Real Estate for Health Care or BioTech

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Real Estate For Clinical Health Care or Biotech Use

Revenue for a healthcare practice can be uneven, pending results of billing vs collections.

% cash per visit

% private pay

% Insurance collections

% from medicare or medicaid collections; if applicable.

If space changes are planned for your practice, how will your revenue fit with space costs?  Analyze to make the right choice.  Apply Occupancy Cost Ratio, some principles from CAHIMS, and project management via CAPM.  Occupancy alternatives are Lease, Buy, Like-Kind Exchange or Sale-Leaseback.

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Lease

Leasing space affords relatively (predictable) fixed costs, includes outsourced management (from the landlord); most of the architectural services, fees and construction costs are borne by the landlord, yet amortized over the life of your lease.  Rent (that often includes electricity) is a business expense, reducing income subject to tax.  The business terms of lease (and renewal) should match the occupancy needs of your practice.

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Own

Pros: Owning has deductible tax advantages: i) mortgage interest, ii) depreciation, iii) property maintenance and groundscape expenses.  Investment advantages: I) equity appreciation, ii) asset appreciation, iii) adds financial value to your practice.

Cons: I) office space is fixed unless you lease extra space until ready to use, ii) you pay/manage construction/rehab to ready the property for use, iii) unexpected repairs [needing funding and project management] lower profits, iv) months to sell vs move at lease expiration.

Other important space expenses are I.T., phones, furniture, fixtures & equipment (their financing rent, maintenance), gas, electric, water/sewer and trash.

If its cost-effective, property management duties can be outsourced to a fee-based vendor.  The vendor typically explains the terms of their engagement in a Service Level Agreement (SLA). SLAs should be more specific about remediating disputes and what service are not included.  Your business manager should manage the performance of that relationship.

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Like-kind Exchange

If moving to sell / buy is preferred, you can defer the capital gains taxes by making a Like-kind exchange; I review the activities necessary to complete this type of transaction.  In general, you must invest all proceeds of sale into the exchanged property within six months of closing on your existing one to defer capital gains taxes from sale.  There are business rules, tax rules and procedures to comply with.

Sale Leaseback

Remaining in your location may be the best choice, yet you want to exit property management to focus on patient care (and practice operations).  A sale-leaseback sells your property to an investor in exchange for a long term lease (7 years or more); business terms of the lease will be negotiated.  You get a big check for your property and flip property management to the investor.  Some doctors have chosen this route over others in 2011 because loans are available for properties supported by reliable rent from creditworthy tenants.

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Real Estate Analysis

How would you know which choice is best for your medical practice?  Applying Occupancy Cost Ratio and vendor analysis methods from CAHIMS helps to sharpen your short list of choices.  BREG Health Care (with transactional contributors to the 7-Point Service) offers an unbiased neutral perspective of your real estate costs, free from fees of a transaction.  We review your space operating costs to produce a complete, cogent report to suggest tangible ways to operate lean and efficiently.  The team reviews market conditions, runs draft analysis to present a rough idea of market conditions to consider.  You get a financial picture of your options with strategic advice of which option to choose.  (You decide how to apply the net proceeds of sale to your medical practice.)

BREG has brokered 19,000rsf of long-term leases on behalf of health care providers and landlords.  If BREG Health Care and Biotech can be of help to your business, please click “Request A Consultation” at the upper right of the screen, write “Health Care of Biotech” in the subject line; add your comments, name, email address and direct dial number to reach you; I reply within 24 hours.  Thanks for reading, perhaps we’ll talk with each other soon. ###

Lease Medical Office Space

If you’re a healthcare services provider facing a need for medical office space, there are multiple moving parts of a lease to consider. (The project is akin to a patient researching / preparing to experience a lengthy procedure with a short recovery time.) The Landlord’s review of your space use, needs of buildout and financial stability of the practice will be evaluated, as a loan officer of a bank would review your loan application; its a large financial investment to make relative to the income expected. Knowing a) your needs, b) how to mitigate the risk, and c) guarantee rent payments, will sell the landlord to accept a lease with your practice. For example, specialty medical chains or hospitals offer the guarantee of a large, financially strong corporation, that rent will always be paid for the duration of the lease; such guarantee is attractive to the landlord (their investors and/or lenders). BREG has leased office space multiple times for established practices and specialty chains that required new building installations; select Case Studies at this link show examples. The outline below offers takeaways to apply to your next office lease deal.

