The Impact of Healthcare in Real Estate

Who is being affected? Many of the recent changes in the healthcare industry have drastically changed the way in which today’s consumer demands  access to healthcare.  Today’s consumer expects both convenience and quality care in close proximity to where they live. Historically, we have seen acute care facilities as  common practice; today’s Healthcare facilities are aiming for the most cost-effective ways to deliver service.  Some of the real estate sectors that have seen the most impact include: Medical Product & Equipment Warehouses Pharmaceutical & Laboratory Facilities Outpatient Surgery and Treatment Centers Medical Office Buildings (MOB’s) Health Retailers & Co-tenancy in Retail Centers Urgent Care Facilities Other Factors Impacting Real Estate Markets Aging Population An estimated 3 million baby boomers will hit retirement age each year, over the next 20 years. An aging population calls for an increased demand for healthcare. Most of healthcare spending is non-discretionary and often requires physical space for delivery of care both in Medical Space and Senior Housing. Alignments and Consolidations Physician Groups and Hospitals may consolidate their medical practice groups or form alliances to expand their footprint. Both scenarios will create an increased demand for re-development, enhanced utilization of existing space, and opportunities for new space.  It may also decrease demand for smaller medical office space in the market. Example: Tampa General Hospital and Florida Hospital joined forces to build a multi-million dollar outpatient center in Brandon. This was not a merger; all hospital operations remained separate. The new company is called West Florida Health. The goal was to become a collaboration of both independent and employed doctors and   providers that can work together to provide quality care for patients. This is just one of the many examples happening in our community…continue reading Mergers and Acquisitions (M&A) With the continuous expansion in healthcare coverage, the demand for healthcare accommodations rise. This growth creates an active M&A   market.  Example: HCA  purchased 3 hospitals from IASIS Healthcare, LLC, including Memorial Hospital of Tampa, Palms of Pasadena,...

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Mergers and Acquisitions: What Physicians Need to Know

Medical practices are being acquired at a rapid rate as doctors seek haven from the challenges of today’s healthcare business environment. Equity, Inc. sat down with Reid Haney, a transactional and healthcare lawyer at Hill Ward Henderson, to discuss what trends he is seeing in the Tampa Bay Healthcare market and his advice for physicians considering selling their practice. His healthcare resume spans a variety of specialties from primary care physicians to radiologists. Physicians are seeking to sell their practice for many reasons, including increasing regulatory requirements such as HIPPA and Stark laws, as well as the push to electronic health records.  Selling the practice allows the physician to focus solely on practicing medicine; as opposed to managing the cumbersome administrative and compliance processes. Haney recommends that physicians plan ahead to increase the value of their practice. “Get your ducks in a row, before speaking with sellers.” This involves sitting down with a lawyer and an accountant one to two years prior to selling a practice to review financial statements, account receivables (A/R), and contracts. Physicians should make sure that the practice’s financial statements truly reflect the business operations. This includes reviewing non-essential business expenses closely. Otherwise, these items will be removed during due diligence and will inevitably delay the process.  Additionally, reducing the life cycle of your receivables will help in your valuation. Finally, it’s important to have a good handle on your contracts.  Know what you have and what is in them. Additionally, Reid suggests that physicians should be willing to continue to practice for the acquiring company for at least a few years post acquisition. If a physician is looking to retire right away, he/she may not maximize their value of the practice.  Most employment contracts with hospitals or large private entities last for only two to three years, and due to Stark and Anti-Kickback regulations, the compensation is closely scrutinized.  Long-term job security is very difficult to obtain in these transactions. Due to tight regulatory...

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Capital Market Analysis

Capital Market Analysis Lee Jackson, VP of Capital Markets Equity, Inc.   A thorough understanding of capital markets is critical when considering the purchase of a medical office building (MOB).  Lee Jackson, VP of Capital Markets for Equity, Inc. is our in-house expert and our go-to source for valuable industry information.  Jackson foresees an industry-wide increase in interest rates, due in part to the discontinuation of the Fed’s bond buying program.   MOB CAP Rates and Interest Rates According to Jackson, cap rates haven’t caught up to Wall Street’s rising expectations of increasing interest rates because of the lack of existing inventory.  “However, with new larger medical office buildings coming online (driven by payment and delivery changes of the Affordable Care Act), cap rates will start to climb within 12 to 24 months”, Jackson says.  “At first, the increase in cap rates won’t be as noticeable (15 to 25 basis points in the next 12 months), but cap rates will gradually begin to tick up 35 to 50 basis points per year, over the next few years”.   Owner Occupied MOB’s How does a rising cap rate trend impact physicians that own and occupy their medical office space?  Simply put, rising cap rates and interest rates mean that if the current net operating income of a medical office building stays the same, a buyer will pay less for this building in the future.  To prepare for this, Jackson strongly suggests physicians engage a medical office expert to help them clearly define their real estate exit strategy.  Too often physicians do not plan an exit strategy because they assume that their practice will not change or that they will eventually sell their practice and real estate to another physician.  However, this is a perilous gamble when most physicians coming out of residency today are opting to become employees of larger medical groups or hospitals. Physician owners should be looking ten years down the road, and asking themselves, ‘What will my...

