Hospitals Employing Physicians: Is It Different This Time?

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Around 15 years ago, physician practices were purchased by hospitals at compellingly high prices. Unfortunately for these hospital systems, within a matter of just a few years, the physicians were re-injected back into the community, largely because the hospital systems had not realized a return on investment. Fast forward to 2012, we hear similar stories about physicians becoming incorporated into a hospital’s network.
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The reasons for hospital systems obtaining physician groups may be many. But, most conversations boil down to either a specialty or geographic play, whereby hospitals seek entrance or command of certain designated fields or locales. Also, with the establishment of healthcare reform, and impetus from both hospital and physicians for greater reimbursements, as well as a movement to adopt a more streamlined, technologically advanced care distribution model — we think this time may be different.
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Based on casual conversations, the motivations to join a hospital from a physician perspective is appearing much greater today than it was in the mid-90′s. A weakened economy, high employment or practice costs, entry barriers, a more savvy-consumer, and the potential for declining reimbursements, are among the top justifications that we hear from physician groups.
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There seems to be a greater number of differences in how the hospital systems are purchasing medical practices today, though, when compared to that of years past. Mainly, hospital systems are not offering to pay exorbitant prices, likely as a result of previous miscalculations. As for those that we speak with, many are not seeking to purchase practices outright (staff, equipment, management, real estate, in some cases). Instead, the hospital is offering employment compensation, with greater emphasis on incentives for productivity, to a select group of physicians for a number of years. Also, because reform will include greater regulatory oversight of physician purchases, this may be an incentive for hospitals to complete acquisitions prior to 2014, when the majority of reform’s initiatives take effect.
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The most common way that a physician practice group is absorbed by a hospital is through a method where physician owners and practice administrators keep an ongoing operation in place, essentially subjecting to less guidelines and oversight, but to assume some naming rights, some jurisdiction, as well as partnership for likely for potential future transaction.

As for the outright sale of a practice to a hospital, it may be achieved in several different ways. A hospital may purchase a practice’s tangible assets with physicians and staff as employees of the practice, whereby the unit is obtained as a separate entity. In another instance, the hospital may acquire the assets, physicians and staff to become employees of the hospital, in which the practice discontinues. As for unique circumstances, the staff becomes employees of the hospital, but the physicians remain separate.

A certain consideration should be made by physician groups as to the value of their practice to the hospital system. Because anti-kickback laws exist, the hospital cannot pay a physician group more than ‘fair value’ for their practice. Any payment that is beyond a certain amount could be considered a ‘kickback’ for services provided to the hospital. Also, keep in mind, the revenue generated by physicians for referrals outside of the practice itself are not considered in the valuation.

Another issue that comes from a practice purchase is that physicians are not relieved of their responsibilities. This is because the acquisition is commonly considered a separate operating division or profit center of the hospital. Consequently, the physicians compensation is still tied to the profitability of their previous medical practice. This provides troublesome if physicians are nearing retirement.

One last reminder, and a stark reminder of how this time may be different, is how the practice’s patients now can easily become part of hospital’s affiliated practice, especially with the advent of electronic medical records. In essence, the hospital now owns and operates all patient lists and records that have been accumulated by the practice group.

While I will leave you with the determination of whether it is better to sell, partner or lease with a hospital, MREA has established healthcare real estate professionals, accountants and attorneys to whom you have access. Contact us for our wide range of client responsibilities that incorporate business strategies with extensive real estate capabilities.

Why We Perform Our Own Market Research

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In light of recent articles regarding the largest commercial real estate brokerage firm in the world NOT providing data to the largest online commercial real estate data provider, we thought we would make our viewers aware of the positive and negative of seeking commercial real estate information online.

Having spent considerable time with a few of the largest commercial real estate platforms in the country, I can attest that commercial real estate dealings are kept sacred, some having bound agreements as to non-disclosure among all parties involved, and rightfully so.  These are business engagements that involve competitive people, seeking a competitive advantage in their respective competitive markets. Mirroring the administrative behaviors of everyday business affairs within other industries, commercial real estate is, and should be treated, no different.