Establish a Committee. Establish a committee to assemble needs, goals and objectives three (3) years before the go-live date for the new space; the time passes fast factoring patient visits, personal lives and project planning. This committee will create the criteria for the space search, office operations equipment, space aesthetics, parking needs, move-in and go-live dates. Members will include a decision maker(s), a project manager versed with construction of medical space, a proofreader of content, a face of the committee (as Single Point of Contact) to the project’s players. Decision members sign off internally or publicly on key aspects of the project; avoiding misunderstood assumptions. This committee keeps the search and secure process moving forward until complete; doctors add input/make decisions when not involved with patients. All committee members (doctors included) must communicate calmly / thoughtfully through the move in date despite unforeseen dramas from the project. (Planning and lead time dilute the impact of these dramas.) When the space is fully prepped for use, add time for all staff to prepare their respective space for use plus a full test drill to ensure everything works as expected for opening day. There should be nominal downtime from opening day of the newly built space.

Identify your needs, goals and objectives of the project. Pre-planning puts time on your side to identify the right location and space, at financial and legal terms favorable to the practice. This is a sizable investment to the landlord; your interests must meet theirs to shake on a deal you’ll mutually accept. Physical attributes are space layout, waiting room size,clerical space, exam rooms, lab rooms, procedure rooms, management offices, community space, locations and sizes of entry/exit doors, proximity of space to building parking, HVAC, lighting. Aesthetic needs are cosmetic ambiance of space (wood, carpet, paint, furniture, display monitors, clerical counter to patients, musaq); the mood of the entire space contributes to the experience you want your patients to have from each visit. Technical needs include computers, phones/fax, medical equipment, plumbing, electricity, medical gas for equipment and for patients, HVAC. The project manager of the committee ought to be from an architectural firm with niche serving healthcare providers. It would be cost-effective to hire an architect to create a rough drawing of the space to your specifications and collect a rough estimate to build the space. The result is discussed with the practice’s accountant to identify a budget to lease the space; that investment contributes to project planning. A Tenant Rep realtor with niche in serving healthcare providers, works with your accountant to factor the construction estimate into a financial projection of leasing costs (both initially and over the term of the lease). The Tenant Rep should advise the committee on the lead time needed to source a space, build and equip it and begin operating from the space.

Lease Term. Conventional office space rents at a discount to medical office space, typically for a five (5) year term. Medical office space typically rents at a $7-$10psf premium to office space to factor in higher traffic use to the building and space and construction costs; an average ten (10) year lease amortizes the up-front investment to build the space. These aspects should be discussed in committee to budget the rent costs and project practice operations ten years forward. (Note: this approach is indifferent to the space size you secure.)

Tenant Rep = Advocacy. The nature of the search criteria and details of project execution necessitate hiring a Tenant Rep realtor. They advocate for the search/secure needs of the practice and the business terms of the lease until 45 days after the move-in date. This approach produces a best outcome of the project, enabling doctors and support staff to remain focused on patient care. The Tenant Rep will prepare a simple representation agreement to review for signature. Ask your practice attorney to review it to advise the committee of its implications and your rights.

Construction Management. The project manager within your committee is responsible to oversee “all” construction efforts to ensure the space is built to your specifications, on-time, at or below budget. Advocacy of construction for your practice is essential to project outcome; do not skimp on advocacy nor expect the landlord to complete “as discussed”.

Real Estate Attorney. Your Tenant Rep ought to recommend or refer a Tenant Rep attorney with niche serving healthcare providers. Such specialty will protect your rights in the lease; avoid a business attorney lacking years of experience negotiating office leases for doctors. The attorney’s job is to work with your Tenant Rep and the Landlord’s attorney to ensure your legal rights in the lease are protected. (Note: a lease gives you strong rights of possession and use during its term.)

