In the end, the circumstances must dictate the real estate decisions. Hospital systems often discover a hodgepodge of real estate projects supporting the business of delivery: some owned, some leased, some financed with tax-exempt debt and some capitalized with precious cash.
In assessing the validity of your real estate strategy, consider the following factors:
- In the last decade, outsourcing the capitalization and development of real estate projects is based on a few factors:
- Capital creation to redeploy into core business
- Avoidance of regulatory scrutiny in leasing owned-space to independent physicians
- Management distraction in owning and developing space
- Proposed lease accounting changes and their impact
- Balance sheet impact by rating agencies (who control access and price of tax-exempt debt)
- Implementation of Patient Protection and Affordable Care Act
- Reimbursement cuts, new patient demand, operating margin pressure, physician integration, market consolidation
- Access to capital markets and diversification of financing sources for capital plan
- Tax-exempt debt market
- Commercial banks, life companies, pension funds, commercial mortage-backed security, private equity
- Real Estate Capital Markets (e.g. REITs, Net Lease, Equity Joint Ventures)
– $3.4 trillion in commercial real estate loan refinancing requirements between 2011-2014
- Interest Rate Environment
In today’s capital market environment, CFOs with the foresight to take advantage of low interest rates will likely be rewarded, as we may not see them again for another decade. Several strategies to take advantage of the medical real estate capital markets are the following:
- Assess any owned real estate on balance sheet relative to revised strategic plan
- Analyze any current hospital leases of significant space that occupy majority of building relative to financing strategy
- In situations where significant hospital space is needed, ask for a purchase proposal and lease proposal from building owner
In light of the changing environment in healthcare, we recommend taking a fresh look at your system’s real estate strategy. Real estate is a significant capital expenditure in the healthcare delivery business, and failure to include it into the mix as you reshape your business model will likely have a detrimental impact on your competitive position. Additionally, the state of the market in the real estate capital markets drives this conversation, so we recommend choosing a real estate advisory firm that specializes in medical real estate capital markets.
Brian Jenkins has two decades of real estate and healthcare experience, and previously served as equity investment officer of medical real estate for the National Electrical Benefit Fund. He has acted as primary development partner on more than 250,000 square feet of outpatient medical office projects. Before that, Mr. Jenkins was a healthcare attorney at McGuire Woods, participating in hospital M&A transactions. Learn more about Savills.
