[ By Todd H. Varney ]
The demand for medical office buildings is stronger than ever, as the population of individuals 60 years of age or more is rapidly expanding. The future of medical real estate development is bright, as physicians and hospitals seek modern facilities to treat the next generation of patients. Many services that are traditionally handled on an inpatient basis at the hospital are being shifted to outpatient facilities located in new medical office buildings.
While the medical business is booming, healthcare providers are continually being squeezed by narrowing margins and declining reimbursement rates. Physicians feel they are working harder than ever, only to make take home less income. Because of this trend, physicians are seeking alternative methods to improve their financial status. The shared equity model in new medical office buildings is a prescription for success for the physician, developer and sponsoring hospital. As the need for new medical facilities has grown, so too has the competition in the medical real estate development field. The market once dominated by a handful of national firms now has over 25 nationally recognized medical real estate development companies. This increased competition has been healthy for the end user — the healthcare provider — as each firm strives to distinguish themselves with their shared ownership models.
There are several shared ownership models available in the market today, and each provides the ability of the healthcare system to bring a building online without any cash investment or debt on their balance sheets.
Model #1 Equity Participation Program
The Equity Participation Program is a development program designed to help healthcare providers develop new medical facilities on an off balance sheet basis to better position themselves to effectively address the onslaught of changes that are sweeping the healthcare industry. Tenants are typically provided with 50-70 percent of the equity ownership in the facility with no cash investment. Tenants receive this equity on a pro-rata basis, based upon the proportionate share of space leased in the building.
This program is designed specifically with the healthcare provider and physicians in mind. Healthcare providers that need new facilities but are concerned about the cash investment and associated debt can utilize the Equity Participation Program to develop new facilities without taking on the financial risk. The funding for the project is structured so that the tenants in the project have no liability for the mortgage debt.
A healthcare development company partners with the healthcare provider to develop the new medical facility, providing 100 percent of the capital. The healthcare provider is not required to assume any mortgage liability or make any cash contribution for ownership in the project. This allows healthcare providers to direct their capital toward investment in their core business of providing high quality cost-effective healthcare to their patients.
Model #2 Tenant/Developer Investment Program
Under the Tenant/Developer Investment Program developers offer the tenants an opportunity to share in the equity ownership through an investment program. Tenants will receive a significant ownership interest in the project (up to 70 percent) in return for their equity investment, should they elect to invest. Should the tenants not wish to invest, the investment will be contributed by principals of the development company.
This additional equity investment reduces the loan amount, which in turn reduces the base rental expense. The reduced base rental expense, combined with the net cash return and equity appreciation, provides a very substantial financial return for the tenant investors. The size of the equity contribution for each of the tenant investors will be allocated based on their pro-rata share of the rentable square footage in the project.
This program is structured similar to the Equity Participation Program, in that the hospital and tenants are not required to assume any liability for the mortgage debt. Use and occupancy restrictions will also be incorporated into the tenant leases to prevent them from providing services that are in competition with the hospital.
Model #3 Asset Conversion Program
The Asset Conversion Program is designed to monetize existing assets for healthcare systems, thereby affording them the opportunity to reinvest the proceeds into their core hospital business. By converting a traditional hospital-owned medical building to a shared ownership program, the hospital enhances physician recruitment and strengthens existing relationships, as the physicians get the option to become owners in the facility without any of the typical development risks.
No matter which development model is best suited to their healthcare client, developers need to be mindful of the scrutiny hospitals face with regulatory compliance issues relative to facility ownership and operations. When selecting a medical real estate development firm, healthcare clients should be selective in their review and partner with a company who has an extensive track record in healthcare development.