Moving trades, equipment providers, Information Technology and phone/fax. The construction project manager oversees liaising with the commercial mover, medical and office equipment providers, cabling installers, and IT installers. Ask your IT provider to oversee the installation of your phone circuit and phone/fax equipment.

Construction Punch List. When your space is about 95% ready for occupancy, (about 4 weeks from the move-in date), the committee, Tenant Rep, General Contractor and Landlord should meet to tour the space to identify open items to close within the budget of the buildout. These items makeup a written “punchlist” for the general contractor to complete. After the tour, have your project manager meet with all moving trades to carefully label the space where items will be placed; agree on a delivery/install date and time to complete. Another tour should be made by the same entourage to view completion of the punch list; arrange a formal meeting to accept in writing that the space is ready for move-in. Your project manager should notify the moving trades to confirm the space is ready to accept their work. This careful tedious approach ensures a smooth outcome, on-time.

Your project manager should be on-site during the move-in process, overseeing the effort agreed to. Once complete, the entourage should visit the space a last time to accept (in writing) that the space is ready to use. Implement a day(s) for the staff to prepare their respective spaces for use (as outlined in the paragraph above about establishing the search committee). Your Tenant Rep and project manager should work collaboratively, over the next 45 days, talking every few days to ensure the space is operating as expected. Let them talk with any trades to close holes in space operations during that time, enabling doctors and support staff to focus on patient care.

I trust this post has been helpful to you and offered takeways to implement in your healthcare practice. If you’d like to discuss BREG’s Tenant Rep services for healthcare providers, please click “Request A Consultation” link in the upper right of the screen. Enter “BREG Medical” in the subject line; please include your name, email address and telephone number in the message body; I reply within 24 hours. Thanks for reading and listening. ###

Lease or Buy

The space your business operates from represents an investment of available cash to bring a product or service to market to generate a return on investment. I have preached for many years that real estate is a tool to operate a business. This tool must be flexible in use and marketable to relet or sell when its no longer useful to your business. Space size and price do not offer enough of a means to compare options to choose from. Factors to consider include physical space, price, acquisition costs, holding costs/benefits, tax effect, return on investment. Merely looking for space within a budget leaves you vulnerable to taking ill-fitted space that you’ll live to regret using. A savvy Tenant Rep will show you the qualitative and quantitative modeling of how to look at your space options to decide which deal meets your operating needs. Such modeling has worked well for my clients since the late 1990’s.

Lease, Renew or Relet

You can choose to move to lease, exercise an option to renew or to relet space within your building at new terms. Critical questions to ask are space amount, engineering of use, layout, construction and space equipment costs, moving costs, budget and cost of capital, tax effect, flexibility of use (sublets/assigns, expansion or contraction rights). Each space considered should be presented in column format to facilitate a decision of accept, fine tune terms or drop the space from consideration. This format also enables preparing fighting alternatives to secure the deal you need. Overall, this method of comparison uncovers fine points of options to root out the right one for you. Give your business enough time to conduct this search and analyze project at a leisurely pace, relative to market conditions. Signing the term sheet of the deal testifies that the choice made from the search process is to move, exercise an option to renew or draft a new lease for your space met the operating needs of your business with a predictable outcome.

Purchase. Purchasing calls for placing available cash for acquisition costs, construction and property management, mortgage and property taxes; all other costs being equal if leasing. Analysis performed by your Tenant Rep shows how your investment will perform as compared to placing the money in other investments and how the real estate adds value to the business. If you’ll lease the unused portion of the property, the Tenant Rep prepares a financial model about how the net profit from Tenant(s) would be invested to enhance investment yield. A financial model for purchasing space shows how your cash will work for you plus net proceeds of sale, projected over a holding period.

Sale-Leaseback. If you own your property and are considering to unlock its cash value from a sale-leaseback, a financial model will show the present value of the property, the interest rate to pay rent, any operating costs, how investor’s holding period may affect your rent responsibilities. Tax impact influences your consideration to complete a sale-leaseback transaction.

Comparing to lease, buy or sale-leaseback shows your cash outlays, productivity of staff from space design and location, and shows tax impact.

