Transformation is the major theme driving the business of healthcare delivery in the United States, so it is not surprising that the medical office building (MOB) sector is also seeing fundamental changes. In one foundational shift, the Centers for Medicare and Medicaid Services (CMS) reduced physician reimbursements for certain outpatient services delivered in off-campus hospital facilities.
In a November 2 announcement, the CMS explained, medical practices that perform certain outpatient services in off-campus hospital settings will receive 20 percent less in reimbursements. The move was part of an ongoing shift in the way reimbursements for such services are funded under Section 603 of the Bipartisan Budget Act of 2015.
“CMS believes that this adjustment will provide a more level playing field for competition between hospitals and physician practices by promoting greater payment alignment,” according to a statement from the agency.
That decision is not likely to impact demand for MOBs, experts say. Health care providers are still looking to provide patient services in outpatient facilities as one strategy to stabilize their margins, says Chris Bodnar, executive vice president of the investment properties division at real estate services firm CBRE and a co-lead of the CBRE healthcare capital markets group.
“Either way, health care systems will continue to drive outpatient services,” Bodnar says. “It is a more cost-effective way to deliver services for the hospital and the patient.”
The vacancy rate at MOBs decreased by a modest 10 basis points per quarter between the first quarter of 2010 and the first quarter of 2017, according to the 2017 U.S. Medical Office and Health Care Report from CBRE. Overall, the vacancy rate averaged 8.0 percent in the first quarter of this year, a nearly 300 basis points decline from the first quarter of 2010. Also, in 22 of the 29 quarters before CBRE issued its report, the research firm found that absorption had exceeded the addition of new space.
That consistent decline in vacancy is characteristic of the MOB sector, and has insulated it from the volatility that can be so disruptive to other sectors. But that steadiness also has a flipside, which is flat rent growth. CBRE found that overall asking rents for medical properties it tracks have only moved between $22 and $23 per sq. ft.
MOB tenants tend to set down roots and remain in the same space for long periods of time, mainly to stay close to their patient bases and supporting services, according to CBRE. Also, given the amount of mergers and acquisitions among healthcare groups in recent years, smaller medical office spaces designed for individual and small practices have become obsolete. Larger medical associations require more space, according to Bodnar.
“There is rental growth being driven in newer facilities to accommodate the way healthcare is being delivered in today’s market,” he says.
Liquidity continues to flow in from newer investors, and cap rates are still falling. By the second quarter of 2017, cap rates for off-campus properties averaged 6.3 percent, barely distinguishable from the 6.1 percent cap rates on on-campus, or hospital, properties, according to data from Revista, a medical real estate research firm headquartered in Arnold, Md.
“A lot of people are looking to jump in on new opportunities. That is driving down cap rates,” says Hilda F. Martin, principal of Revista. “Investors want the deals that have not been announced.”
As motivated investors, particularly private equity firms, build the relationships that give them the inside track on attractive deals and step up efforts to make more acquisitions, they are moving into the sector with the backing of commercial banks. One lender in the sector, BMO Financial Group, is increasing its participation and doing so in a more organized way, according to Imran Javaid, managing director of BMO Harris Healthcare Real Estate Finance.
“Hospital systems realize that they cannot be at the hospitals and have the patients come to them,” says Javaid. “That is what’s driving the development of these buildings. They are going out to where people live and work.”
According to Revista, about 20.8 million sq. ft. of MOB space should be delivered to the market in 2017. The amount of completed projects has increased steadily, but incrementally, every year since 2014. Experts expect that to continue in the near term, and not just because the aging population will likely result in higher numbers of patients using the facilities in the years to come. Very little of any space in the sector is speculative, according to Javaid.
“We are not seeing speculative development,” Javaid says. “Absorption has outpaced new supply for a long time.”
With the day-to-day stress of making a medical office building run, a very basic, crucial consideration might be slipping by, unnoticed: what to do with the aging building? Neglecting wear and tear could mean even a successful property will see its returns diminish. It might be time to consider the sale-leaseback writes Transwestern SVP of healthcare real estate Brent Barnes in this EXCLUSIVE commentary for GlobeSt.com.
The views expressed are the author’s own.
Hospital administrators are often vexed by the older medical office buildings (MOBs) they own, unsure how to address the properties’ increasingly outdated appearance, perhaps exacerbated by deferred maintenance. Were the structures in pristine condition, the owner would most likely have already monetized the assets through a partial or full sale-leaseback, a transaction type that grew popular in healthcare real estate over the past decade.
In a sale-leaseback, an outside landlord purchases the property and leases it back to the seller. This generates sale proceeds for the seller while the buyer gains a fully occupied building with a rental income stream guaranteed for the duration of the lease. MOB sale-leasebacks have averaged a 7.0 percent capitalization rate for the new landlord, or a 7.0 percent annual rate of return on the acquisition price.