Which brings me back to the first line of this article to which I may provide an analogous, hypothetical point.  In general, should businesses voluntarily engage in providing market data to third parties so that they can republish, or repurpose the data to fit their own needs?  Further, should we provide privileged information from a competitive business landscape to online platforms that are controlled by competitive businesspersons that sell this data to our competitors, and worse yet, may sell this to a purchasing entity to be taken private or sent overseas?  Well, it appears that the largest commercial real estate firm in the world thinks not.

So, given the fact that not all commercial real estate listings, transactional activity or data is secured by online platforms, and, in all actuality, less than 50% is captured, it is certainly questionable as to why users seek such data or trends to influence their financial decisions.  Given the certainty now, that some, or most, commercial real estate transactional activity goes unreported, or underreported, to online platforms, why are individuals, owners, investors, businesses or hospital systems relying on this information for a perceived advantage in real estate negotiations. It just proves wasteful, ill-informed and, dare I say, lazy.  Given the fact that state politicians and regulatory authorities largely determine how much information a business should share to the public, it is in our belief that the commercial real estate industry should rely on such data, as well as their own best efforts to influence decision-making in the sector.  The promotes competition where, eventually, the creme rises to the top.

As for commercial real estate listing or transactional reporting right now, most will say that ‘it is the best we got”, to which I disagree. This suggests that anything is better than nothing and proves why it is imperative to seek qualified professionals that specialize, who become proficient within a certain sector, or section, of their market.  The greater the specialization within a segment, the more efficient the data. This data can be purposefully created and shared with those who they choose, which will lead to a competitive advantage for themselves and their clients.  See, the industry does not need underutilized, poorly informed, general salespeople seeking to sidle up to every potential transaction by distributing data that appears convincing in the hopes that an unjustified reward will find its way in their direction.  Rather, we need, and deserve, active, intelligent leaders who can comprehend that a high level of command, or mastery, within any endeavor, is the greatest path to long-term financial reward.

Stop, Go, Stop, Go, Stop…Go!

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2012 is shaping up to be a good year for commercial real estate practitioners with a recession now becoming less of a reality.  By simply observing search queries that funnel to this blog (by no means an economic indicator), it would appear that we will see steeper interest in the consummation of land purchases for proposed developments, as well as the disconnection of locked down building construction plans.

It is our responsibility to observe and record trends on how the money migrates within commercial real estate sectors to properly advise our clients within health care.  And, over the past few years, we have remained exceedingly cautious in advocating large, speculative investments into the sector.  As my financial advisors always remind me, the trend is your friend and the trend remains down.

But, as the stock market has remained trapped in a trading range for more than a year, coupled with a stable outlook for real estate investment trusts (REITS), where pent up demand has the potential to make a bold re-emergence, our interest, as well as our clients, is certainly improving.

As for a simple analysis on capital migration, the last year+ has witnessed investor interest rocket higher in areas such multifamily and farmland with, and without, fundamental, long-term supportive cases for upside to continue within the either sector.  See, one investment type can be characterized as deflationary and the other inflationary, and both are highly speculative with the potential be burned if the glut of homes is efficiently dealt with and economy/dollar stabilizes.

This type of investment activity implies that money is burning holes in the wealthiest of investment capital and/or non-domestic capital is playing a larger role than is being reported.  In any case, this risky capital allocation suggests that once a firmer footing in the economy is gained, the beaten down sectors within commercial real estate sectors will see tremendous activity.

What are indicators that suggest money is moving into commercial real estate?  Certainly, studying the largest investment houses is important, but also leasing activity through tenant relocation or expansion is another.  From a middle market perspective, we believe keeping an eye on investment in land by seasoned developers or JV interest in more speculative plays could be the catalyst in determining when to enter the neglected business investment sector.  For instance, if news publications get a hold of large plots of land or large urban infill tracts transferring, it may be time to contact your brokers again.

