Tag Archives: technology

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.

PWC/ULI: Texas Buoyed by the Three US Employment Drivers

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One of the most popular reads for the commercial real estate industry, the PWC/ULI Emerging Trends for Real Estate 2012 suggests Houston is very well positioned to capture investment dollars with strong medical, increasing technology sector and high oil prices.

Interesting excerpts:

1. Trophy and Medical Offices. Gateway class A office space always commands attention, but interest flags elsewhere, especially in the suburbs. Expect slim pickings when dipping into second-tier cities, and forget about office parks. Niche-sector, medical office space gains favor: “The tenants are recessionproof,” and “the health care act will help spur demand as more hospital procedures move into doctors’ offices.” Over the longer term, a bulging senior citizen population promises to expand needs for various outpatient facilities and clinics.

2. If real estate is “all about jobs,” then head to the few cities where employment growth actually occurs. Besides the gateways, the current front-runners rely on energy, high tech,
and health care–related industries, as well as universities and government offices. Austin becomes a current favorite because it claims all these attributes. Bigger Texas cities—Houston and Dallas—also sustain investor interest because of their energy backbones.

3. Pockets of hiring occur in certain industries and parts of the country:

The strong energy sector, driven by current ■■ high oil prices, helps Texas cities and some out-of-the-way places like NorthDakota (“not exactly a happening real estate market,” says an interviewee).

■■ Technology boosts northern California, the Seattle area, Boston, and smaller high-tech markets like Austin and Raleigh-Durham.

■■ Health care expands everywhere. The steadily graying population needs more medical attention, but work skews to lower-paid aides or highly skilled doctors, nurses, and
technicians.

4. Until recent energy industry gains, hot growth cities Dallas and Houston consistently registered lagging investment ratings. As long as oil and gas prices remain high, these markets will continue to make survey inroads, but investors should remain wary of historic volatility resulting from a lack of geographic and zoning barriers to restrain development.

5. Health care trends—rising older demographics and skyrocketing costs—make medical office space a logical play, but this niche sector with limited opportunities investing
in smaller buildings could easily be overwhelmed by capital.

Office Space Types: Open & Closed

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Office space can refer to a variety of parts that encompass the whole, of which the the most common are provided here: meeting spaces integrated into the office environment, reception, office support spaces such as work rooms, storage rooms, file rooms, mail rooms, copier areas, service units/coffee bar, and coat storage integrated into the office environment, and telephone and communications equipment rooms located in tenant suites containing tenant equipment.

Spaces and features that may be classified as a separate space type or covered as a special feature include:

  • Millwork other than service unit/coffee bar and coat storage
  • Meeting spaces and conference rooms that include special lighting systems, acoustical treatment, moveable partitions, millwork, or A/V systems
  • Secure storage, strong rooms, vaults, and hardened partitions located within the office suite
  • Large filing, library, or storage areas with concentrated floor loads
  • Enclosed spaces requiring acoustical separation higher than 40 STC, partitions to structure with acoustical insulation, and ductwork sound baffling
  • Specialized window treatments (blackout shades, plantation shutters, motorized fabric draperies, etc.), interior windows, glass block partitions, and glazed doors
  • Humidity, pathogenic, or hypoallergenic air treatment systems
  • Upgrade or changes to standard items such as plaster or vaulted ceilings, specialty lighting, or upgraded ceiling tiles
  • Private toilets, elevators, or staircases

Office space plans can be arranged in several scenarios, including: 100% closed office (fully closed), 80%-20% (open), 20%-80% (closed), and 100% open office (fully open).

Space Attributes

Over 50 percent of workers in the U.S. spend the workday in office buildings and spaces, and employers today are increasingly bearing the responsibility of providing a quality workspace. Thus office space of choice is commonly a flexible environment that integrates technology, comfort and safety, and energy efficiency to provide a productive, cost-effective, and aesthetically pleasing working environment. Typical features of office space types include the list of applicable design objectives elements as outlined below.

Functional / Operational

  • Integrated Technology: Begin the design process with a thorough understanding of the technological requirements of the space, including anticipated future needs.
  • Occupancy: Office space types fall into the B2 occupancy classification, with sprinklered construction. The GSA acoustical class is C1 for enclosed offices and Class C2 for open offices.

Productivity

  • Flexibility: The office space type is durable and adaptable, and will typically include features such as a raised floor system for the distribution of critical services (power, voice, data, and HVAC) and mobile workstations to accommodate changes in employee, equipment, and storage needs over time.

Safety and Security

  • Comfort and Safety: The health, safety and comfort of employees is of paramount concern to employers. For this reason, the office space type should be designed with increased fresh air ventilation, the specification of non-toxic and low-polluting materials and indoor air quality monitoring. Non-quantifiable benefits such as access to windows and view, and opportunities for interaction should also be taken into account.

