Hospitals often view their medical office building (MOB) investments differently than doctors that own their medical facilities. Doctors can build equity owning MOB’s during their career, with an expectation to cash out equity near retirement by either selling to a practice partner based on a market appraisal, or by structuring a Sale/Leaseback transaction with an investor to create a higher net present value of the MOB asset.
Hospitals typically have more complex issues to assess. Most have an investment portfolio consisting primarily of equities. Some hospitals consider MOB’s to be part of their investment portfolio. Other health care systems do not, and view their MOBs strictly from an accounting standpoint as an operating asset. A hospital system typically owns buildings they occupy with other owned MOBs rented to doctors and other health care providers.
Owner-Occupied MOBs
Hospital-occupied medical office buildings are good candidates for sale/leaseback transactions to monetize value in cases where the hospital has limited access to capital for property improvements, expansion or to free up cash to fund operations. However, it is not always necessary for health care providers to monetize owner/occupied MOB’s if they have strong credit with good access to capital at reasonable rates.
Tenant-Occupied MOBs
Hospital-owned, tenant occupied MOB’s have recently become a higher priority to sell for several reasons. MOBs are investments that tie up hospital capital that could more effectively be utilized on more strategic investments. Vacant MOB spaces provide zero-to-negative returns on this capital. Due to soft office market conditions across the US, many hospitals have increased vacancies with the opportunity cost of this capital tied up in their MOBs.
The estimated value of MOB holdings is added to the health care provider’s investment portfolio which hospitals use to analyze “MOB holdings percentage” of total investment. When the ratio of “MOB Holdings” as a percentage of total portfolio assets increases, portfolio risk also increases from an investment perspective due to the lack of geographic and industry diversification inherent in MOBs. This is especially true if patient volumes decrease as is the case currently in many markets. There are significant concerns today when effects of our uncertain economic conditions combine with uncertainty posed by health care reform. Special attention to safe diversification of the hospital’s overall investment portfolio is warranted.
Sale/leaseback of select hospital occupied buildings and/or straight sales of tenant occupied buildings can provide that asset diversification and improve the cash positions at a time when cash can be utilized to take advantage of more strategic opportunities.
An example of this strategy can be seen in the transaction where Carle Foundation Hospital sold its 92,000 sf MOB in Bloomington, IL for $24.25 million or $264 per square foot at an 8.5% cap rate, according to Robert Tonkinson, former CFO of the Carle Foundation based in Urbana, Illinois.
New Statutes: Stark Law
Two new statutes recently enacted by Congress will bring greater governmental scrutiny and action. Enforcement of these rules will cause headaches for hospitals and will likely motivate many to consider exiting commercial real estate or forming strategic partnerships with MOB real estate specialists. The “ 2009 Fraud Enforcement and Recovery Act” (FERA) and the “Patient Protection and Affordable Care Act” (PPACA) will have an impact on a hospital’s decision to self-disclose Stark Law violations related to hospital-physician leasing arrangements.
The impact of these rules on MOBs could be significant and cause many health care firms to sell their MOBs to third parties, if only to avoid the potential risks. Hospitals that wish to retain their MOB interests may consider outsourcing MOB management to commercial MOB specialists as an added layer of insulation from Stark Law liability. The most transparent and savvy way out of this newly heightened government scrutiny, however, may be to monetize MOB’s with sales or sale/master leasebacks. This avoids the inherent potential conflict posed by a doctor that refers patients to a hospital, and later asks the same hospital for six months free rent to sign a new lease. In this situation, the negotiation is driven by Federal Health Care Regulations with heavy fines awarded to hospitals that don’t live within these strict rules that are designed to protect patients by elimination of waste, fraud and unfairness within the federal healthcare reimbursement system. When a doctor asks a private investor MOB owner for six months free rent to sign that same new lease next to the hospital, it becomes a simple business decision driven by market forces, without the negative baggage of perceived conflicts of provider-owned MOBs.
MOB Values Up
The Deaconess Clinic of Evansville, Indiana sold five MOB’s totaling 260,500 sf for $45.26 million or $174 psf at an 8.25% cap rate in March 2010 using a 14-year term master lease back. According to Real Capital Analytics, the average annual sale price for MOB sales in major cities across the country of $5 million and up, has risensteadily from$140 psfin 2002 … to $218 psf at the top of the overheated market in 2006 … to $226 psf by the end of the second quarter of 2010.
This is not a misprint. We are actually getting higher prices today for large MOBs in major cities than we did at the peak of the real estate cycle just a few years ago. So what’s the catch? Unlike other segments of commercial real estate that have seen falling values, there is exceptional demand today supporting stronger-than-ever values for large MOB’s with strong-credit tenants on long term leases in major US markets.