Until then, we are all running the red light.

Cleaning House: HIPAA & Medical Records

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‘Cleaning House’ is a simple, figurative analogy as to what is currently taking place in the health care industry.

Now that reform has been responsible for identifying and correcting some of the system’s major abusers of taxpayer dollars, the latest news is with regards to the significant security breaches of medical records that have the potential to have much greater ramifications to the local, state and even our country.  Most of the breaches have been concentrated within the medical industry, but keep in mind that this is now one of the most scrutinized sectors of our economy.

We wanted to touch upon a few ideas when selecting where files are headed to secure that the information does not come back to haunt you.

The truth is that in each business, large and small, several employees have the ability to access personal financial or medical records that cover a huge spectrum of our population.  Many companies opt not to deal with this appropriately, compiling the information and throwing it in the nearest waste receptacle. Also, many organizations to not adhere to standards to store or destruct legal documentation, which makes it even easier to attract the wrong group of conspirers or thieves.

In the health care industry, the potential ramifications, are, and will be, even greater.  Not properly storing proprietary information, or discarding it without destroying it, is exposing the organization to a risk of litigation and a potential loss of business.   HIPAA law requires medical organizations to maintain a reasonable and appropriate amount of technical and personal safeguards to prevent an unauthorized breach of critical information.  The fines are still regarded as a ‘slap on the wrist’ by many physicians, but the way that a ‘contagion of transparency’ is now firmly planted and spreading rapidly, complying to any HIPAA regulation is in your best interests.

For unintentional violation of the HIPAA regulations, the Department of Health & Human Services can levy:

A fine of $100 per violation and a maximum of $25,000 per year.  And, trust me when I tell you that, the buzz circulating within our network of attorneys suggests that is it is becoming increasingly more difficult to challenge these rulings.

For intentional violations of the HIPAA regulations, the Department of Justice may levy:

  • A fine up to $50,000 and 1 year of prison for knowingly obtaining or disclosing PHI
  • A fine up to $10,000 and 5 years if done under false pretenses
  • A fine up to $250,000 and 10 years if intent to sell, transfer, or use for commercial advantage, personal gain, or malicious harm

Penalties may apply to the individual violator but they may also apply to the organization or even to its officers.

As for proper measures of disposing physical or technical medical records when involving real estate decisions, please contact our office.

For the complete HIPAA regulations, visit the Department of Health and Human Services.

To learn more about HIPAA insurance reform or HIPAA administrative simplification, visit Center for Medicare & Medicaid Services (CMS).

Healthcare Bankruptcy & Receivership – Real Estate Services

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MREA is dedicated to improving the health and wealth of it clients through several varying healthcare real estate competencies, many of which are located on our website. Our specialization within this narrow, niche sector provides our physicians, investors, owners and medical center customers with direct exposure to healthcare real estate opportunities. Currently, our firm is fielding a greater number of inquiries for the assistance of distressed real estate property offerings.  So, we offer a quick post of our services.

As most are aware, an unfortunate reality exists in today’s real estate marketplace.  The financial system is working on ways to deal with those that relied too heavily on leverage and debt instruments to fund real estate purchases during the middle to latter years of last decade.  This reality haunts the medical real estate industry that, just 5 to 7 years ago, expanded greatly to accommodate forecasting models that placed significant emphasis on serving a growing, health-conscious population, especially that of the baby boomers.

As the commercial and healthcare real estate industries are in the initial stages of coping with an abundance of over-leveraged property, our firm is well positioned to capture a lion’s share of these opportunities.  It is because our firm has developed “across-the-board” relationships within the healthcare real estate sector whereby delivering property offerings (lease, sale, redevelopment) directly to the doorstep of an actively managed database of medical tenants, investors and hospital owners.

