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101’s - Understanding Different Types of Property

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Health Care Properties

Health Care Properties 101

Once you’ve decided to venture into the realm of commercial real estate, the next decision that may keep you up at night is, “What type of commercial properties should I invest in?” Anyone who follows demographic trends might find the health care sector an attractive option, and they’d have good reason. Health care has become one of the hottest areas for investment with opportunities ranging from biomedical stocks to nursing homes. Literally every city and perhaps most neighborhoods need some level of localized health care facility. Find the right real estate opportunity and you’ll have a winner with high-quality professional tenants and steady cash flow, all in an industry practically immune to traditional economic business cycles.

The Paradigm Shift

As our aging population continues to overload the health care system, the industry has become increasingly savvy at cutting costs. Over the past 20 to 25 years, there has been a trend away from lengthy hospital stays for many procedures and a move towards “alternative site care” or ASCs, due in part to a push from insurance companies to reduce costs. Technology has also provided opportunities for the medical practitioners to perform less invasive procedures, decreasing the need for inpatient care while increasing the need for outpatient services. Gone are the days where one needed to visit the local community hospital for surgery of any type. More and more private practices are utilizing their own facilities for most outpatient procedures, including laser surgeries, imaging services and physical therapy.
This trend has provided today’s commercial real estate investors with new opportunities. Demand for facilities from urgent care centers to full-service orthopedic facilities continues to build. Knowing your market and meeting this demand can provide opportunities to reap great rewards.

The Risk

It is important to realize that most medical facilities are special purpose buildings and are outfitted and furnished much differently than for example, a lawyer’s office. A typical medical office is defined by a large waiting room, windowed reception area, and as many examining rooms as possible equipped with sinks and numerous cabinets. Changing the layout to suit a lawyer or other office use would require a major interior remodeling. Conversely, if you purchase a non-medical building for conversion to a health care operation, you can expect to pay for some major plumbing work in addition to the normal tenant fit out.

Planning

When investing in a health care facility, planning may be your most important phase of the project. First and foremost, you should determine what your role will be going forward -- real estate developer, building manager, or merely a tenant in your own facility. If you are a real estate investment novice or just a medical professional looking for your own facility, there are full-service real estate management companies specializing in medical facilities that can handle everything from analyzing the historical finances of an existing facility to marketing and strategy consulting services or even contractor selection if you are building a new facility. It is highly recommended that you seek out at least some of these services on your first investment. Some others services offered include:

• Physician Alignment Strategies
• Market Analysis
• Operational Analysis
• Space Programming
• Site Analysis
• Capital/Ownership Analysis
• Architect Selection
• Project Construction Supervision
• Facility Management

Many of these firms have experienced health care consultants who understand current trends in the industry. For example, why build an imaging facility with a dark room when most modern practices are transitioning to film-less digital systems?

Along these same lines, don’t assume if you are buying an existing building that it will meet all of today’s modern health care industry needs. In fact, when deciding whether to build or buy, obsolescence may be an important factor in your choice. Some older buildings may not be worth the renovation costs you’ll incur to bring them into the 21st century.

Zoning and Other Regulatory Issues

As part of your planning process, one cannot underestimate the importance of researching the inevitable minefield of zoning laws and regulatory agencies you’ll need to maneuver through to complete your project. From handicap accessibility to hazardous waste disposal, no stone should be left unturned when considering site specifications.

Local ordinances will provide typical “nuisance” issues such as restrictions on building height, fire codes and the like. But also keep in mind that some zoning laws can actually work to your advantage, from eliminating excessive competition to keeping the neighborhood from spiraling into an undesirable location. Do your research here and it can pay great returns in the future. Spend some time doing research at the local planning commission to see what the longer-term goals of the community are as well.

When considering the implications of state and federal regulations, you’ll find yourself dealing with laws that were usually passed to protect the consumer rather than the aesthetic affect it might have on the community. Again, research and planning is critical here too. What will be the facility’s primary service? For example, long-term care facilities and nursing homes may be regulated on a completely different level than your average dentist office complex -- especially once federal reimbursement such as Medicare comes into play. Once the government begins sending checks to you or other tenants in the building you can expect a much higher level of scrutiny than someone operating a plastic surgery operation funded primarily by individual patients.

There are also a few accreditation programs that can assist you with this process, the most well-known being JCAHO (Joint Commission on Accreditation of Health Care Organizations) and HFAP (Health Care Facilities Accreditation Program). These programs evaluate everything from a facilities’ medical standard operating procedures to building code adherence. These accreditations are critical in the health care industry and it would behoove an investor to spend some time learning how site specifications may affect the tenant’s ability to become accredited.

Market Research

Another important phase of the planning process is to perform your due diligence when it comes to market research. What are the current industry trends? Are there similar facilities you can inspect? What is the competition like in the area where you are looking?

Most importantly, unless you’ve pre-leased all of your space, you probably need to determine what the current vacancy rates and average rent are for medical space in your area. Tenants will be the lifeblood of the operation so be sure to spend enough time to thoroughly understand your local market.

Financing

Obtaining financing for health care real estate is similar to that of any other type of commercial financing arrangement with the primary considerations being income and cash flow. However, health care has one significant difference from other industries that underwriters take into account, specifically the “source” of the income. The primary source of a health care operation’s income (with a few exceptions) is from Medicare, Medicaid, or health insurance companies. The underwriter will consider this as an extra risk. Any new laws or changes in existing ones that may alter the thresholds for reimbursement are perceived as a significant risk to cash flow. The result is that you can expect to pay more for financing than your average commercial loan rate.

If you have done your homework, understand your market and have a well thought out plan, then investing in health care real estate can be just the right prescription for a successful investment.