Tag Archives: physician

Healthcare Facility Leasing FAQs

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We are commonly asked questions that pertain to concerns which are healthcare industry-specific, yet we can always find a way these issues relate back to the contractual obligations of real estate commitments.  As a courtesy to those that are seeking guidance explicitly for when the rubber meets the road (real estate meets healthcare), we have provided some fairly uncomplicated scenarios that will likely exist in a health facility lease transaction.

Landlord Vs. HIPAA
Commonly, a lease agreement will allow the landlord entry onto the premises for the purposes of inspections and repairs.  HIPAA provides guidelines to protect medical records and personal health information.  A lease within a medical facility will typically provide that the landlord may not enter an exam room with patients present.  Further, most leases will indicate that any location within the spatial premises leased by the tenant, if entered, will have the potential to breach privacy or confidentiality of patients or medical records.

Tenant Vs. Medical Waste
A medical lease agreement will typically include a provision that prohibits a tenant from using or storing any hazardous materials on the property without the consent of the landlord.  If the tenant will require the use of such materials, the lease will commonly indicate that the materials commonly used in concert with the permitted use of the leased premises will be allowed, as long as the materials are stored in compliance with strict regulatory commitments.

As for the disposal of hazardous waste, leases commonly provide that the landlord will be responsible for janitorial services, but will require the tenant to arrange for its own disposal of medical waste.

Stark Law Vs. Landlord/Tenant
It is important to consider if a relationship exists that has the ability to breach Stark laws, or potentially, Texas law.  The Anti-Kickback Statute deems it a felony to offer, tender or receive fee, or compensation, if the payment is determined to influence referrals for patients.  So, it is important for a lease to exist and to comply with the following:

  1. Be in Writing
  2. Identify the Premises
  3. Term of Lease at Least 1 Year
  4. If Interval (Time Share, etc), Lease to Specify Schedule and Rent for Interval
  5. Rent must be Fair Market Value

Permitted Use Vs. Technology
A lease agreement will include a permitted use provision that restricts the use of the space to certain business operations.  Yet, a tenant wants to maintain flexibility, especially with the newly minted technological changes that are required to adapt and compete within a specialty.  So, a tenant wants the provision to be as broad as possible, while a landlord seeks to restrict the use to improve tenant mix and provide other tenants with exclusive rights.  While a rare bone of contention today, technology will eventually force tenants to seek very general, or highly specific opportunities.

Building Vs. Equipment
The medical industry has some of the most cumbersome and demanding equipment.  It requires specific attention when placing on the premises of a multi-story structure.  Thus, some buildings have special provisions for weight distribution or electrical capacity.  The location and installation of necessary landlord and tenant is commonly addressed in lease.

Improvements Vs Landlord/Tenant
The lease agreement will provide how each party will become responsible for design, materials and installation of the tenant’s improvements.  While a highly negotiable item within the lease, it should determine the control of implementation and ownership of improvements.

Lease Vs. Physician Practice
A greater number of leases are requiring personal guaranties from key members within a physician group for the purposes of adherence to contractual obligations.  With more physicians defecting to hospitals, merging practices, or even leaving certain jurisdictions, we are noticing considerations for physicians to be released from guaranty if the leave the practice, while including those that enter.  Other limits include guaranty amounts proportionate to ownership share of practice.

These are abbreviated responses to a few common inquiries pertaining to medical real estate, none of which constitute legal advice.  Please make sure to contact Robert S. “Bob” Lowery for guidance with your healthcare real estate decisions.

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.

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.  

Alternative Ways of Purchasing Medical Real Estate

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The most common ways of purchasing medical real estate is through direct purchase, participation in a real estate partnership vehicle with other investors [such as general partnerships, limited partnerships, various corporate entities, and, in Texas, limited liability companies (LLCs), as well as investments in real estate securities such as Real Estate Investment Trusts (REITs).

Alternative Ways of Purchasing Medical Real Estate

Section 1031

Real estate can be acquired via tax-deferred exchanges under Section 1031 of the IRS Code, in which a client “trades” one investment property for another, deferring the taxes due on the sale of the exchanged property. This allows the doctor to reinvest “pre-tax” dollars in another real estate investment, potentially benefiting from appreciation on the larger investment. The physician may also exchange one larger property into two or several smaller properties and pay tax consequences for each one as those properties are sold as cash is needed.