But what about smaller MOB deals in smaller markets? I personally brokered the sale of 53 MOBs with an average sale price of $1,031,000 per transaction, located in tertiary markets in Florida, North Carolina, South Carolina, Georgia and Illinois from 2002 through the second quarter of 2010. I created the nearby bar charts to compare annual MOB big sales (i.e. $5+ million) in big markets (reported by Real Capital Analytics) to my smaller MOB sales (i.e. $1 million) in small markets over the past nine years. From 2002 through 2005, there was an average MOB price difference of only $20 psf between the big deals/big markets and the small deals/small markets.
Over that 2002-2005 period, cap rates for large transactions averaged only 0.6% lower than the small deal/small market prices. But the gap started to widen from 2006 thru 2008, when the big MOB deals averaged $30 psf higher and the cap rates for big deals compressed to average 1.5% lower than the cap rates for the small deals.
There was a striking difference from 2009 through Q2-2010 as big deals in big markets pulled away and averaged $80 psf higher than the small deals in small markets, with the cap rate differential moderating to only 1.1 percent. This condition over the last two years reveals an interesting trend. The more sophisticated investors (like hospital systems) that own big MOB’s in big cities realized that in addition to the other good reasons to sell mentioned previously, the top of market to sell for highest price is actually now, so they are selling.
Doctors predominately own smaller MOBs in smaller markets and are somewhat isolated from the realities of the current favorable market condition for MOBs. They have tended to remain on the sidelines during these last two years believing their MOB values are down like the rest of the real estate market, when in fact the opposite is true.
The majority of small MOB sales over the last two years were mostly distressed, vacant properties that sold at very low prices, creating the disparity of $80 psf between large ($5+ million) and small ($1 million) recorded MOB transactions. This should change, however, in 2011as the gap between large and small MOB deals narrows when doctors in smaller markets realize MOBs have escaped the declines of other segments and that now is one of the best times ever to sell medical office space at strong valuations.
/wp-content/uploads/2020/08/florida-medical-space-logo.png00ADMIN/wp-content/uploads/2020/08/florida-medical-space-logo.pngADMIN2018-11-07 21:48:562018-11-07 21:48:56Hospital Views On Medical Office Buildings
Florida Hospital leaders broke ground last week on an emergency department that will expand the health care system’s network to better serve residents of Oviedo and surrounding communities in Seminole County.
The emergency department will have 24 patient rooms (including two pediatric-friendly rooms to make ER visits less stressful for young patients); respiratory therapy; diagnostic imaging, including CT scans, X-ray and ultrasound; and a full-service laboratory.
The facility, slated to open in fall 2019, will be staffed by a comprehensive clinical team including board-certified emergency physicians and emergency nurses.
“We are excited to add this ER to our growing network of care,” said Jennifer Wandersleben, CEO of Florida Hospital’s Winter Park Memorial Hospital. “Many Oviedo residents already entrust physicians within the Florida Hospital network with their health care, and we are making it easier to access our emergency services. As we transition to AdventHealth, our mission is to make our patients feel whole — by treating the mind, body and spirit — in a setting that’s close to home.”
The approximately 19,000-square-foot facility, which will be known as AdventHealth Oviedo ER, will be located at 8100 Red Bug Lake Road.
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A Boynton Beach developer has proposed to build a modern, three-story medical office and retail building in a lot that has been vacant since 2005.
Bradley Miller, president of Miller Land Planning, presented the plan to city commissioners, asking to construct the offices on the northeast corner of Riviera Drive and Federal Highway. The empty lot used to house an IHOP restaurant until it was demolished in 2005. That same year a project was proposed to have a mixed-use building for offices, retail and eight town homes but was nixed in the midst of the real-estate collapse, according to documents.
The site will have a 32-space parking lot behind the building, 13 off-street parking spaces, new sidewalks, a covered pedestrian area and open stairwells at both ends of the building. Medical offices will take up the second and third floors while retail shops and a 900-foot art museum will take up the first floor, Miller said.
Dr. Joseph Gretzula, a local dermatologist who Miller said has been renting space in Boynton Beach “for a long period of time,” is planning to move into the site.
“He’s been wanting to have his own place and thankfully he’s staying here in the city and using this opportunity to move his business there,” Miller said. “This keeps an existing business here and it’s a nice development area for a space that’s been here for a while.”
Gretzula plans to rent out a retail space to sell “high-end lotions and creams” and is also providing all of the art for the small museum, Miller said. The museum will be in the lobby area and open not just to patients but also to the public.
“People can go inside and view the collection during office hours,” Miller said. “It will also viewable from the windows at night.”
A unique addition to the building will be a rooftop terrace with space for a meditation area and yoga. Miller stressed the terrace will only be used for medical workers and patients — not for parties and other social events.
