you a detailed map of existing competitor locations, given your specialty, as well as a center per population.  This will determine if this market is saturated or requires medical growth now and in the future.

Our clients have been discouraged by the data provided by chambers, local and political organizations as they often are dated, or biased.  Most of the larger brokerage shops will subscribe to non-biased research and news to assist in location analysis.

Traffic Patterns

What are the major thoroughfares for business and residential commuters within a five-mile radius for your area? Where are popular businesses such as supermarkets and banks located? The most popular businesses attract potential clients for your organization. Also, upscale businesses can attract upscale clients – an example, Starbucks.

An issue many healthcare professionals do not consider is traffic patterns. This takes some research if you are going to attempt to locate yourself without brokerage assistance. But, you can go the city records for existing traffic counts around the sites you are considering. Or you can go out yourself and, literally, count the cars going down your street per hour, morning and afternoon. As a rule of thumb, 35,000 cars a day should be considered when evaluating a retail location, but what you are not privy to are the streets that have the potential for massive growth in the future.  Also, remember that while we all despise sitting in traffic, the slower things move, the greater the visibility.

Something else you may consider is what side of the street is most convenient to your customer. If most of your patients make appointments in the afternoon hours and congestion is heavier going west, that is the side you choose. Another consideration is accessibility: No one likes having to U-Turn, especially in Houston.

Signage

If your practice is consumer-direct, frontage signage is crucial. So, once you’ve narrowed your choice to a few locations, check local regulations on outside office signs. Are there signage restrictions enforced by the landlord? If your customers cannot see you from the street, you may as well be invisible, so it may be crucial to negotiate for your sign’s visibility. But, what does signage matter when the street is inundated with them?  Another negotiation point.

Additional items to consider:

Make sure you study at least five to ten sites in your targeted area. When chosen, consider the following:

  • If you rely heavily on insurance, consider the employers in the area.  As a tip, marketers often work to get an “in” with large local employers who offer favorable insurances to their employees.
  • Does the building provide enough square footage for your use, or collaboration with other doctors.  You may have expansion possibilities to consider.
  • Does your potential location have well-lit, convenient parking for your patients as this is the #1 complaint?
  • What is the image of the building, and how does it look? Some landlords take great pride in keeping their building clean and modern, while others simply let it depreciate to save money on costly expenses. Something to know, before you move in.
  • Consider hospital proximity. Beyond the obvious convenience of locating close to the hospital, you also will likely benefit from the patient perception that you are located in a recognized healthcare area.
  • If you are a specialist, it often helps to locate in a high density medical user building in close proximity to large, referring practices. For example, a landlord that we are familiar, will go out of her way to introduce physicians to one another. If you choose this route, remember that ground floors are best available space for medical users as 100% of the traffic will go right by your doorstep.
  • Most consumer direct practices (e.g., family practice, general dentistry, etc.) can benefit greatly from being visible, and generally should avoid upscale medical buildings. Instead, consumer direct practices should generally choose either free-standing buildings (with signage and street frontage) or even retail center locations.
  • If your group chooses a retail location (strip center or mall), the greater your visibility, the more you will pay a landlord. But, keep in mind that the extra rent that you are paying is simply a marketing expense, which you can and should evaluate on a return on investment basis.
  • You should talk to your accountant about the relative advantages of owning vs. leasing your office space. We have several examples for buildings in the Greater Houston area and would provide you our analysis without charge.  Beyond the obvious tax and income issues, make sure you consider the tradeoff between long term investment potential vs. short term cash flow, flexibility versus hassle factors, personality, etc.
  • Finally, make sure you use common sense here. No kidding, a podiatrist once called us in desperation after relocating to the second floor of an office building which did not have a functioning elevator. Doctors already have the stigma of poor business decision-making – this request did not help their case.