Precision Guidance in Healthcare Real Estate
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Why We Perform Our Own Market Research
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. This 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 area, of their market. The greater the specialization within a segment, the more efficient the data. The businesses that capture this data then hold the advantage to whom it should be shared, 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 comprehend that a high level of command, or mastery, within any endeavor, is the greatest path to long-term financial reward.
Healthcare Bankruptcy & Receivership – Real Estate Services
MREA is dedicated to improving the health and wealth of ita 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
MREA Sets Sights on Houston’s Medical Real Estate Market
Houston, TX (WiredPRNews.com) — MREA | Medical Real Estate Advisors (www.MREAusa.com) has announced the launch of MREA – a healthcare real estate advisory focused on leasing, management, acquisition, disposition and development. MREA is a strategic initiative within the medical arena and will consist of a team of healthcare facility managers and commercial real estate professionals exclusively dedicated to representing customers and clients for their medical real estate needs.
MREA will offer clients strategic guidance, powerful research and detailed consulting in determining real estate opportunities within the most profitable and populous medical locations in the Greater Houston area. As healthcare real estate service providers, MREA will represent their clients by facilitating the special requirements of each particular medical assignment with creativity, sincerity and professionalism.
MREA will offer the following real estate services:
Site Selection
Acquisition
Leasing
Brokerage
Development
Financing
Asset Management
Property Management
Consulting
MREA is currently the only healthcare real estate boutique firm in the Houston area that offers a full-service model to its clients. Robert S. “Bob” Lowery, Managing Partner, assisted in formation of the firm and currently maintains over 5,000 physician, investor and hospital connections. Also, with Mr. Lowery’s leadership that spans two decades in the Houston community and years of experience assisting a broad range of investment capital seeking both commercial and healthcare real estate properties throughout Texas, MREA is a highly-connected, high-powered member of healthcare investment and owner-occupied real estate.
“After performing a thorough historical analysis of healthcare real estate leases and sales, we determined that the medical community, from physicians to investment, was not represented in a way that promotes the competitive spirit which is evident in other commercial real estate asset classes. Because the majority of the growth in the sector’s balance sheets and real estate occurred during the last decade, we think Greater Houston’s supply is ample to cover its demand. Thus, there is little concern for rental rate growth in the near term,” says Robert Lowery.
“A sure-fire way for owners to protect their healthcare real estate assets is through the services of a specialized firm that can facilitate the needs of both the medical sector and its real estate, not necessarily one of the other. Our grassroots efforts to obtain and secure relationships with physician groups and medical organizations along with our comprehension of the intricacies of the asset will allow MREA to grow rapidly as stability within the overall commercial real estate sector is found,” adds Mr. Lowery.
MREA is a full-service capable, medical focused real estate company that works with healthcare providers to augment existing business plans and strategies for growth, stability or consolidation of their real estate portfolio. The firm will provide comprehensive real estate solutions.
Fundamental Differences Between Commercial Real Estate and Residential
Our broker brethren on the residential real estate have opened doors to excellent opportunities for our group to capitalize. Working within our 28-person commercial real estate brokerage office that covers entire Houston area, we are fortunate to have residential offices disbursed throughout the community. Our continuous feedback with approximately 10 Coldwell Banker residential agents, provides us with invaluable data and significant advantage for our clients who are searching for growth or upside in a commercial property investment. We regard this residential data as absolutely essential for future, telling real estate trends in the Greater Houston area. It is important to recognize that if not for residential real estate stability, commercial real estate would cease to function properly.
These two cousins (residential and commercial) appear to be similar from the standpoint of a lay person, yet as any seasoned investor or broker will tell you, they could not be more different. The easiest way I can explain this difference is that a residential investment transaction tends to rely more on investor/buyer emotion and ability to move a tenant in quickly, whereby the commercial real estate transaction is closer in similarity to any large business transaction with several moving parts and people.
We have highlighted 5 advantages and 5 disadvantages when purchasing a commercial property over residential.