Sale-leaseback buyers prefer buildings that can command market rents with little up-front investment beyond the acquisition price. Cosmetic flaws such as outdated lobbies, restrooms and corridors, a lack of modern technological infrastructure and similar drawbacks can impede a landlord’s ability to demand market rents. Correcting these problems would increase the owner’s cost and diminish overall returns.
This seems to limit the options for hospital systems with older, owned buildings requiring renovation, and further delay will compound the problem. Healthcare providers know that patients – especially those in the millennial generation – expect to receive treatment in attractive buildings with bright, welcoming interiors. At some point, failure to renovate will drive patients and tenants to competing providers that offer more modern facilities.
Let’s Make a Deal
The hospital owner in this position has a viable option to retrofit the building and monetize the asset through a sale-leaseback. Here’s how:
Design a realistic renovation that will put the building on par with competing properties, able to attract tenants and charge market rent. Then prepare a detailed cost estimate and timeline for the work. A healthcare real estate advisor can assemble and direct a team to complete this process, working with an architect, building contractor and other experts.
Price to sell.
Rather than setting an asking price at the market’s current capitalization rate of approximately 7.0 percent, structure a transaction in which the buyer purchases at an 8 percent cap and require the buyer to invest that money into the needed capital improvements. For example, an owner might drop a building’s asking price from $30 million to $25 million. That $5 million margin will enable the buyer to make the required asset upgrades and still achieve a healthy overall return.
Structure and close the deal.
After marketing the offering as a package contingent on the renovation and capital improvement plan and selecting a buyer, be sure to include language in the transaction documents binding the new owner to complete the improvements according to schedule. For example, the buyer may commit to upgrade restrooms and corridors within 24 months and renovate the lobby the following year.
Including a detailed renovation plan in the offering and selecting a capable buyer to execute the improvements can turn a tired MOB into a modern, patient-centric care center that helps both the hospital system and the new landlord meet their objectives.
A Fort Lauderdale commercial real estate firm sold a development site in Dania Beach to a medical wholesaler for $7.5 million, property records show.
Q-Med Corporation, a wholesale distributor of medical, surgical, dental and laboratory products, paid $18 per square foot for 9-acre site at 2281 Griffin Road.
The seller is a company controlled by the Halliday Group, a Fort Lauderdale-based commercial real estate company. Records show it purchased the property in 2005 for $3.1 million, which means the firm more than doubled its investment.
Q-Med operates out of a 104,000-square-foot distribution center in Fort Lauderdale at 3801 Southwest 30th Avenue, where it supplies more than 9,000 products to distributors and retailers worldwide, according to its website.
A number of new developments are planned in Dania Beach, including Kimco Realty Corp.’s $1 billion Dania Pointe, a shopping and entertainment center under construction just east of Interstate 95, and Dev Motwani’s 300-unit million multifamily project planned for the corner of Dania Beach Boulevard and Federal Highway.
Source: The Real Deal
JFK Medical Center acquired a neighboring medical office building from HCP Inc. for $11.25 million.
The hospital, part of HCA Healthcare (NYSE: HCA), already owned the 2.2-acre site at 5503 S. Congress Ave.
But the 30,745-square-foot building on the property was owned by the Irvine, California-based medical office REIT (NYSE: HCP), which had a ground lease on the property.
The office building was developed in 1993 by Atlantis Medical Center, which sold the underlying land without the building for $1.44 million in 1998 to JFK Medical Center. At that time, the company signed a 99-year ground lease with the hospital. Atlantis Medical Center later became part of HCP through a merger.
The recent sale price of the building equated to $366 per square foot.
In a current online listing, the building has 2,889 square feet available for lease at $20 per square foot.
Florida health care officials are offering $50 million to federally qualified health centers to help offset the costs of care they will provide to poor residents in the coming year.
It’s more money than the centers — which usually provide primary care in communities — have ever been offered under the state’s long-running Low Income Pool, or LIP, program.
But there’s a catch: To tap into it, the federally qualified health centers have to agree to a change that could impact $137 million in “wrap around” funding that’s currently paid to them.
Wrap around payments cover the difference between what managed care plans pay health clinics and the rate the federal government says the clinics should be paid for services. If a managed care plan doesn’t pay a clinic the amount the federal government has set, the state makes up the difference.
Under the special terms and conditions included in a recently approved Medicaid “waiver,” federally qualified health centers that don’t agree to accept the policy change can’t tap into this year’s LIP funding, which also includes money for Florida’s hospitals.