MREA Distressed 

The Medical Real Estate Advisors (MREA) have the expertise required to effectively manage a variety of distressed situations involving non-performing loans, as well as the management, leasing, disposition and redevelopment of Real Estate Owned (REO) property.  Our professionals are actively involved in loan workouts, mortgage possessions and foreclosures and we seek avenues to eliminate overexposure by directing any offerings to a secure database of medical professionals and investors.  Along with traditional distressed real estate services, our specialized competencies include judicial and non-judicial foreclosures, court-appointed receiverships, bankruptcies and deed-in-lieus.

Receivership Services

Mr. Robert S. “Bob” Lowery and his team of associates are versed in court proceedings that involve the foreclosure and appointment of a receiver.  Our comprehensive real estate solutions for the medical industry play a vital role in the efficient transition of the asset from its current position to that of significant value to the marketplace. Services include:

Strategic Planning – Stabilization of Property — Tenant Retention — Property Management — Marketing & Advertising — Leasing — Exit Strategies

Bankruptcy Services

To complement an expansive list of healthcare real estate services, MREA is involved in working with bankruptcy trustees to assist with businesses that are financially troubled, either directly or indirectly, from their real estate holdings.  Our services:

Assisting Turnaround Management Companies — Monetizing Assets — Advising Lender Workouts — Creditor Assignments — Representing Buyers & Sellers — Real Estate & Recapitalizations — Equipment, Furniture, Business Item Liquidations

Robert S. “Bob” Lowery is Managing Partner of MREA | Medical Real Estate Advisors

Social Media VS. Commercial Real Estate

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I remember the day in early 2010 like it was yesterday.   After a horrible year for our industry, the company called in all of the associates to mention that the firm’s corporate marketing platform was shifting to adopt very unique selling strategies incorporated within social media. For the firm, social media would be the horse to pull the cart for the indefinite future.

As an avid participant of social media marketing techniques for several years prior, whereby utilizing it as a defined percentage of my overall personal branding strategy, my reaction was not one of rejoice.  It was not that we were implementing 21st century technology to benefit our organization and its associates; we were.  My discontent was that we would dilute ourselves and our profession by largely incorporating social media’s bold, yet sloppy entrance into the internet as our preferred method of corporate branding and potential client interaction.

Why?  In my mind, social media is, and will always be, in whatever form, utilized as a simpler, more cost-effective alternative to professional corporate public relations and marketing.  Therefore, if I am in the majority on this, which I certainly believe I am, using social media suggests to an educated, informed public, especially within the ranks of healthcare and commercial real estate, that our message, any message, is important.  It is not.

Utilizing a “free” media campaign as a large percentage of the company’s brand and product distribution is simply recipe for disaster.  In business, through education it is realized that just because someone else is, or is not doing it, does not make it a sound business decision (or even profitable). By exclusively implementing social media, simply because it is the easiest way to promote your product or service, or worse, to gather fiduciary relationships, suggests that not everyone should actually be in business. Remember the expression — Talk is cheap, well, social media is essentially cheapening our words with each egregious talking point or reference.  The thought that forwarding material by clicking buttons just because someone else’s story line looks appealing is a good idea, it is not.

So, how can social media work for you?

A few suggestions:  Build a profitable brand prior to implementing social media.  This takes years of effort, but when your brand is ready for mainstream, implement it wisely.  Because, in the end, it truly depends on the time spent utilizing it (or abusing it) and what you are delivering that separates you from the noise. So, if you are in the widget business, you should advertise your widgets or help people understand how your widgets work, or how your widget is worth something over your competitors widgets.  Be realistic though, no one wants to hear your message again and again.  If so, the “any message” just gets lost in a verbal chaos known as social media and time could be wisely spent in more productive, profitable ways for yourself, your company and, especially, your clients.

See, social media is free because it has no direction, no purpose, no unique selling points to deliver to its customers; large or small.  It resembles an enormous disfigured mass of molten hot lava that swallows each unsatisfied marketing campaign or underfunded budget and dilutes it through over absorption.  Using this analogy, the heat eventually cools and turns into a hardened object called igneous rock.  The rock signifies time lost chasing a passing fad.