The advantages:
- Longer Leases and Peace of Mind
Unlike a residential rental agreement, which might be as short as 6 or 12 months, commercial leases can be anywhere from 3 to 20 years in length. And, they are typically secured by bank guarantees when/if default occurs.
- Commercial Tenants are Responsible for Minor Repairs
Within the majority of commercial leases signed today, tenants are footing the bill for repairs within leased spaces. As a bonus, they need the property to be in the best possible condition for clients and employees, as the bar is set high. So, not only do commercial tenants save you time and money, in some cases they will improve and add value to your property.
- Strong Return on Investment
Commercial property returns on invested capital is typically somewhere between 7% and 10% after expenses. Deductible items are also attractive because of favorable depreciation rates.
- Regular Rent Increases
Commercial rents are reviewed every year and increased in line with inflation, or by 4%, whichever is more. Many commercial leases that we see are offered at a certain price for the first year, but escalate by 25% within a 5 year period.
- Tenant Mix
To reduce the risk of being stuck with excess space in the building, most educated investors maintain a blend of stable long-term leases and short-term, placing less secure tenants on higher rent.
The disadvantages:
- Finding Replacement Tenants Can Take Time
For the most part, it’s a much larger decision to move an entire business than it is to move into a new rental home. So, while commercial tenants can be with you for many years, it can take many months to find a replacement to fill space. Investors will need to allocate resources for this expectation.
- Prices are Typically Higher
Generally, commercial real estate is a larger purchase than residential, especially in prime locations.
- Larger Down-Payments Required
To protect against the risk of losing a large tenant and not having that replacement, lenders will require the investor to place a larger down-payment.
- Risk of Loss
Although most commercial tenants are responsible for repairs in their space, the larger items are the responsibility of the investor. It is also common for the building to have ongoing maintenance and security issues so hiring a management company becomes an absolute must and is factored into most property investments.
- Barrier to Entry
Banks and other lenders are more rigorous in their lending process for a commercial property investment than for residential and building owners are more selective when choosing a tenant.
Please contact Robert S. “Bob” Lowery for any commercial real estate related questions.
Leasing Vs. Owning
Given my history, whereby I have reaped greater financial reward by representing buyers and sellers, in my honest opinion, leasing is typically a better option for most business owners – rather than owning. Sometimes, local situations may justify owning commercial real estate. We all know stories about the business owner/operator whose real estate was in the path of growth and was bought out by a developer for substantial profit. We also know the purchaser who ran into a very timely deal when competition in the marketplace was thin. The romance of owning real estate can be compelling and hindsight is 20-20. But, in other circumstances, real estate proves cumbersome and has inhibited the growth of many core business models. A lesson can be learned from large corporations who rarely choose to own their buildings. Often they sell, or sell and leaseback their real estate to get it off their books. Here are a few reasons why leasing is typically better than owning:
- Leasing affords more flexibility to expand or contract. It’s a less complicated to renegotiate lease terms than have to dispose of a building in a soft market.
- Buying and selling commercial real estate is a matter of market timing that professionals are better than any novices. As we have witnessed, those new to the game often buy at the top of the market or sell at the bottom.
- Business owners often make commercial real estate buying or selling decisions based upon the needs of their business rather than the real estate market. One of the two will suffer.
- The business may be neglected because of real estate management distractions. Real estate management is best performed by professionals.
- Selling a business may be more difficult if the buyer is required to buy the real estate as part of the transaction. The seller is negotiating on two fronts and one will have a diminished outcome.
- Precious working capital is tied up in financing the real estate.
- You can only write off interest expense (not amortization) on a mortgage while lease payments are 100% deductible.
- You can end up with phantom, taxable income when selling a depreciated building.
- You should be spending your time shaping your business and not dealing with the day-to-day maintenance and management headaches of owning a building. Let the landlord do it.
- Income-to-asset based ratios are improved by not owning real estate, which may help public companies compare better to others in the same industry.