“This is a big change for us compared to all the years we have been participating in LIP,” Andrew Behrman, president and CEO of the Florida Association of Community Health Centers, told The News Service of Florida. “And we don’t want to blindly accept the special terms and conditions that put all the reimbursement through managed-care plans. We’ve had quite a few incidents where we’ve had issues with getting paid.”
Michael Gervasi is the CEO of Florida Community Health Centers, Inc., which operates 12 centers in six counties around Lake Okeechobee. Gervasi said his centers have contracts with about a half dozen managed care plans that participate in the statewide Medicaid managed-care program. He said he has about $400,000 in open, unpaid claims.
“Most of them, I think, are good people trying to do the right thing, but I think efficiency gets in the way,” Gervasi said of his dealings with managed-care plans, which are mostly comprised of health maintenance organizations, or HMOs.
Gervasi said managed-care plans have denied claims for a number reasons, but he primarily blamed the credentialing process. Credentialing is used to evaluate the qualifications, practice histories and educational backgrounds of doctors.
Credentialing can be delayed if a health plan has a difficult time confirming a physician’s educational background, which, Gervasi said, is bothersome, but legitimate. But there are times when the credentialing process is slowed down because it “falls through the cracks” when there’s a change of staff at an HMO.
Though he refused to disclose the name of the plan, one of the managed care plans his centers contracts with has $200,000 in unpaid claims stemming from services provided over the last 18 months, he said.
“I tell my staff every Friday, go to the AHCA (Agency for Health Care Administration) complaint line and make a complaint,” he said.
Armed with experiences like Gervasi’s, Behrman initially shared his reservations with AHCA when he was told in June about the proposed funding changes.
Then the requirement appeared in the special terms and conditions that were part of the Medicaid 1115 waiver, which reauthorized Florida’s Medicaid managed-care program. Moreover, the waiver also reauthorized the Low Income Pool, which uses local contributions to draw down matching federal Medicaid dollars. LIP funding is used to help compensate health care providers for charity care they provide.
Though the federal government authorized up to $1.5 billion in LIP spending annually for the next five years, a top state Medicaid official said a preliminary projection indicates about $790.4 million is expected to be available in the first year, including $50 million for the federally qualified health centers.
Behrman shared his concerns with the media over the summer, and the issue has risen to the attention of the Florida Senate, where it was discussed in a health-care budget committee two weeks ago and will be considered by the full Appropriations Committee this week.
Meanwhile, Behrman met with state Medicaid officials Beth Kidder and Tom Wallace for 90 minutes on Monday to discuss ways to accomplish what the agency wants but to, at the same time, give health clinics assurances they will receive full payment.
“We are working on a solution to try to ameliorate the concerns of the community health centers and to provide us with protections we need to make sure the managed-care companies follow through (on payments),” he said, adding he told Medicaid officials that they can’t “just throw us out there and expect the managed-care companies are going to go ahead and make the payments and there not be any issues.”
To accomplish that, Behrman wants the agency to include protections for the clinics in the contracts it signs with Medicaid HMOs. Comfort language could include a requirement that managed-care plans pay for covered services to Medicaid patients that are provided by Medicaid-participating physicians. It also could include timelines for health plans to complete the credentialing process.
He said Monday’s meeting with Kidder and Wallace was productive and that they will meet again next week to continue to discuss his members’ concerns.
Agency for Health Care Administration spokeswoman Shelisha Coleman wouldn’t comment on the tenor of the meeting but said in a prepared statement that the state “will continue working with everyone to ensure that we have the best models to provide care for families.”
Behrman said he hopes that if the language is included in the contracts between the state and the managed-care plans, the 48 federally qualified health centers he represents will agree to the change. But at the end of the day, he said, each health center will have the ability to decide whether it wants to participate in LIP.
Gervasi said the 12 federally qualified health centers in his organization will qualify for $600,000 under the state’s proposed LIP model. Nevertheless, his health centers may end up walking away from the program this year, he said.
“My (chief financial officer) has already said to me if the managed care companies are responsible for my wrap-around payments, we’re going to lose more money than the $600,000.
The medical office housing the Weston Outpatient Surgery Center was sold for $11.53 million.
Weston Pavilion Partners, managed by Saul R. Epstein in Coconut Creek, sold the 32,559-square-foot building at 2229 N. Commerce Parkway in Weston to Weston Surgery SPE, an affiliate of Nashville-based Montecito Medical Real Estate. Capital One provided an $8.5 million mortgage to the buyer.
The price equated to $354 per square foot.
The medical office building was built on the 3.1-acre site in 1999. It last traded for $6.7 million in 2004.
Since 2005, Montecito Medical Real Estate has acquired a national portfolio of nearly 80 medical office properties valued at more than $1.5 billion, according to its website.
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