Discussing the possibilities and future at the intersection of healthcare and commercial real estate
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Today’s episode of the Providers, Properties and Performance podcast is my interview on the Healthcare Leadership Podcast with host Jennifer Thompson, where I discuss the benefits for physician owners to invest in the real estate where they practice. We talk about best practices that allow physicians to own healthcare real estate while continuing to practice to their license.
[2:10] How a clinician can own medical facilities and practice medicine at the same time
Unless they have a real estate background, I highly recommend that they hire a professional property management company. This company can take care of daily maintenance that comes up and meet with vendors. It is helpful to be able to delegate these unpredictable and time-consuming tasks to somebody else with specific expertise.
A property manager can also have a couple vendors go out and bid it competitively,. They can also collect rent, chase late payments, and do accounting. Sometimes a clinician may try to do this all in-house, but typically a building is under a different LLC than their healthcare practice so it has a separate set of books.
So, unless a physician wants to have a second part-time job managing the property, I recommend they hire that out. Vendors sometimes start working early in the morning and are done by mid-afternoon, so their hours don’t always coincide with those of physicians. It’s worth paying somebody else to handle all of these things so physicians can practice to their license.
[5:53] My advice for a physician who is looking to go into real estate
I would recommend they choose an advisor that has experience in doing healthcare real estate transactions in the commercial real estate world. Typically healthcare real estate falls under “office” for a lot of big firms, but it really is its own separate subset. You have to really understand the market when it comes to lease rates and tenant improvements for medical office buildings and space planning.
Each specialty has some unique requirements for their spaces. A lab needs different requirements than an orthopedic group who has different needs from cardiology. Sometimes there are different diagnostic tests that have to be available, or they have to have a surgery center and/or a clinic space right next to it.
When a healthcare company buys a building, the practice will still lease the building. They have to lease it under market conditions, so they have to buy where the lease rate makes sense. An advisor should know the current market fundamentals to advise properly, because if they get a loan the lender will want all of this information.
[8:48] Trends in healthcare real estate since the COVID-19 pandemic
The medical space started to change when the 2008-2009 recession occurred. When that happened, practices were already starting to evaluate the cost of their real estate. They realized the expense and that they could move the administrative space out to lower the costs and separate it from the revenue-generating clinical space.
With the pandemic, they also started the “hub and spoke” model where hospital groups would invest in community medicine providers. Telemedicine was just starting to get a little bit of a foothold, and now I think a lot of practices are folding it into their offerings. It cannot be 100%, because they still need to see patients. They can, however, do pre-meetings or pre-op discussions before the patient has to come into the office. Behavioral health has really adopted telemedicine, so they may build telemedicine rooms for efficiency in the clinical space. This allows clinicians to go back and forth between telemedicine patients and in-person patients.
In addition, I see a lot more practices wanting high visibility. In Arizona where I live, there is a lot of sprawl and land. Early in my career, if a developer had a piece of land they would build a medical building and sometimes they were successful. Now, I think the location has to be very strategic and promote that visibility. They want it to be easy for patients to find them, and they want signage. That is why we are seeing the trend of practices considering retail locations. It offers good parking options as well as visibility.
[14:19] Healthcare real estate in retail locations
Whatever anyone’s opinion is of The Affordable Care Act, it has put an emphasis on preventative care. You aren’t necessarily sick, but you need to get a checkup or go to appointments to maintain health. Some practices, such as oncology or dialysis, are not going to be in a retail center. Health and wellness options are starting to adapt to retail locations, even if they do their surgeries elsewhere. It is convenient for patients and promotes preventative medicine.
[17:08] The first things to think about when deciding to own real estate versus renting
Financing and lending are important things to consider, unless they are paying in cash. Physicians typically get low cost of capital. There are a lot of lending institutions that like physicians because they are high earners. They are a good risk. Many programs are favorable to healthcare practices, so the first thing to do would be to figure out how much you can qualify for. Once you know that, you can figure out how this relates to current rental expenses and think through the tax advantages of owning.
In the healthcare real estate asset class, there are a lot of partners that could participate in joint ventures and own part of the building. They could be more active or passive investors, but there are several different programs out there with joint venture developers.
I also advocate for having a lot of runway. If they are leasing a space, they should give themselves around three years. No one should be forced into any decisions, and they should have the time to explore and analyze all available options. You can buy existing buildings, purchase for adaptive reuse, and build from scratch. The rezoning process can take about six months on its own, so there is a lot of time involved and several factors that are out of anyone’s control.
[20:46] How physicians can set themselves up for real estate success from day one
The best way to get the highest valuation is to have a tenant in the building (even if the tenant is themselves). When physicians have about 10 years left to practice, they should consider what they want to do with their real estate portfolio. There are investors out there that purchase these assets for the cash flow. It can be an easy decision for physicians to sell and exit the real estate while it still has value.
[23:10] Offloading healthcare real estate
I typically don’t see early careerists unless they are from a high net worth family looking to take on the expense of buying a building. Physicians typically come out of school with a lot of loans and they have to figure things out. They are also high earners, so by mid-career many want to invest in real estate. They start exploring the option to create some equity.
Late careerists then start thinking about how many years they have left to practice. If it’s a practice that has a succession plan, maybe that becomes part of their recruiting tool. There are companies out there that can help them structure those sorts of things. Sometimes they may sell because they need cash for their operations or because they want to expand.
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