Tax and Risk Management

The way a physician takes ownership of real estate will affect the tax treatment of income and profit. For example, having an LLC-owned investment property will provide him/her with the same protection from individual liability as a corporation, while allowing him/her to have much more favorable tax treatment. Real estate can be bought directly by purchasing it in the following manners:

1. Paying cash,

2. Paying a cash down payment and acquiring a loan,

3. Paying cash to the seller who is financing, or

4. Financing the purchase by using either new real estate financing, seller financing, or credit borrowing when a lender is willing to loan solely on the strength of, and the financial statement of, the borrower, or a combination of these.

Trading and Secured Loans

Real estate also can be acquired by trading other valuable assets, sometimes in combination with financing. A client can obtain interests in real estate by making loans on real estate assets that are secured by a deed of trust or a mortgage. Another method is to invest as a participating lender. In such an instance the borrower needs to agree to provide equity kickers or participation in cash flow whereby the lender (doctor) can benefit directly from the real estate performance.

Equity Participation Plans

With an equity participation, the physician-investor can profit or gain from the sale of the property, sometimes in a preferential manner (i.e., the money the doctor loaned is returned, with interest, and a predetermined percentage or portion of the gain is given to the owner/borrower before distribution of the sales proceeds). Similarly, the doctor can participate in annual cash flow, giving a fixed or a fluctuating amount depending on the performance of the investment. As a lender, many of the benefits of ownership of real estate are not available to the MD, but the doctor should have a security interest in the property and no direct responsibility for operation of the real estate investment. Also, if possible, the borrower should provide additional guarantees of performance. The borrower could do this by providing additional security, such as the deeds of trust on the borrower’s house, other real-estate, and the acquired property; bank letters of credit; or guarantees of performance from people other than the party to whom the money is originally loaned.

Assessment

If a physician-investor is considering acquiring or lending on real estate, s/he should check with his professional advisors, including accountants and attorneys, before proceeding. The doctor’s attorney should review any contracts or agreements before the client signs anything. The physician also will need a due diligence review to ascertain both the relative values of the real estate on which money is being loaned and the borrower’s track record and background.

Two Hospital-Physician Leasing Scenarios

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1.  The Unpleasant Surprise:

The hospital performs a routine audit of physician leases on file.  The audit reveals…

Nearly two years of Consumer Price Index (CPI) increases have not been collected.  A cardiovascular group that occupies 10,000 square feet of space within the building is to be informed that $5 per rentable square feet was undercharged.

Because this outcome is required to be enforced due to language in lease, the physician group is out $100,000.

2.  The Holdover Gap:

The hospital owns a medical office building on campus and has a 4 year term with a podiatrist group that is now expired.  Currently, the lease is 3 months past its original term limit and the group continues to make payments equal to prior months during the lease term.

Lease states holdover rent should be 150% until the tenant surrender premises or sign a new lease.

The tenant is obligated to pay additional 50% for 10,000 square feet over three months and sign a lease that commences in the future.

We will continue to add these in an effort to improve the real estate relationship between hospital and physician.  So, stay in touch!

Remember, according to Stark Law the lease must comply with the following:

  • Written Agreement, signed by the parties and specifies the premises;
  • Term of at least one year;
  • Space is for business purpose and may include pro-rata common area expenses;
  • Rent is set in advance and consistent with fair market value;
  • Rent is not shaped in a manner that takes into account the volume or value of referrals;
  • Agreement is commercially reasonable;
  • Holdover is month-to-month for up to 180 days following an agreement that is over one year.

Comprehension of a Medical Lease Contract

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Statement:  After auditing countless medical leases through our firm, its CPA and attorney partners, we want to make fully aware the consequences of any real estate agreement that is executed (signed).

On behalf of the associates of this firm, the declaration above is about as harsh and opinionated that we, as advisors, can be without crossing the line whereby disassociating ourselves in our mission to coordinate the healthcare real estate markets; physician, hospital, investor, owners.

But, speaking from the perspective of a landlord (lessor), the largest impediment that a landlord sees is the lack of commitment and foresight from the lessee’s principal founders with regards to their own organization’s goals and objectives.  The landlord has to take into account that the necessary financial due diligence has been performed and the organization is prepared for the legal ramifications if ANY PART of the contract is broken.  Thus, it is essential when provided any document that requires signature that it is taken to someone else for further review.  Take it to your spouse, your associates, your financial partners, your attorney, your accountant, your shareholders.  If your firm is fortunate enough to have real estate representation that will not charge you an arm or leg, take it to your broker.