So, is your time better served Twittering or working?  We think working.  Remember the days when companies told their employees not to use the internet in lieu of working.  Still true today.

By the way, I just missed a potential client’s call writing this post.

This is an educated opinion written by Robert S. “Bob” Lowery.

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.

13 Real Estate Investment Strategies

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We have outlined some real estate investment strategies that are “outside of the box” when contemplating how to participate in a commercial real estate investment.  When reviewing any of the options below, we feel that it is important to seek the guidance of an experienced CPA or real estate attorney, as per our obligations to our state licensing entity.

1. Find, Purchase, Hold

This strategy is designed to create long-term, residual wealth.  A certain emphasis is placed on identifying and locating the resources necessary to make a deal successful and to protect future interests.  In this situation, it is important to analyze closing and any financing fees, as well as adopt strategies that may reduce or eliminate operating expenses and maximize cash flow.

2. Fix it, Flip it

Most investors that entered within the last decade have relied on property prices rising year-over-year.  Today’s investors are more apt to turn properties quick for cash.  Get in, Get out. The anatomy of a flip is determined by how clear the objective is and able the budget, as well as how clean the marketing plan when solicited to the public.

3. Pre-Foreclosures, Foreclosures

This method has not been an excellent source of opportunities, although it is in its infancy in today’s marketplace.  Acquiring foreclosed properties through two methods, auction and bank REOs, may provide the buyer with aggressive prices and terms that tend to be more favorable.  It is important to understand that a certain level of preparation is required prior to bidding at auction. You will need to become a strong participant, or procure a broker that is proficient in the auction process.  How you should approach banks for REOs is another consideration.

4. Tax Lien Certificates

Secured by real estate and guaranteed by the government, tax-defaulted paper is another investment vehicle that is used by keen investors.  Delinquent taxes of others can in return yield a handsome interest rate as well as the possibility to obtain the property itself, free and clear. Understanding the differences between tax lien certificates and tax deeds, how to research properties online and hedge against certain risk factors associated with tax foreclosures is paramount.

5. Lease Options

Leasing the property today for purchase tomorrow is a creative acquisition strategy for those with limited available funds. We recommend learning how options differ from that of a standard lease, as well as the ways to create options, the proper method of transferring title and the differences between certain options. There are many legal aspects of options and we recommend sitting with a real estate attorney to discuss.

6. Probate Purchases

A strategy for obtaining leads to purchase real property that is for sale, but has not yet been exposed to the market. Probate refers to the transfer of (in this case) real estate when people die, with and without a will.  It is important to understand the differences between probate and non-probate, as well as where the property will be sold.

7. Subject-to Purchases

This is a method of buying property that is subject to the seller’s existing financing.  You may present offers to motivated sellers to gain ownership of property without qualifying for new financing.   Down payments and interest rates are the real motivators as it may be significantly less than from a traditional lender.  In addition to analyzing the property, it is important to evaluate the existing financing, the sellers position in the property, and the market.

8. Wholesaling

A wholesaler places a property, typically distressed, under contract and assigns or resells the property to another investor.  The investors a wholesaler sells to either use cash, lines of credit, or hard money loans to obtain the property.  This is a great low risk way of inviting investors to your party.  If a property is priced low enough, someone will buy it.

9. Rehabs

There are many facets of running a successful rehabilitation project, including the analysis of repair options and cost factors.  Understanding the benefits as well as the pitfalls of rehabs is essential.  Also, locating economically feasible properties, based on an understanding of cost estimations is key.

10. Short Sales

This is the investment into purchasing pre-foreclosure properties by discounting existing mortgages. The critical keys to success in the short sale process are through the conversations that take place between sellers, loss mitigation specialists, and other professionals who determine property value.  Analyzing the components of a successful offer and learn the secrets of handling second mortgages, judgments, liens, and other title issues are of importance.

