Why Health Insurance Marketplaces Are Here to Stay

An investor paper by S&P Capital IQ, a division of McGraw Hill Financial, predicts that Standard & Poor’s 500 companies could shift 90 percent of their workforce from job-based health coverage to individual insurance sold on the nation’s marketplaces. If all U.S. companies with 50 or more employees followed, they could collectively save $3.25 trillion through 2025, according to report.

The S&P 500 is a stock market index of 500 large companies with common stock traded on the New York Stock Exchange or NASDAQ. It’s considered a leader of the larger U.S. economy. S&P 500 companies employ roughly 20 percent of the U.S. workforce for companies with more than 50 workers.

According to the report, the transition to marketplace coverage won’t take long. It is estimated that 30% of S&P 500 workers should shift coverage by 2017, 70% by 2019, and an estimated 90% of workers transferred by 2020.

These projections could change over time as the ACA is amended and modified, with implementation likely forwarded because of healthcare reform. “Whether the current version of the ACA remains intact or is amended,” the report said, “the burden of acquiring or providing health benefits is sure to shift more from the employer toward the individual or employee, with varying degrees of support from the government, as time passes.”

From a financial perspective, data and predictions within S&P Capital IQ’s model appear sound. Conceptually, a shift from employer-based healthcare where, on a global scale, costs far exceed results, to a platform that rewards competitiveness seems a recipe for sustainability and fiscal responsibility.

Senior Care Options Expanding Within Communities

Senior handThere is no doubting that senior housing has an image problem.

According to a study commissioned by Clarity and The EAR Foundation in 2007, adults fear the impact of change that comes along with latter parts of aging. The concern of less independence and being shuffled to a nursing facility takes precedence over a select group of fears that include that of their own mortality. Of their children, greater than 3 out of 4 participants feared that their parents would be mistreated or become depressed in a senior housing facility. This issue can largely be attributed to the design and location of nursing homes and facilities.

For the past several decades, senior housing developments have been marketed as specialized suburban structures situated near recreational and medical facilities. These developments would address a market need, but do so in a highly restrictive, age-consistent, autonomous urban design independent of the surrounding community. More recently, the industry has established simplistic models (independent living, assisted living, skilled nursing, others) for what are, in reality, very complex relationships among real estate, finance, and healthcare industries.

While contemporary senior housing facilities remain in an awkward stage of development, the anatomy and forward design features indicate a promising future. For example, senior living offerings have diversified into an array of care models ranging from active adult retirement housing, to memory loss units, to rehabilitation facilities, to entire communities that offer a continuum of care when compared to their institutional, hospital-like settings of the past.

The adaptation to a new seniors marketplace, brought on by the retiring Baby Boomers, could result in an organization of resources and redeployment in creative ways, likely as infill projects woven into the communities, and even neighborhoods, where aging adults want to stay. This is new, as earlier models of senior housing did not provide many options. These now-retiring adults are interested in location and amenity features that are neither dominating or prohibitive, nor withdrawing or lazy. Instead, they are seeking to skew social categories, and in their individual pursuits, potentially meld lifestyles with that of their children.

Rather than conceiving senior housing as an individual, isolated development, the future of the industry may belong to providers and real estate developers who produce methods for borrowing on and contributing to a wider, mixed-generation neighborhood. We are certainly getting close to the point where the senior living industry begins to move away from providing “retirement communities” to providing for retirement in existing communities.

For information on senior housing developments in Texas, please contact Robert S. “Bob” Lowery, Managing Partner of MREA | Medical Real Estate Advisors  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.

Is Commercial Real Estate … Inflation Protected?

With a jump in treasury bond yields – a 23% drop in the 10-Year Treasury Bond over the last month – users and investors of healthcare real estate are once again wading through a sea of financial paperwork looking for ways to adjust for an anticipated inflation in borrowing costs. In the near term, little to no action is warranted as a lack of supply on the market is far inferior than that of capital demand for healthcare real estate product, but, over the course of following years, this increase, however great or small, will need to be reallocated or risk adjusted.

fedWhat we all know for certain know is that the Federal Reserve’s epic measures to stimulate the economy have fallen short of its own initial target inflation objectives and employment rate to this point. As a background, the Federal Reserve manages short-term interest rates by targeting the federal funds rate, which represents the cost of overnight funds. The federal funds rate anchors the short end of the Treasury yield curve which, since the 1980’s, has kept commercial real estate improving by lowering the cost of capital and availability to borrowers.