“It was best described to me being like a patio at your home — that if you want to get out and use outside space it’s there for you.” Miller said.
The project would bring job creation, Miller said. The location also makes it easily accessible to residents in adjacent neighborhoods, such as single-family homes on Rivera Drive and Snug Harbor Gardens condominiums, who are seeking medical services.
A resident who lives next to the proposed site, Linda Morton, said she is concerned with increased traffic on Riviera Drive, which is already a tight road for residents.
“Right now our street barely accommodates two cars going down the street,” Morton said.
Miller assured Morton the proposed off-site parking spaces and future construction will not tamper with traffic and “will be within the public right of way.”
Final approval for the site will be made at the Nov. 7 meeting.
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While there has been a surge in construction of new healthcare facilities over the last few years, many providers are looking at renovations instead.
“Every dollar has to count,” said HKS Architects principal and Pediatric Practice Leader Rachel Knox, who was one of the panelists at Bisnow’s State of Denver Healthcare event Oct. 4 at the Hyatt Regency Aurora-Denver Conference Center. “There’s been an emphasis on renovation projects in what used to be subpar space. Now, it’s ‘how can we create parity between new and old and make it seem seamless for the patients and staff to use that space?’”
Phoenix-based Banner Health, which serves northern Colorado, has a new hospital in Fort Collins, but Senior Project Executive of Development and Construction Kyle Majchrowski said the healthcare provider explores both repurposing an existing building and new construction when determining how to expand its presence.
“Repurposing has moved up,” Majchrowski said. “We ask, ‘Do we really need all that space, or can we change or modify it?’ We have a lot of unused real estate — let’s take advantage of it and see what we can do with it.”
WSP Senior Vice President Mark Montgomery said renovating a property provides flexibility and adaptability, but if the square footage isn’t adequate, the building must either be razed and rebuilt or sold.
Of the eight free-standing emergency departments Fleisher Smyth Brokaw CEO Michelle Brokaw has developed over the last three years, three were renovations. But, she said, they all cost the same to develop — the location is the key.
“Now everything has to be on the corner of Main and Main,” Brokaw said. “We spend a lot of time building out old bank buildings.”
Event panelists also discussed the labor shortage, building strong development teams, how to maintain access to healthcare to the region’s most vulnerable people and how to implement technology into medicine.
“Every major company, whether it’s Google or Apple, is thinking about what technology should be deployed in healthcare right now,” University of Colorado Managing Director of Innovations on the Anschutz Medical Campus Kimberly Muller said. “Every segment of our economy has been transformed by technology. Healthcare and education are the last two industries to be disrupted by technology.”
Technology will allow patients to be cared for in their homes rather than hospitals, but the reimbursement model has to change to allow that to happen, Children’s Hospital Colorado CEO Jena Hausmann said. Today, many children are admitted to a hospital after an emergency room visit so staff can monitor their oxygen levels. Children’s has spent $30M over the last 10 years figuring out how to get parents to perform that task.
“There is always a push to outpatient treatment or discharging patients sooner,” Hausmann said. “But just because we save somebody money in the system, doesn’t mean it gets to the consumer or governmental payers.”
/wp-content/uploads/2020/08/florida-medical-space-logo.png00ADMIN/wp-content/uploads/2020/08/florida-medical-space-logo.pngADMIN2018-10-29 01:03:482018-10-29 01:03:48Healthcare Providers Looking To Renovate Rather Than Build New
Florida Hospital Tampa, part of Adventist Health System, has broken ground on a six-story, 300,000-square-foot patient and surgical tower at the corner of Fletcher Avenue and Bruce B. Downs Boulevard in Tampa.
The $256 million expansion project will be known as the Taneja Center for Innovative Surgery and is slated to open in 2021. According to a press release, it will feature 24 new operating rooms, a new hospital entrance and more than 100 private dedicated surgical care beds. It will create an estimated 117 clinical jobs in its first year of operation, and 587 jobs by the fifth year, the release states.
“This is a state-of-the-art project that will provide specialty care in Tampa Bay that you can’t find anywhere else in our area,” states Brian Adams, president and CEO of Florida Hospital Tampa, in the release. “Our goal is to design a surgical tower that isn’t just relevant today, but will be relevant 30 years from now, combining surgical innovation and the most advanced robotic technologies with the nation’s best physicians.”
The family of Jugal and Manju Taneja provided a generous gift toward the expansion project — the largest donation ever to the hospital’s west Florida division.
“This is about more than growth and expansion,” states Mike Schultz, president and CEO of Florida Hospital West Florida Division, in the release. “This is about connecting our community to the kind of expert health care that’s needed and delivering it with Florida Hospital’s unique brand of inspired, compassionate care.”