11. Land Development

Conceptualizing the creation of a project is the best way to significant returns over a period of time, especially if a fee is underwritten.  A step by step process for land identification, procurement, and entitlement are essential.  The development focus is on basic principles and strategies of land location, market needs analysis, project approval, and the decision-making processes involved therein. Comprehension of the viability of a project for potential profitability and marketability while learning the key role that a certain level of knowledge plays in the land development process is important. Developing a feasibility study, to land identification, to plan submittal are all aspects in land development.

12. Seller Financed Notes

This is the ability to generate significant passive income yields when purchasing real estate secured seller-financed notes is attractive to investors.  The idea is to locate and negotiate the purchase of a note, as well as structure and create notes and negotiations that may take place between note holders and investors. The due diligence involved in compiling and verifying the necessary information, calculating an offer based on desired yield, analyzing deal risk factors, and the process of closing and funding a note purchase transaction are important.

13. IRA and Retirement Plan Investing

The benefits of the IRA through real estate investment serves as a vehicle that provides the freedom to invest in what the investor truly wants, instead of what the insurance company or stockbroker is offering.

And, there are more!  Contact us for a thorough review of each investment strategy, with your objective, to best determine an ideal fit.  Then, let us perform the due diligence necessary to uncover the opportunity.

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.

Valuing Medical Real Estate on Cap Rates…Fuggedaboutit!

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Physician and investor ownership of medical income property still sits as a relative newcomer on the expansive list of commercial real estate investments, which includes office, retail, industrial, among several others.  All-in-all, there may be over 100 specialty and categorical types of commercial real estate investments if broken down by industry and tenancy (single, multiple).

Commercial real estate brokers typically will arrange all investments alike, utilizing a simple formula known as cap rate pricing so as not to confuse or curtail into any real estate investment type.  But, every commercial property user (from Fortune 500 company to auto repair franchise) and investment (fully-leased hospital medical office building to empty warehouse) is uniquely, comparatively different.  So, to achieve proper valuation the asset needs to be compared directly to those of competitive properties with a percentage emphasis on who transacted, why and how, as well as economic conditions within the submarket, city and national economy.  It is our experience that most buyers and sellers will place a greater weight on certain factors when transacting, especially when motivated by a needs or capital availability basis.  This is botched recipe that has led to the relative uncertainty for our sector as a whole.

So, it takes a skilled eye and real-time comprehension of certain functionality of business and investment types, as well as a wide array of financial and economic data points to properly price and transact in the commercial real estate marketplace.   Unfortunately, just a handful of brokerage platforms adhere to a heightened sense of knowledge and disclosure when advising their clients, primarily due to inefficient formulas for pricing commercial property.  While this is certainly not a testament against commercial real estate brokerage platforms, it is a testament about a vast investment class that in some conversations remains broken based on inefficient pricing mechanisms, one of which includes cap rate pricing.

Example.

A cardiovascular care facility has a Net Operating Income of $100,000, and the sales price for the property is $1,000,000, therefore the cap rate is 10%.  Most property investors, and now physician investors, are becoming more comfortable with this simple strategy of valuing a property for the purposes of an exit basis.

But, what does a cap rate of 10% tell you?  Let’s first discuss what it does not tell you.

A cap rate does not tell you what your return will be if the property requires financing.  With an overwhelming majority of property requiring financing and terms changing daily, what are the costs of capital? Nor, does it appropriately account for tax and interest calculations either. It cannot pit an apples to apples comparison of unique property characteristics.  It does not tell you who, what, why, how or where.  Prior to contracting on a needs or investment basis, it is very important to know the competition in the market and how, why they can transact at certain levels.  Simply doing some quick math to obtain a cap rate does not accomplish this.

If not healthcare real estate, we will be happy to direct you to advisors with a keen eye on the rolling ball.  If your physician, user or investment group needs to determine the price of which to contract in the today’s commercial real estate market, please contact us for a proven transactional formula that may lead to a higher or lower price dependent on a variety of factors.