If a change of the real estate for your business is on your horizon of projects, I encourage you to contact me to talk it out. Please click “Request A Consultation” link in the upper right of the screen. Enter “Real Estate on My Horizon” in the subject line; please include your name, email address and telephone number in the message body; I reply within 24 hours. Thanks for reading and listening.

Did You Plan for No?

In the midst of negotiating your deal for space with key stakeholders’ talking to secure their position in the deal, have you planned for them to say “No” to your critical/important needs or worse, act out to meet their needs?? Finding these issues out now could derail/end your deal unexpectedly; that’s to be avoided.  Most stakeholders of a deal don’t prepare for such contingencies…yet such preparation is essential to close the deal. Making compromises (that may include agreeing to split the difference) in the midst of negotiating can harm or eliminate meeting critical/important needs. Negotiating is a conversational debate among stakeholders to meet their needs of doing a deal. Maintaining positive relations is key to stakeholders agreeing that a deal is worth doing.

Naturally, any negotiation will factor in time to compensate for general disagreements, even some issues may need tuning or re-engineering to realize interests. However, no interests should be compromised or deal terms’ forced to re-trade that harms anyone’s critical/important interests.

While negotiations are being planned, consider the risks that key stakeholders may say no to your critical and important needs. What would your options be to meet your needs AND stakeholders to meet their needs? (Consider these steps akin to your attorney preparing you for trial.) Here are brief recommendations to assess risks before all stakeholders talk to negotiate.


i) Identify the key stakeholders.
ii) What’s important to them (you included)?
iii) Brainstorm what they or you may do if neither gets what’s important to them.
iv) How likely are options in brainstorming likely to occur?
v) How do unilateral actions affect stakeholders?
vi) How do unilateral actions affect you?
vii) As you perform the preparatory process, has it inferred that you forgot to identify/address any issues/interests you were planning to negotiate for? If so, return to analyze/fix what’s missing, then walk through all steps, including this one, to ready yourself to negotiate. If you or stakeholders do not meet your needs, an option should be to drop the deal.

Now you’re ready to negotiate that includes talking out options if your /their needs are not met. The outcome is a positive choice for all stakeholders involved. My negotiating practices have used this method successfully for 10 years. If I can be of help to you securing your next piece of commercial space, please click “Request A Consultation” at the right of the screen, write “Planning For No ” in the subject line; add your comments, name, email address and direct dial number to reach you; I reply within 24 hours.) Thanks for reading. ###

Deal Get What You Need?

Before you sign a lease or contract for new space for your business, do the negotiated terms get what you need? Just because the deal is market competitive (and perhaps a good one), is that deal good for your business? Don’t sell yourself on a deal that didn’t get what you should have. (The deals to my past customers were always good for their needs and at market competitive terms.)

Brokers’ efforts are often driven by their need to generate commissions to feed the overhead of their business. Landlords make deals to realize property returns on investment and feed overhead cost s of building operations. Clients and Tenants respectively often give up too much to secure space they need.


How can your broker secure the terms your business needs to operate with? They learn about the issues important to you, what your interests and positions are of those issues, identify creative ways to secure your needs with the landlord or seller, and educate you of the risks of picking the wrong deal or property you ask them to secure. (Note: Savvy realtors have staggered payouts coming to them regularly, affording them the ability to engineer deals that are right for their clients and market competitive.

I suggest taking 2yrs to secure the space you want for every 7500rsf of office space and 15Ksf of industrial you need. The conversation begins to identify who the stakeholders will be for the move, a consensus of important issues among stakeholders, what the interests are among those issues, what interests are critical, important or tradeable. Your broker’s job is to identify creative options of how your interests will be secured, solving your issues, how to get the seller’s issues secured and how the agent will be paid to represent you. There’s a methodical process to prepare for negotiation and a methodical way to negotiate that keeps all stakeholders happy with each other.

