Commercial Real Estate Deal

Commercial Real Estate Deal - Hospitals Stay Healthy
by Outsourcing Real Estate

by Andy and David Farbman
Continued from front page

Medical centers, hospitals and physician management companies nationwide are enlisting full-service real estate partners to handle property management, space brokerage, financial reporting, site acquisition and asset productivity. It's an emerging trend that is already paying dividends for healthcare providers. At progressive institutions, the focus that began with on-site services now embraces external areas such as real estate portfolios - a dormant asset that can be shaken up and put to work by modifying, through a Michigan Real Estate Services consultant, how off-site space is owned, financed and managed.

"We've seen several big benefits," says Benjamin Carter, chief operating officer at Oakwood Healthcare Inc. in Dearborn, a four-hospital health system that delegated its property management business to NAI Farbman in 1999. "Our operating expenses for building maintenance, housekeeping and energy use have fallen dramatically. The cost of installing more efficient lighting and heating systems that Farbman recommended was financed through the savings from lower utility bills."

Blind Spot for Administrators

Carter acknowledged that "no one was looking closely at building maintenance because that's not our specialty." Similarly, leasing agents apply a full-time focus to retaining tenants and filling vacancies.

Another potential blind spot involves the value of real estate holdings, which can be converted into operating revenue without relocating offices. Oakwood generated cash to make capital investments through these steps:

Refinancing three debt-free ambulatory care buildings, yielding $12 million.
A sale-leaseback arrangement on another property freed up more than $6 million in cash.
Negotiations that revised lease terms for administrative offices produced $1.8 million in savings.

Elsewhere in southeastern Michigan, Mount Clemens General Hospital gained $10 million by selling three medical office buildings and then leasing the same space.

Aggressive Value-boosting

"We definitely would not have been able to purchase some of our latest equipment outright without drawing on the equity and appreciation value of our real estate," said Carter of Oakwood.

Moreover, it's easier for an outside firm to enforce rental agreements with staff physicians. "Our managers mediate the leasing conflict that often exists between physician tenants and administrators," notes Stephen E. Hull, a vice-president at Healthcare Realty Services, a publicly-held company in Tennessee. "Balancing the business relationship between health systems and physicians, specifically as it relates to facility operations and leasing office space, can often be a consuming task for healthcare executives."

Dramatic results can occur quickly when independent specialists pitch in. NAI Farbman gathered $172,000 in past-due rents during the first three months of property management for Mount Clemens General, for example.

Property management firms also routinely challenge property tax assessments and attend municipal hearings on behalf of medical clients, an approach that often reduces tax liabilities. With extensive property portfolios, these companies can obtain more attractive bids from maintenance, landscaping and construction contractors.

"Economies of scale produce real cost savings," says Bruce A. Rendina of Palm Beach Gardens, Fla., who founded Paramount Real Estate Services, Inc. there in 1988. His firm now manages about 50 medical properties in nine states. "In medical real estate management, as in medicine, a reservoir of specialized knowledge is essential to ensure success," he adds.

NAI Farbman, like other firms, uses headquarters personnel and on-site managers to arrange all interior and exterior work at client sites, including cleaning, repairs, groundskeeping, preventive maintenance and even regulatory compliance. That last area is an essential part of serving healthcare institutions, which are inspected periodically by the state and the Joint Commission on Accreditation of Healthcare Organizations. Property managers follow environment of care regulations, housekeeping rules, air quality standards, evacuation drills, backup generator requirements, weekly checks of emergency lighting, preventive maintenance guidelines and detailed record-keeping.

Carving a Niche

The larger management firms are able participate in joint ventures, such as Michigan Real Estate Services, as NAI Farbman did with groups of Oakwood Healthcare System physicians to build and own two medical office buildings designed according to their specifications. Farbman also works closely with Henry Ford Health System in Detroit.

"Our [Michigan Real Estate Services] partner has served as a one-stop contact for property management and land acquisition," says Nicole Jackson, manager of corporate property services for Henry Ford Health System in Detroit. "Their brokers are very familiar with the area and presented about 20 site choices for an ambulatory care facility." The hospital network bought two adjacent parcels in Brownstown Township, south of the city, and has started construction on the 35-acre site, which could become the home of a future hospital. "Their expertise was invaluable," Jackson says of the MRES allies.

Beyond receiving brokerage services, clients draw on resources of their real estate partner's headquarters staff, which includes accountants who specialize in medical industry services. "It really is helpful to have one point of contact, especially because I'm a one-person department," adds the Henry Ford manager.

Just as medical administrators recruit well-trained clinical specialists for patient care, they can assign medical real estate professionals to monitor the pulse of hospital properties. Those partners help directors and administrators view real estate as a productive asset that fits into a long-range business perspective. It's a proven prescription for financial strength.

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