Industry Voices—Realizing value in healthcare real estate holdings needs a comprehensive review

Healthcare real estate development can be a time consuming and capital-intensive undertaking.

Each project requires numerous approvals on the front end not only from the decision-makers within an organization but also from the local governing authorities, as well. Anyone exploring such a project will need to engage a laundry list of consultants.

Architects, engineers, land planners, environmental firms, appraisers, lenders, contractors—all of these vendors and more must be managed by the developer and their proposals must be compiled into a package for submittal to the local governing authorities for approval before they can even begin to move dirt, which means substantial capital and time can be invested in a project without any guarantee that a project will move forward.  

Despite the underlying challenges associated with real estate development, the battle for market share and rapid expansion of ambulatory strategies amongst healthcare providers has never been as intense as it is today. In fact, according to the American Institute of Architects, 40% of new retail real estate transactions are for medical facilities, up from just 2% a decade ago.

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Before any healthcare system, hospital, or physician group decides to move forward with a new development project, a comprehensive strategic capital review can raise important questions and bring forth answers to the viability not only of the individual project, but also to the viability of the system’s strategic plan as well.

By evaluating factors such as their current real estate and financial stature, the economic and demographic trends of the local real estate market, lease versus own scenarios, market competition, changing regulations and organizational focus in the context of their current realities and future plans, the provider can make sound decisions with tested and verified data to increase the probability of success.

Understand your current capital situation

Determining the size, location and cost of an expansion or renovation are important, but that’s not your best first step. Put simply, a list of what you have and what you need helps set the stage for understanding how you might leverage what you have in order to get what you need.

A financial review will help you make strategic capital decisions based on future needs. Determining whether to own, lease or even joint venture will have a direct impact on the resources you will be able to allocate towards future core business decisions such as physician recruitment or expanding certain service lines. These are variables that extend across all your properties to one degree or another and should be evaluated concurrently.

Determine your capabilities

The highest and best use of capital for most healthcare organizations is funding their core business of patient care, not developing and managing real estate—especially in off-campus situations, where 73% of new healthcare construction now takes place, according to JLL Research.

During a comprehensive strategic capital review, consider whether your in-house capabilities match current priorities and needs. You may consider whether outsourcing upgrades, maintenance and lease renewals to a dedicated property manager would benefit the organization by freeing up executives for business and clinical strategy. An experienced partner can help manage the details of non-core responsibilities. They can manage upkeep, upgrades, maintenance, lease renewals and other necessities that can be expensive, labor-intensive and unanticipated in a healthcare provider’s ordinary line of business. These factors can bring unforeseen challenges—and possibly missed opportunities.

Consider multiple sources of capital

A review should consider options to source new or unlock current capital. Whether your top priority is a new clinic in the suburbs or renovating a facility for a downtown medical mall, an illuminating question to ask during this process is, “If you didn’t already own the existing buildings in your portfolio, would you buy them today?”

If the answer is no, there are several ways to free up that capital for other uses—which may eliminate the need for issuing bonds or procuring financing for new projects.

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For example, a hospital with an owned medical office building can find capital flexibility by transferring ownership at market prices, either fully divesting or recapitalizing with a third-party partner, to unlock capital for a new facility or core business services. This new flexibility could allow the hospital to effectively double its footprint without having to borrow. For existing properties, the hospital could continue to own the land by issuing a ground lease and selling the actual facility to a third party while still maintaining the controls and ensuring no competitive uses infringe on the current uses in the facility.

By considering such options, providers can find greater financial flexibility for other projects too, such as purchasing new imaging equipment, a surgical suite expansion, an emergency room renovation or countless other needs.

Know your limitations

Speed to market has never been more important and delivering a project on time and on budget may be the most vital criteria for the success of any real estate project. Navigating hurdles that constrain speed to market is where expertise in healthcare construction can be most valuable. A healthcare real estate expert who knows the intricacies of such hurdles can avoid expensive problems.

Funds are limited and construction takes time, so decisions about where to build, whether to own or lease or whether to build new or renovate can have long-lasting effects on your organization’s opportunity costs as well as its long-term success.

If your sources of capital seem limited or too expensive, a comprehensive strategic capital review can help uncover options you may not have considered. By taking the time to undergo a comprehensive strategic capital review, healthcare providers can reduce the potential for future challenges and increase the probability of success.

Stephen K. Barry is President of Rendina Healthcare Real Estate.