As a reminder, whether leasing, buying or performing a sale-leaseback, our team services office and medical real estate owners and users in the Greater Houston area. At your convenience, please provide a simple phone call to our office to determine how we may improve your position in the local marketplace.
The ideas and opinions discussed in this article are subject to change, especially given the proposed FASB/IASB rules.
10 Lease Renewal Reminders
1. The most important consideration any tenant may do is to hire a tenant representation broker, especially when relocation is an option. Working for both landlords and tenants, I can say for certain that having a tenant broker can provide a tremendous advantage during a renewal negotiation. Just by placing a tenant broker on your team can increase the leverage in your lease negotiation. In the Greater Houston market, it is traditional for the landlord to pay your commercial broker’s fees, so it is imperative to be informed about the commercial real estate marketplace through brokerage representation.
2. Second – begin early. You do not want to subject your company to a position where it is down to the wire and the terms will not be favorable. Most tenants neglect this point and end up signing a poor deal only because they were not familiar with the process and had no time to negotiate a better transaction. “Early” can even mean over nine months or greater in advance of the lease termination, especially for those spaces that are large, and whose lease documents were written previously in a complex manner.
3. On that note, review other options. Even if you are not considering other space, you should always keep your eye on other space. Have a number two and three pick for that “just in case” scenario. Performing proper due-diligence to see what the competition is offering for incentives is our job as tenant representatives. And, you will be surprised at what we can uncover. The simple fact that you have options lets your landlord know that you have alternatives.
4. Negotiations do not take place casually in your office or at showings. Even the largest companies make this mistake. Stop talking and start listening for negotiable items. So often, emotions and ego enter into negotiations and they will typically lead you to nowhere. Remember, these are business decisions that need to be handled behind the closed doors of your business operation.
5. Always have you landlord present you with the first proposal. This not only will lay the groundwork for a possible counter proposal by your team, but it will reveal what position the owner is angling.
6. Once you get your proposal from the landlord, always counter. Even if it looks like a great deal with everything you want, 99% of the time you can get more if you simply counter. In addition, you should always ask for more than what you want, that is, if you have a leg to stand on. Typically a back and forth takes place, so do not begin by asking for too little.
7. You should not put stock into how long you have been at your current property, how many times you have paid your rent on time, or how little you have called to report problems at your space. None of these items will present you with a better deal.
8. You should avoid having side conversations or direct conversations with your landlord or their representative. This can hinder your tenant representative’s negotiation power and can muddy the waters if things were promised in a side-conversation that your representative was not privy.
9. Your business should try and keep only those who need to know on a “need to know” basis. Rumors spread fast, especially among co-workers. You do not need the latest updates on your renewal negotiations to be made aware. In the end, this will hurt your negotiation efforts.
10. Lastly, I always recommend to my clients that you seek the assistance of a real estate lawyer before signing any legally binding documents. A good time to bring in an attorney is often when a lease document is produced for the tenant’s review. It is the attorney’s job to find the glitches, problem areas, and other questionable sections in the often lengthy lease document, that may not be in your best interests. If there are any, they should produce alternatives to the lease section language or suggest deleting it all together.
Is Your Building a Class A, B or C?
The most misunderstood description of commercial buildings also happens to also be the most overused description of commercial buildings, which is especially true for office and medical. If you are not familiar with the building designations (Class A, B or C), than pay attention to the next time the owner, broker or developer speak about the property. Most often you will hear the building oversold as a Class A, the highest classification of the grouping. But, the truth is that the majority of the buildings built over the last 5-10 years could easily be classified as a B building and possibly a C.
There are no true definitive, distinctive ground rules set a regulatory commission regarding classifications, thus the oversell of the building and property’s amenities to the public. But to make an simple correlation, think of a building like you would a car.
- Is there enough demand to keep the price of the vehicle higher than the market average?
- Is the vehicle engineering above par, on par, or below market?
- Does the manufacturer have a good track record, or do they spit out product cheaper and cheaper each and every year?
- What does the user say of the car?