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To Buy or Lease Medical Office Space?

Physicians often contemplate whether it is a better investment for them to buy the real estate for their practice or lease medical office space. The motto ‘it is better to own than rent’ does not apply to every situation when it comes to medical office space. Prior to making a purchase, physicians should establish clear objectives pertaining to the short and long term goals for the practice. Here are some things to consider when deciding whether to purchase or lease medical office space: Financing.  Available financing options play a role in the decision to lease or purchase.  Today, many lenders are fairly lenient when lending money to physicians, frequently offering 90% financing options (or better). Providers should consult with a financial lender on rates and terms for financing. Also, it is recommended to sit with an accountant to determine the costs and related rent structure that will be required to support a purchase. Capital.  Availability or access to capital within the practice can be a huge factor when determining whether to lease or purchase. If a practice has excess cash and has no major operational purchases or needs in its future, it may make sense to invest that money in a new facility or building. However, if a practice does not have access to excess cash it may be wise to save the money to invest in future practice operations or potential expansion costs. Fixed vs. Variable Cost. If a physician purchases medical office space, they have a good idea what the costs will be over the long term. This is especially true with a long-term, fixed-rate mortgage. When leasing office space, the market often dictates what the long-term costs will be. Flexibility.  The ability to be flexible is a big factor in the lease or purchase decision process.  This pertains to a practice’s ability to grow or shrink as needed.  If your practice is relatively new and in a high-growth mode, leasing would impose fewer constraints on growth...

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Five Trends in Medical Office Design

Keeping along the lines of this month’s theme “working with specialist” we sat down with Equity’s very own Phil Kirkpatrick to discuss some trends in Healthcare Office Design. Phil is a Project Manager for Equity and oversees the development of Medical Office Buildings, Surgery Centers, and Skilled Nursing Facilities. Specialist keep abreast of trends, cost saving strategies and efficiencies in design, and understand regulatory requirements that may affect design. Below are a few trends that he shared with us. Patient Waiting Rooms Patients often form their first impression of a medical practice in the waiting room, or reception area. Everything from the arrangement of seating to the type and intensity of lighting has an impact on a patient’s experience. Phil Kirkpatrick explains how medical office design has evolved to improve the experience for a patient. “Many physician offices are doing away with reception windows and installing an open countertop at the reception desk.”  While most offices used reception windows to comply with HIPPA regulations, it did not give a warm and welcoming feel to the patient. Phil explains that there are several ways to make an open reception desk still comply with HIPPA regulations.  Additionally, the patient waiting room is typically where the “upgrades” are installed in the office. More physicians are using granite countertops at the reception desk, rather than in exam rooms.  Additionally, using LED instead of linear fluorescent light fixtures in waiting rooms, or natural lightening from windows when applicable. Less Filing and Storage Areas One trend that affects space demand and design for medical office buildings is the onset of electronic medical records. The need for file storage in a medical office has decreased significantly. Rather than decreasing the size of a standard physician office, many physicians use that space for more clinical space or different sub-waiting rooms. Centralized Washing Stations Another space utilization trend that Phil Kirkpatrick sees in new medical office build out is a centralized washing station. Rather than having a sink...

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Access Knowledgeable Vendors

As specialized healthcare consultants, unique to the commercial real estate industry, our objective is to help physicians achieve their goals with respect to their clinic locations. Whether a provider is looking to purchase a medical facility or to lease medical office space, we assist through our proprietary database of contacts and relationships. In the fall of 2013, our firm was approached by a physician looking to break away from his existing practice to start his own. He was located in a small medical community with limited options for real estate. He had the option of driving around on his lunch break or on weekends to call on real estate signs; however, he wanted to maintain some confidentiality and did not want word getting back to his partner. Our team at Equity was able to help him identify several sites that would work for his practice. After careful review of each site, we were able to narrow them down to the one he wanted to make an offer on. While many commercial real estate agents may have been able to achieve the same results, our unique experience in servicing the healthcare industry allowed us to streamline the purchasing process. After making an offer and negotiating a contract, there was still plenty of work to be done. In this particular physician’s case, we needed a corporate real estate attorney to review the Purchase Sale Agreement, add language for impact fee credits, and to review the Title. Knowing who to rely on for these services and who specializes in servicing the healthcare industry was critical for a smooth and successful closing. The building required full build-out for a medical practice. Its current condition was “shell” which meant the exterior walls were built, but the interior only consisted of dirt floor with no electrical, HVAC or plumbing. The physician needed a contractor that was not only experienced in building medical practices, but one that could design and build the practice to his liking...

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