The 2yrs lead time gives your broker the ability to find the best options for you to consider, secure the deal that’s best for you and is market competitive. The next time you begin to think about a need for commercial space, hold a holistic view of your assumptions and begin to create objectives. From that you will be ready to meet a savvy commercial realtor to help you identify and secure the terms worth signing for. I have worked this way for 10+ years. If I can be of help to you, please click “Request A Consultation” at the right of the screen, write “Interest-Based Negotiation ” in the subject line; add your comments, name, email address and direct dial number to reach you; I reply within 24 hours.) ###

Tenant Rep – Project Manager

Is your Tenant Rep steering your space change(s) to reach its objectives, keeping to schedule and budget?  Changes to commercial space is Project Management.  A structured, proactive approach to project management could assure the project realizes its objectives, perhaps ahead of schedule and under-budget.

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Tenant Rep services are about meeting client needs plus project management, similar to a corporate real estate director.   Meeting the objectives of change requires a seasoned project team with project leader.   Having managed many change events, I offer a comprehensive perspective to assess, plan and monitor a seasoned team to manage a project. My services include:

  • Agreement on objectives between us;
  • Scope of Work that gets you the deliverable you expect;
  • A cogent plan, subject to field conditions, to deliver the Scope of Work;
  • Competent project team and project manager to execute the plan;
  • Astute, timely, monitoring the project to keep scope, schedule and budget on track;
  • Brief yet detailed recap that project objectives were met, comforting you to accept the deliverable received, agreeing to close the project.

If your Tenant Rep is not giving you these services, ask why; once you experience structured project management you’ll ask yourself why you waited to.  See my education and experience at LinkedIn to understand how I can serve dual roles as your Tenant Rep and Project Leader, from initial conversation to post project support.  If you have an initiative you’d like to discuss or would like some free advice, click “Request A Consultation” link, fill out the form and send; I reply within 24 hours to learn about your specific real estate needs. Thanks for reading. ###.

Learn Real Estate Costs Ahead of Needs

Small-Mid size users of commercial space (5K-100Krsf) often analyze their space needs just before starting a search; such timing would likely cost your business the wrong space size, overpriced deal terms and bloated operating costs. Also, merely comparing market rates to your rent [or mortgage] does not accurately measure the economics of your space. Do you know how much your occupancy costs take as a percentage of revenue [generated from the space ]?

The costs to operate space are: rent (or mortgage and property taxes), utilities, IT network and phones. The one-time costs to expand/relocate can include: movers, architectural and/or project management services, construction (beyond landlord’s work), furniture & fixtures, voice and data wiring, phone and computer equipment. If changes to your space are in-review [among executives], knowing both the revenue generated from the space and its occupancy costs will help expedite planning and decision-making within budget.

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A triumvirate of academics and experience are blended to deliver this service; it sets me apart from conventional real estate analysts. i) a complex understanding of commercial real estate, ii) academics and hands-on experience assembling/interpreting the economics of business operations, iii) training/experience with spreadsheet software.

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I often performed this analysis for clients as commercial realtor; I was a virtual real estate department to emerging businesses with 5-100 employees in metros New York and Atlanta, 1995-2007. (Figures and space needs came from collaborating with the Comptroller and CEO). The results enabled me to source the right spaces and negotiate the sharpest of terms a landlord could afford; those business terms matched or cut the client’s projected occupancy costs.   I deliver this service in five steps:

  1. Identify gross revenue from space / current occupancy costs (by category) = % occupancy costs claim from revenue.
  2. Estimate future space needs and occupancy term; scrub to market conditions.
  3. Project revenue from new space. How much more revenue could be kept as profit if occupancy costs were less?
  4. Identify space costs for the next occupancy term via a projection of entry costs, rent and operating costs (mentioned above).
  5. Compare sales projections to projected occupancy costs to reveal how much space is needed and what to budget for it. Add one-time relocation expenses outlined above.

(Note: Your results from this service will be most effective when completed two (2) years before operating from new space (up to 20Krsf; up to 4 years prior for 100Krsf). The lead time positions your business to negotiate from strength.)

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I can work directly for your company, collaborating with your Comptroller, or as subcontractor to the CPA firm you work with. I work per diem or by project; I estimate 24 hours per assignment; the work is completed in 5 consecutive days. If you’d like to talk with me, please click “Request a Consultation” at the mid right of the screen and fill out the form; I’ll reply to you within 24 hours. I trust that the content of this post was helpful to you. ###