- If the car is under warranty, how is the customer service when brought to the shop?
- Can anybody, everybody, use this type of car or do they establish a lengthy track record, celebrity or rapport in their respective business to obtain?
- Is the interior built-out using the lastest and most recent technology, as well as design strategy?
- Is the car using the most efficient and safety measures?
- Are the majority of the amenities built-in or tacked on…
…and so on.
The Square Feet blog, to which I am a subscriber, posts…
- Class A. These buildings represent the highest quality buildings in their market. They are generally the best looking buildings with the best construction, and possess high quality building infrastructure. Class A buildings also are well-located, have good access, and are professionally managed. As a result of this, they attract the highest quality tenants and also command the highest rents.
- Class B. This is the next notch down. Class B buildings are generally a little older, but still have good quality management and tenants. Often times, value-added investors target these buildings as investments since well-located Class B buildings can be returned to their Class A glory through renovation such as facade and common area improvements. Class B buildings should generally not be functionally obsolete and should be well maintained.
- Class C. The lowest classification of office building and space is Class C. These are older buildings (usually more than 20), and are located in less desirable areas and are in need of extensive renovation. Architecturally, these buildings are the least desirable and building infrastructure and technology is out-dated. As a result, Class C buildings have the lowest rental rates, take the longest time to lease, and are often targeted as re-development opportunities.
And additional consideration for…
- HVAC Capacity
- Elevator quantity and speed
- Backup Power
- Security and life safety infrastructure
- Ceiling heights
- Floor load capacity
- Location
- Access (freeway, public transportation)
- Parking
- Construction, Common Area Improvements
- Nearby and/or on-site amenities (dry cleaning, restaurants, ATM, etc.)
…in which I could supplement with…
- LEED designation
- Insurance requirements
- Interior build
- Maintenance
So, next time you hear a real estate representative tell you that a building is Class A, you now have the armament to dispute or corroborate.
Investing in Medical Real Estate
Most serious commercial property investors are well aware that multifamily apartment buildings are leading the commercial sector recovery.
Right now, multifamily transactions are well on pace to eclipse the 2009 and 2010 by the first half of 2011. Remember though, medical offices are the best commercial investment for the future. Hedge funds, insurance companies, pension funds, and other highly capitalized investment groups have been moving into large medical centers for several years. Smaller investors, have made similar moves into single office practices and small medical complexes.
There are several reasons that medical real estate is on the short list of commercial investments to be closely analyzed. It’s difficult to single out an individual reason, as there are many. However, the fact that a growing number of baby boomers will be entering their 60′s cannot be denied. The medical needs of baby boomers are about to explode.
On average, 7,000 new beneficiaries will be added to Medicare every day during 2011. That adds up to 2.5 million in a single year. Over the next 20 years, the Medicare program will expand to cover approximately 70 million people, compared to 42.5 million in 2008 (source: AARP). As baby boomers continue to age, the senior care market will also expand into assisted living and nursing home care until 2030 and beyond.
Another reason that medical facilities would make a solid addition to your commercial property portfolio is the Obama administration’s Health Care Reform package. Whether you agree with it or not, when fully implemented, the program is expected to provide medical coverage to an additional 32 million people as well as improve coverage for those with limited coverage or those that have reached their life term limit, which has been abolished. The 32 million becoming eligible for health insurance will no longer have to be treated at hospital emergency rooms for non-emergency conditions. They will receive preventive medical services and other treatments from private practitioners operating out of private medical offices.
Finally, I would like to the caliber of tenants that lease medical facilities. These are not a couple of high school hot rod enthusiasts partnering up to start an automotive performance parts store without any business background. The kind of tenants that go out of business as soon as their SBA loans run dry. Instead, doctors are highly trained and educated individuals. These motivated tenants attend university and intern programs for between 11 and 16 years before beginning their medical practice. That shows serious tenacity and dedication towards their profession. Once they start their medical practice, they lease or buy hundreds of thousands of dollars of expensive and specialized equipment. These are not people that are going to give up their practice on a whim and leave you with a difficult to fill vacancy.