Sustainable

  • Energy Efficiency: As energy costs increase with higher reliance on technology, strategies such as the specification of high-efficiency lighting and lighting controls; the application of daylighting; the use of occupancy sensors; and the installation of high-efficiency HVAC equipment should be considered.

Example Programs

Two sample building programs and plans are provided, for ‘fully closed’ and ‘fully open’ offices. They include minor file and library reference areas, conference space, break space with service unit/coffee bar, and reception area.

“Fully” Closed Office

Description
Tenant Occupiable Areas		 Qty. SF Each Space Req’d. Sum Actual SF Tenant Usable Factor Tenant USF
Office Spaces

12,170
    Enclosed Executive Offices

2

225

450
    Enclosed Large Offices

52

150

7,800
    Enclosed Small Offices

26

120

3,120
    Open Large Office

0

140

0
    Open Small Office

0

100

0
    Open Workstations

9

80

720
    Reception Desk

1

80

80
Support Spaces

3,134
    Reception Seating

1

200

200
    ”Unimproved” Conference
Large

1

600

600
    Conference Small

3

150

450
    Informal Breakout Centers

0

80

0
    Printer/Copier/Fax Center

3

60

180
    Break Room Service Unit

1

340

340
    Information Reference Centers

2

150

300
    Supply Room

4

40

160
    Work Room

1

200

200
    File Area

2

144

288
    Documents Room

1

240

240
    Server Room

1

176

176
    Tenant Suite

15,304

15,304

1.35

20,592

“Fully” Open Office

Description
Tenant Occupiable Areas		 Qty. SF Each Space Req’d. Sum Actual SF Tenant Usable Factor Tenant USF
Office Spaces

10,600
    Enclosed Executive Offices

0

180

0
    Enclosed Large Offices

0

150

0
    Enclosed Small Offices

0

120

0
    Open Large Office

4

180

720
    Open Small Office

15

120

1,800
    Open Workstations

100

80

8,000
    Reception Desk

1

80

80
Support Spaces

30%

4,614
    Reception Seating

1

120

120
    ”Unimproved” Conference
Large

1

600

600
    Conference Small

5

150

750
    Informal Breakout Centers

12

80

960
    Printer/Copier/Fax Center

3

80

240
    Break Room Service Unit

1

340

340
    Information Reference Centers

3

180

540
    Supply Center

4

40

160
    Work Center

1

200

200
    File Area

2

144

288
    Documents Room

1

240

240
    Server Room

1

176

176
    Tenant Suite

15,214

15,214

1.35

20,572

What is CAD? 2D? 3D?

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…Computer-Aided Design.

Prior to 3D’s adoption in the mid 1990’s, 2D CAD technology was the optimum method for computer-aided design and analysis. Today, 2D CAD technology has already reached to its full drawing efficiency and all advantages have long ago been absorbed. 3D CAD approach is a completely different technology, capable of providing far more wide-ranging benefits.

Whereas 2D CAD reduces time scales to some extent, the end product is flat to the screen, similar to the building floor plan.  3D CAD goes much further, directly supporting the whole product development cycle, speeding up every activity and increasing the quality of design by removing many sources of inaccuracy and error. The accurate 3D solid geometric model with all engineering information attached to it, becomes a complete digital product model for purposes of design review, analysis and in a form immediately usable by all planning processes. When allied to product data management and the Internet, 3D solid modeling provides an entire foundation for product information flow across the collaborative engineering process.

Early 2D drawings provide an indirect and incomplete picture of a product or system, subject to interpretation and error. Taking off data in correct form for analysis, simulation and manufacturing processes requires additional effort and is subject to mistakes. Sending drawings digitally to partners, customers and suppliers is fine, but the potential for errors and misinterpretation are enormous.

Various 3D display collections have been used for today’s architectural cognizance, which turning designs as simple as a sketch and manipulating them into a visual, practical reality. Additionally, this software can be the designs, to be broadcast on light video for a visual representation of the mechanics of the design. These visualizations can be used to pattern an assortment of buildings such as commercial, medical, institutional, hospitality, auditoriums, as well as skyscrapers.

By using this technique, it is possible to simply daydream your interior to the designs on your screen.  Architects use customized building models and make changes as per your requirements. You can additionally correct designs for influence of lighting, wall colors, tree arrangements, parking shades, among other things.

3D displaying is a beautiful routine and can be purely spectacular, especially if you are aware of its capabilities.

If you would like to speak to an architect regarding a potential design or require more input regarding CAD systems, we are happy to provide our best local contacts.

Is Your Building a Class A, B or C?

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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.