Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/306204
25 May | June | 2014 CCIM.com the competing demands for capital, more hospitals are holding onto their cash and relying on investments by publicly traded real estate investment trusts, private equity partnerships, and institutional lend- ers. T ird-party investors are also becoming more comfortable with new ambulatory facilities being of campus as the investment returns have become almost identical to on-campus projects for facilities with high-percentage hospital tenancy. With respect to new projects, what trends are you seeing in design layout and size? T ere has been a drastic increase in the relative size of new facilities that are of ering more-comprehensive medical services under one roof. Several years ago 40,000 to 50,000 square feet was the standard size for a hospital-sponsored MOB, and it usually opened with about 85 percent occupancy — mostly third-party physicians in a multiple tenant building — and f lled up within three to four years. Today, we are seeing projects that are 120,000 to 150,000 sf with about the same occupancy on opening day. But now, all of that space is under one master lease for hospital services and hospital- employed physicians. Certainly the design team is very instrumental in the architec- tural process, but from a real estate perspective, this new model af ects more than the design. It af ects the land analysis and selec- tion process for the land broker, the capital stack and underwriting analysis for the investment adviser, and the selection of the general contractor for bonding purposes for the development manager. Site selection and land acquisition are critical success factors today because healthcare location is much more retail. Analytical models are used to measure demographic opportunities for a health system to pick up market share. T e newer, larger model also tends to consolidate and integrate many more medical specialties into one location. T is consolida- tion creates an opportunity to reposition the older clinics that were vacated by the physicians moving into the new facility. T ere is little doubt that more existing facilities will become obsolete in the near future as the growing number of hospital-employed physicians are asked to relocate. Can you elaborate on the physician-sponsored development opportunities? Many of the development projects that we see are new projects involving a multispecialty group of physicians with all of the doctors under the same group. But sometimes it is a group of doctors from dif erent practices that are coming together into a common real estate project. When they are coming from dif erent practices, one form of ownership that is quite common is the condominium struc- ture where there is separate, fee-simple ownership of each of ce in the building by the dif erent doctors. When it is a single group of doctors, we are seeing the formation of a special purpose entity — usually a limited liability corporation — with the individual doctors having ownership on a pro-rata basis and the partnership owns the entire building. T e partnership retains control of the project, including the sourcing of project debt, and usually has a board comprised of physicians that rely upon a third-party property management f rm to run the property operations, management, and accounting. In recent years, we have seen more disparate groups coming together and of ering dif erent services such as a large primary care practice in the building with an allergist, dermatologist, and a "time- share" of ce where a cardiologist and rheumatologist may rotate through on a regular set schedule. T is model does two things: It helps disperse a broader mix of services out into submarkets and it is a very cost-ef ective real estate strategy because the doctors are able to spread the facility overhead. What's the difference between developing for a physician group and developing for a hospital? Overall, for any MOB, the development cycle is probably going to be a little longer than other non-medical projects. When the client is a hospital, there are many stakeholders that will be involved, and receiving their input is critical to the success of the project. T is will include hospital administration, clinicians, physicians, and support personnel like the infection control department that monitors air quality during construction. Physician-sponsored projects are typi- cally somewhat faster for the development cycle, but the f nancing strategy may be a little more complicated than the hospital-spon- sored project if the f nancing involves multiple physician/owners. But I think it is important, as a developer, to allow physician own- ership either through a real estate partnership or some other struc- ture if the medical tenants want to be investors. Facility decisions are long-term commitments and sometimes they would prefer to pay rent to themselves. Is leasing medical real estate much different than leasing general offi ce space? Yes, it is fundamentally dif erent. Medical of ce space can be much more expensive to build out than general of ce, so the real estate adviser to the landlord and investors needs to factor this into the investment analysis. T e tenant may elect to make an equity invest- ment in the tenant improvements if the allowance in the lease does not cover all of the costs, thereby holding down the landlord's com- mitment. But the adviser should model a full capital contribution scenario in the cash f ow pro forma and review the impact of the tenant's contribution with the landlord/investor. A second dif erence is that, depending on the parties to the lease, the transaction could be covered by federal regulations that provide certain restrictions on the transaction economics. Simply put, there is an inherent requirement that a transaction between a hospital and a physician be at fair market value for the rental rate and that other terms be commercially reasonable. (See sidebar.) 2 2 - 2 5 F - M e d i c a l O f f i c e - G h e e n . i n d d 2 5 22-25 F-Medical Office-Gheen.indd 25 4 / 2 9 / 1 4 2 : 4 7 P M 4/29/14 2:47 PM