Best practices augmented by analytical evidence drives the decision-making process behind clinical care delivery. That same informed approach should apply to the complex decisions surrounding healthcare real estate.
For physicians, the decision to build, buy, lease or sell their practice space should only be made after carefully weighing long-term goals, needs, market forces and economic realities. What makes perfect sense for one group might be the wrong solution for another practice. Turning to medical real estate experts with their specialized knowledge helps physicians sort out the available options to make the best decision to meet a practice's unique needs.
Lease or Own
"There are so many physicians who subconsciously believe owning a building is the next evolution in their practice. Sometimes they are absolutely right - it's a fantastic opportunity - but sometimes it's not," said Rich Campbell, CCIM, principal with Birmingham-based Veritas Medical Real Estate Advisors. "Our physician clients hire us to offer clean, unbiased advice," he continued.
Campbell said the decision to lease vs. own comes with many considerations from location concerns to operational structuring. One of the most important factors, he noted, is to consider total occupancy cost. "The practice always needs to be considered as an occupancy cost," he explained. "Even if you buy a building, the practice is always going to be a tenant."
To get a true picture of financial obligation, Campbell said that occupancy cost should be factored into each scenario being considered - lease, purchase, build or buy. "The cost can vary drastically ... not only city-to-city and market-to-market but also street-to-street," he pointed out. "You have to know how the total occupancy cost in any location affects the operations of the practice."
One factor that shouldn't play into the decision of whether or not to pursue ownership is emotion. "It's just another investment opportunity that needs to be looked at completely separately from your practice," Campbell counseled. That investment, he continued, doesn't happen in a vacuum so other financial options also should be vetted to decide the best use of each physician dollars - whether that means investing those dollars in a building, technology or equipment upgrades or the stock market.
Buying & Selling
"For a variety of reasons, including low interest rates, medical office building transactions have more than tripled during this decade," said Chip Conk, CEO of Montecito Medical Real Estate, which is headquartered in Nashville. He added his company anticipated this trend, and it has fueled Montecito Medical's growth into the nation's largest privately held acquirer of medical office real estate. "In addition, we pioneered a model that enables sellers to reinvest in the property - getting a second bite of the apple, if you will - and also to co-invest with Montecito in additional properties we acquire. The attractiveness of that model has played a big role in our growth."
Conk noted an office building is typically the most valuable asset a physician practice owns. "Individual physician partners within the practice often have invested a meaningful amount of their net worth in the property," he continued. "Selling the property and then leasing it back unlocks capital that the practice can invest to meet a variety of needs - from staying abreast of medical technology, expanding their services or operations, implementing electronic medical records, recruiting new physicians or covering rising salary and insurance costs - all of which ultimately can contribute to improved patient care and satisfaction and the sustained health of the practice group."
Montecito Medical's investment vehicle, dubbed the Provider Real Estate Partnership (PREP) program, offers physicians in a practice group the opportunity to reinvest a portion of the proceeds from the sale back into the medical office building. Conk said the investment is typically 10 to 15 percent. "As investors, they enjoy significant tax advantages for the duration of time we maintain ownership of the property," he explained. "They also receive quarterly distributions from the partnership based on the amount they invest. Then, when Montecito sells the property, they receive a return on their investment."
Conk added many of the same dynamics and principles also apply to hospitals and health systems. "Hospitals in the U.S. collectively own more than $1 trillion in real estate," he pointed out. "The economic power of those assets is greatly underutilized. Selling office properties that they own enables them to redirect capital for new technologies, improvements in care delivery and even new outpatient facilities such as ambulatory surgery centers."
When deciding what direction to take when it comes to owning, selling and leasing, Conk said it was important to start with an accurate picture of what the real estate is worth and then look at the strategy for addressing important needs ... whether that is paying down debt or expanding technology or services.
He noted the model used by Montecito helps address the individual needs and interests of physicians, allowing younger providers who might not be able to afford an ownership stake or those simply not interested in the investment to continue practicing without being required to put up personal funds. "Reinvesting in the property is a decision for individual physicians in the group."
Campbell said when purchasing or divesting real estate as a group, it's critically important to have addressed buy/sell provisions on the front end. What happens to a physician partner's shares of the facility when he or she retires or dies? Do they pass to a spouse or children? If so, do those non-physician owners have input on facility decisions? "It gets really convoluted so you have to be really careful with your operational policies, as well," he said of thinking about the long-term investment.
Reaching Out to a Specialist
Campbell and Conk said partnering with a healthcare real estate specialist is important when considering facility needs.
Campbell laughingly noted he recently had to re-read a particular lease amendment "about 17 times" to fully understand what was being required. "There's no way a client could understand it," he said. Campbell added, "Never hesitate to make a call and ask for help."
Because the process is complex and often takes time, he encouraged physicians to reach out well before a lease is up to begin considering other options. "If it's too early, folks will tell you," Campbell said. More often, he added, physicians wait too long to reach out, which crunches the timeline on an important decision.
"Physicians oftentimes have needs that don't necessarily require a real estate transaction," said Campbell, noting it's one of the reasons Veritas offers advisory services.
Campbell said a general commercial real estate broker without medical real estate experience is always happy to help close a transaction, which is their job. However, he continued, "The broker is not trained, nor is he motivated, to step back and ask if this is right for your practice." Campbell added it's important to find someone who understands the intricacies of medical practices and the total cost of occupancy. Sometimes, he pointed out, "You need someone willing to say, 'You don't need to do this deal.'"
Conk noted the same principles apply to physicians considering selling the properties they own. "For some physician groups, it might make more sense to refinance their property rather than sell," he noted. "But we can help them get a clearer picture of their options so they can come to the decision they think is best for them." He added that practices mulling over the possibility of a sale should consider timing and the state of today's market. "Right now, values for medical office real estate are at historic highs, and interest rates remain low ... it won't always be that way," Conk pointed out.
Buy, sell, build or lease - the decision always stays with the practice but having all the facts enables providers to make an informed decision that is best for individual physicians, the practice and patients. "Go in with eyes wide open," Campbell concluded.
Veritas Medical Real Estate Advisors
Montecito Medical Real Estate