Treasury security yields are determined by the “market” against the backdrop of the federal funds rate. Investors will calibrate yields on Government bonds (Treasuries) to reflect their inflation expectations over the term to maturity. When investors judge inflation risk to be rising, they will push up Treasury yields which, in turn, serve to depress economic activity and send a message to the Fed that the market is concerned. In effect, bond market traders function as the inflation police force. This said, without Federal Reserve as emergency backstop in 2014 as Bernanke has hinted, the question is how high can Treasury yields go? And, how quickly will the banks react?

How Commercial Real Estate Investments React to Inflation…

Important to commercial real estate is the structure of its leases, which often includes annual increases or “bumps” in rent over the term of the lease. The most inflation protective rent increases would call for explicit indexation to inflation. Even without so-called bumps, leases have a specified term calling for a new rent contract upon renewal. If the local property market does not have a supply glut of available space at the time of renewal, the adjustment in rent is, at a minimum, likely to catch up to inflation. Shorter-term leases can catch up more quickly than longer-term ones.

The assignment of expenses can provide further inflation protection for commercial real estate investors. Some leases pass all expenses through to tenants, most commonly the
“triple net” leases on new medical office space, while others pass through only some – or none – of the specified expenses to which they will find themselves locked into a property until leases are reconfigured or property valuation is adjusted downward.

inflationProperty valuation is affected by inflation through two avenues: Net operating income (NOI) growth and capitalization rates, both components of property value and can be determined  as NOI times the inverse of the cap rate. To the degree that inflation protection – rental pass-throughs to tenants, other – is embedded in the net operating income, property value will be affected, without any change in cap rates. But, the market capitalization rate is itself affected by inflation through its link to longer-term interest rates.

Over the cycle, the double edged sword of inflation plays out via higher interest rates, creating negative pressure on property values. But at the same time, strengthening economic growth also will bolster NOI growth, creating a positive impact on property values. The stronger the response of NOI growth to inflation, the more likely it is that property values will be enhanced rather than depressed as interest rates rise with the maturing business cycle.

Cap rates also are affected by the risk appetite of investors. If investors expect commercial real estate to offer inflation protection, the spread between cap rates and longer-term Treasury rates will tighten compared with spreads on other asset types that offer weaker inflation protection, such as corporate bonds.

The key to commercial real estate investment performance is to construct portfolios that are protected from supply excesses that impair the inflation protection otherwise associated with commercial real estate. Historically, commercial real estate has handily beaten inflation except during periods of severe supply gluts brought about by too much construction or a collapse in demand.

For information about any of our healthcare real estate services, contact Robert Lowery, Managing Partner of MREA at 713.701.7900 or email us at office@mreausa.com.

3 Items To Prepare For When Leasing Medical Space

hammer cashThroughout the State of Texas, MREA has assisted practice groups and healthcare professionals make the best real estate and space planning decisions for their organizations. Medical space is uniquely separate from traditional office space offering unique challenges that require professional guidance.

While we prefer to remain positive and energetic in our quest for our clients interests, what follows are a few mistakes that are made when signing a medical lease. Our tenant representative team not only helps to avoid such mistakes, but guides our clients through every step of the leasing process to help procure the ideal opportunity. To request the entire list (seven other items), please contact a healthcare real estate representative at 713.701.7900.

The Personal Guarantee
Medical landlords are apt to require personal guarantees. A personal guarantee is a legal contract between a landlord and an individual to guarantee a specific obligation of a business, usually the remaining rental obligation under a lease. Personal guarantees provide the landlord with additional recourse in the event of a default on a lease agreement. The implications of a personal guarantee are significant because personal assets (e.g., house, cars, retirement funds, etc.) are at risk if the party defaults on the lease.

The landlord commonly advises that to hedge against the high cost of the tenant improvements, personal guarantees are required for medical space. Due to this additional risk, a personal guarantee is instituted to provide additional security for the tenant’s full performance of the lease.

While any landlord that chooses to own a medical office building should expect high build-out costs, they should also be familiar with the lower risk associated when leasing to medical tenants. Furthermore, and as a rebut, the rental rate for medical office space is commonly higher to offset the higher tenant improvement contribution by the landlord. For example, the rental rates for medical space are far greater than those of traditional office space.

