Why Consider Real Estate Developers for Health Care Projects?

As a healthcare executive you are faced with the daunting tasks of responding to the explosive growth of healthcare demand, competitive forces and the desires of physicians to joint venture with you. You can only manage so many projects at one time and, of course, there are capital limitations whether from your own liquidity, debt ratios or the priorities of various projects within your health care organization. These and other factors have contributed to the use of outside healthcare real estate developers by hospitals and health systems across the country.

What is the advantage of using a developer for your real estate project?

Developers specialize in real estate development. That’s their business, whereas your business is to run a healthcare company. Developers bring expertise in land acquisition, zoning, joint venture development, construction, design, project management, leasing and post construction building management. And, where properly implemented, developers can be an important source of additional or off-balance sheet financing…a very important consideration as you try to move quickly and get as much of your strategic plan implemented with limited time and capital.

Let’s examine a few of the reasons you may want to use an outside developer:

1. Access to capital – As mentioned, you only have so much capital to use. Virtually all hospitals have more capital requests than available capital. Sometimes it’s a good thing that all these projects don’t get funded. Other times you are faced with saying “no” to projects which are strategically important. Many developers bring their own financing to the table so, whether it’s preserving your own cash or extending available capital to more projects, developers can help you fund more strategic capital.

   Of course, the increasingly popular use of off-balance sheet financing as a financial strategy is another major issue. The accounting rules are complex, so you need to plan well and partner with a developer who fully understands all of the ramifications and intricacies of EITF-9710. If performed correctly, off-balance sheet financing can improve the financial strength of your organization.

2. A developer can extend your reach and bring speed to market– Whether you have your own in-house project management team, or you assign executives to oversee projects, there is only so much you can do. When working in partnership with a good developer, they can assist with getting more projects done in a shorter period of time. In a competitive environment, this can be key to being in a market first, recruiting physicians and getting returns from new, profitable health care services.
3. Tax-exempt financing may not be right for this project– A tax-exempt hospital may qualify for favorable interest rates; however, when joint venturing with physicians it’s often the case that the project is not eligible for tax-exempt financing. Instead of going to a bank or other source of taxable debt, developer financing may be the answer.
4. Do you really want to manage and develop non-core real estate? You have to decide what your core business really is. Is managing real estate really where you want to spend your time or is this function better outsourced? Zoning, site selection, project management, real estate accounting, property management, leasing and much more can be done by a professional healthcare real estate developer who understands your strategy and helps you implement it.
5. Physicians like to have a piece of the real estate ownership– Real estate is considered a good investment by physicians. Some may want to develop their own real estate, which can be risky business for them. Others might like to joint venture with you or a developer to get a piece of the action. Developers can make this work.
6. What about the ROI on real estate versus other investments? This concept is to take more of a portfolio approach to your investments. What’s the ROI on investments in new technology, IT, cancer centers, etc? Real estate returns are fairly limited because of market forces. Investment expectations on real estate aren’t usually the rates you see from some other investments. Do you want to invest with the expectation of a below 10% return typical for real estate or allocate capital to investments that could generate paybacks in just a few years?
7. Do you really want to be a landlord? When you’re the landlord, you get all the calls about leaky toilets, stained carpet, snow removal, etc. In the healthcare business this is further complicated because of the sometimes tenuous relationships with physicians who are often the tenants in the buildings. What if they don’t pay on time? What if they want a special deal? What if they aren’t happy with their space? There are significant Stark concerns and business relationship concerns here. Isn’t it better to let a developer/manager deal with the tenants?

Summary

Each healthcare system has its own unique capabilities, market factors and priorities. Careful consideration of the use of a competent, ethical healthcare real estate developer can enhance your ability to move more quickly, focus on core strategies, preserve capital and improve the financial strength of your organization.