The bottom line is that if you don’t want to be a landlord of a multifamily apartment building and you don’t want to deal with overflowing toilets or a noisy neighbors in the middle of the night, there are quite attractive investment opportunities in medical real estate. I would encourage you to understand how health care functions and make medical facilities part of your ongoing investment interest.
Real Estate Investing: Residential or Commercial?
Most commercial real estate investors begin their investment careers by purchasing residential or multi-family homes. A number of influential figures of Houston’s commercial landscape dabbled for a period of time.
Here’s how it begins…
The strategy: Residential investors typically lease their homes to stabilize the asset in the hopes of making their riches on the back end or via long-term investment. While most residential investors usually go in with the best attitude, they quickly realize that leasing the home is a “necessary evil” for its long-term benefit: price appreciation. In some cases, residential investors have been willing to accept negative cash flow for this ultimate prize. They do the “toilets, tenants, trash”, or other variation of this commonly used phrase, with the belief that tenant demand & supply of dollars will remain constant and home prices will go up. This is the typical story of the residential investor of the past.
Fast forward to today. The challenge of leasing and managing a home is much greater, while home prices are falling. The old formula for residential investment no longer computes. At best, residential investors are hoping to break even. Different from a couple years ago when everything was going up! As a result, our representation group has welcomed a new group of investors; those that are shifting their investment strategy closer to the core of business and money creation – commercial real estate. Leaving residential investment for it’s older cousin.
These investors are looking into commercial property, such as single-tenant retail and office, shopping centers, small medical office buildings, and industrial are searching for more stability, less management, and more potential upside due to current depressed prices. Let’s explore this paradigm shift…
- Income: Commercial real estate generates far greater income when compared to residential properties in the Greater Houston area. For an example: Rental income on a commercial property can range, but we are locating properties with $300,000 of net operating income (income – expenses) for a $2 Million Property. To equate to residential, the owner would have to rent out at that 15,000 SF home for around $35,000 a month. We say, if you can achieve this on a long-term basis, stay in residential.
- NNN Leases: NNN-leased commercial properties remove a host of issues that are typically provided by a landlord in residential investment. The worst fear for any tenant is deferred maintenance. Your tenant pays good rent to receive poor, inadequate, or no service whatsoever. Furthermore, deferred maintenance will have a negative impact on the property appeal and value. In NNN-leased commercial properties, the tenant has control over the condition of the property. In this type of lease, a landlord and tenant agree on a price and terms, as standard. The difference is in a provision that states that a tenant will pay their pro-rata share of the expenses for the upkeep of the property, among other things. While that means lower base rent to the landlord when compared to a “no expenses to tenant” clause, it includes that the tenant is responsible for the building’s appearance.
- Reliable Tenants: Tenants of commercial buildings are stronger – financially. If you don’t believe that, ask them. As commercial brokers, that is exactly what we do. Unlike residential, financial statements and tax documents are requested to view a company’s past, present and potential future. The greater the company’s history, the greater the lease longevity, the greater the stability and appeal of the property. And, based on commercial real estate’s long-term lease arrangements, if a tenant leaves a property, they will continue to pay rent. If the tenant cannot pay, they will need to replace themselves (via the use of a brokerage house or in-house leasing) with another tenant. This is called subleasing. So, no sweat to the landlord, as they are not responsible for re-tenanting, unlike residential.
- Long-term Leases: On average, businesses usually settle into one location for 7 years. Tenants, such as Walgreens, stay for 20. Residential agreements last around 1 year.
- Management: Much simpler in commercial real estate. For an easy example, which would your choose? 10-tenant shopping center or 10 homes spread throughout the city? Management intensive investment is a waste of your time and your money.
Others….
- Tax Ease
- Credit Impact
- Pride of Ownership
This article was republished from Robert S. “Bob” Lowery’s original post, “8 Reasons to Leave Residential for Commercial…Now!”