  • So, if the landlord wants to reduce risk by requiring a personal guarantee, is it fair to suggest there should be a corresponding reduction to the rental rate?
  • Will the interior improvements be specialty or generic? How does this factor into the decision for a personal guarantee as one size doesn’t fit all.
  • Is the medical group a newly formed entity or is there a solid history of financial performance to ease the landlord’s concerns? What role does this play in the landlord’s decision?

If some form of personal guarantee is necessary, there are steps to take to protect oneself and/or limit a group’s exposure. For example, if you are in a partnership with multiple physicians, limiting a guarantee obligation to a specific percentage ownership in the practice is reasonable. Also, one should be have the capability to structure the guarantee so that it declines each year as the landlord’s risk exposure is reduced.

Additional items in negotiation may include a release of the guarantee based on the percentage of the lease or loan paid off, a specific end date for the guarantee, exclusion of certain personal items from the guarantee, and in some circumstances, personal guarantee insurance.

The Cost of Tenant Improvements
Tenant improvements for a medical space can be very expensive. Building out a space to cater the unique spatial needs of a healthcare group can range anywhere from $50 to $250 per square foot, depending on a myriad factors such as:

  • What is the current condition of the existing suite (warm or cold shell)?
  • What is the level of specialized requirements for the group (e.g., plumbing in exam rooms, lead walls for x-ray units, surgery components, etc.)?
  • What are the groups decision for improvement finishes?

It is keenly important to comprehend the current condition of the space and how this will affect the purchasing power of each tenant improvement dollar going forward. A $25-per-square-foot allowance for a second-generation dental practice may be adequate, but the same allowance will barely get you started if you are building out from a “cold shell.” The point is to understand what is present before signing a lease.

The Timeline and Complexity of a Build Out
Just as the cost for tenant improvements varies by practice specialization and current condition of the space, so does the project’s complexity, and ultimately, the timeline for delivery of the finished space. For example, a practice requiring surgical space and digital x-ray units will take substantially longer to design, redesign, permit and construct than a family practitioner’s office which may simply require individual exam rooms.

We typically advise our medical clients to plan for a minimum four-month build-out period in order to design, obtain the appropriate permits, and construct the suite. For expensive and complex medical projects, the build-out period can be closer to one year — some longer. So, it is crucial to deploy the right team of experts from the outset.

Time happens to be the best leverage for a real estate negotiation. If it is not utilized effectively, things will get expensive — FAST.

Surgery Center Accreditation in the State of Texas

AccreditedTwenty-six states, including Texas, have jurisdiction for office-based surgery to meet various thresholds. The most common specialties performing office-based surgeries are pain management, plastic surgery and GI. This requirement is typically based on the levels of anesthesia used and/or complication of procedure performed.

To fulfill the Texas requirement for office-based surgery accreditation is not as comprehensive (or exhaustive) as that of a ambulatory surgery center. The advantages for such accreditation can be in the form of quicker third party payment, influence of liability insurance premiums and managed care contracts, as well as positive community image, employee recruitment and morale.

This said, the vast majority of commercial payors require accreditation (above and beyond the state license, as applicable, and always Medicare certification) in order for the ASC to perform within their payor network. Documentation as proof must be submitted with a supplementary application before the request for ASC participation would begin.

In order for a healthcare organization to participate in and receive payment from the Medicare or Medicaid programs, it is required to meet the eligibility requirements for program participation, including a certification of compliance with the Conditions of Participation (CoP) or Conditions for Coverage (CfC) as set forth within federal regulations. This certification is based on a survey conducted by the state agency on behalf of the Centers for Medicare & Medicaid Services.

However, if the state will not provide initial or ongoing Medicare surveys, using a national accrediting organization (AO) is the next step. The will have and enforce standards that meet or exceed Medicare’s compliance certifications. CMS ultimately would grant such accrediting organization “deemed status” to receive payments from social assistance programs such as Medicare or Medicaid. For most types of healthcare providers or suppliers, accreditation participation is voluntary and seeking deemed status through accreditation is an option, but not a requirement.

The property below (scroll) was accredited as an ambulatory surgery center with deemed status through the Methodist Hospital System. It is currently available for reuse for qualified tenancy or option to purchase. Please contact Robert Lowery, the exclusive listing agent for property owner, at 713.701.7900.