Typically, the mistakes that we see from physicians (especially independents) is that of discounting the lease instrument and the level of sophistication and comprehension necessary to interpret this contractually-binding obligation effectively.  As an example, if there are 10 items that are conveniently written to control one party of a transaction, does the other party know all 10, or just 5, or 2?  Remember, it is already popular culture that a physician is not a savvy businessperson, which does not speak of their collaborative efforts.  All kidding aside, it is of paramount importance to fully comprehending any contract or, at the least, obtain verbal or written interpretation through fiduciary relationships.

Now, for the really bad news.

The field of experts that truly understand medical contracts and can convey its purpose, as well as its fine print requirements to your organization, are few.  Because most healthcare real estate real estate experts understand this, they will typically work for a 5 to 10 percentage premium over the traditional brokerage firm’s marketed commission or consulting fee.  You may be fortunate to locate a highly skilled healthcare unit, but beware the temptation to accept their services for both sides of any transaction for reasons that I do not need to explain further.

To summarize, our readers should be acutely aware of the needs of their organization first, prior to contracting with any commercial or medical real estate agreement.  They should also make sure they have brokerage or counsel that can perform the necessary tasks associated with YOUR transaction, which should be compensated by their firm.  Until then, we can keep combing over the mistakes, some of which will cost our clients bankruptcy, until lessens are learned.

This article was written by Robert S. “Bob” Lowery, Managing Partner with MREA | Medical Real Estate Advisors.

The Different Types of Ambulatory Surgery Centers

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As commercial real estate professionals, with a strong, unique focus in the medical arena, we are involved in communication with several types of medical real estate owners and operators in the Greater Houston area on a routine basis.  Through our network of partners, vendors, physicians and hospital systems, we have had the privilege of a thorough comprehension of how the Ambulatory Surgery Center functions, thus creating significant value upon acquisition, disposition, and JV opportunities. We would like to dedicate this post to those that would like to increase their basic understanding of the Ambulatory Surgery Center (ASC).

First, the the ASC Safe Harbor regulations identify four different types of Ambulatory Surgery Center entities that may meet safe harbor protection.  These four types of ASC’s include Surgeon-Owned ASC’s, Single-Specialty ASC’s, Multi-Specialty ASC’s and Hospital-Physician ASC’s.  Each category has separate requirements that must be met in addition to the threshold requirements that are applicable to all ASC’s to meet the safe harbor.

Surgeon-Owned ASC’s

Owners of a surgeon-owned ASC may only include general surgeons or surgeons in the same surgical specialty.  The surgeons must be in a position to make referrals to the ASC and to perform surgical procedures on the patients that they refer.  Each surgeon owner must meet a variety of criteria, one of which is an income test for the previous fiscal year or 12-month period.  Each surgeon must derive at least one-third of their total medical practice income from performing surgical procedures that require an ASC or Hospital surgical setting, not location.  This structure does not require all procedures to be performed in the ASC in which they are an investor.  However, when a surgeon’s annual revenues are calculated, at least one-third of the physicians medical practice revenues, must come from the surgeon’s performance of procedures that are listed, as Medicare covered services in an ASC.  The surgical services may be performed in an ASC or in a hospital outpatient department and are not limited to the procedures actually performed in the surgeon-owned ASC.

Single-Specialty ASC’s

This safe harbor allows physicians within the same specialty, whether or not they are surgeons, to invest in an ASC to which they refer their patients and perform surgical procedures on patients in the ASC.  Group practices composed of a single-specialty may also own as well as refer to their own ASC.

Multi-Specialty ASC’s

This safe harbor permits physicians, who are in a variety of specialties, to form an ASC and make referrals to the ASC.  Physician investors in multi-specialty ASC must meet the one-third practice revenue test described above in relation to surgeon-owned ASC’s.  However, unlike surgeon-owned ASC’s, physicians in multi-specialty ASCs must actually perform one-third of their ASC procedures in the ASC in which they hold an financial interest.  This is commonly referred to as the “one-third/one-third” test.  The reasoning behind this requirement is that in this category of ASC, the physicians are actually using the ASC as an extension of their medical office and this does not create significant incentives to generate referral revenues for other investors.  Group practices, composed exclusively of physicians who meet the one-third/one-third test, may also invest in multi-specialty ASC’s.

Hospital/Physician ASCs

Under this safe harbor, a hospital, or several hospitals, must be an investor in the Ambulatory Surgery Center.  The remainder of the investors must be physicians, or group practices, who meet the requirements for a surgeon-owned ASC. There are a number of additional requirements that must be met by physician/hospital ASCs.

If you are an investor or owner, operator or interested party, please provide a call to Robert S. “Bob” Lowery for assistance for Greater Houston Ambulatory Surgery Centers.