Change In Healthcare Delivery Model Bodes Well For Healthcare Real Estate

With the Supreme Court decision in 2012 regarding the legality of the Affordable Care Act, and the re-election of President Obama, the uncertainty hanging over the full implementation of the Affordable Care Act in 2014 is gone.

Although hospitals and healthcare systems have long recognized the need to reduce cost and manage care more efficiently, the Affordable Care Act is in effect the wind at their back accelerating the process.  Existing incentives that reward hospitals and health systems for the volume of services delivered to patients rather than the quality of those services is a primary driver of increased health care costs.  The Affordable Care Act is designed to incent hospitals and health systems based on the quality of care.  Please read our June, 2012 article titled, The Impact of Accountable Care Organizations on Healthcare Real Estate (to access go to pranews.wordpress.com).

At the intersection of quality of care and the most efficient and effective way to deliver that care is the patient experience.  As such, to increase patient access hospitals and health systems continue to construct community based sites or have them included in their future plans.  According to the 2013 Hospital Construction Survey conducted by Health Care Facilities Management and the Society for Healthcare Engineers, 11% of the over 600 survey participants (which included vice presidents and directors of facilities for U.S. hospitals) responded favorably to the following as it relates to future projects.

• Ambulatory surgery centers (11%)
• Satellite offices catering to specialties (11%)
• Outpatient facilities in neighborhood settings (15%)
• Urgent care facilities in neighborhood settings ((12%)
• New medical office building construction (15%)

Case in point with respect to the latter, Montefore Medical Center in New York is an example of what is a growing trend, although perhaps not on the same scale. Montefore recently announced plans to lease a new 11 story, 280,000 square foot ambulatory care facility at the Hutchinson Metro Center in the Bronx. Scheduled for completion in the fourth quarter of 2014, its aim is to provide multidisciplinary care that allows it to treat patients without hospitalization, referred to in the medical profession as “a hospital without beds”.  In addition to building new facilities, the hope by commercial real estate healthcare professionals is that hospitals and other medical providers will start to absorb some of the empty buildings, vacant retail and office space caused by the Great Recession.

The good news for commercial real estate in general and healthcare real estate in particular is that with market fundamentals improving, pension funds (private & public) along with endowments looking for yield are aggressively seeking commercial real estate assets and increasing their portfolio allocations after being flat for the last few years.  In fact some endowments are allocating dollars for value-added and opportunistic funds.  I think that’s great news for healthcare real estate.  Given the space needs of some hospitals and health systems and other medical providers, one can easily envision a scenario where a fund can re-purpose an office building or retail center using a medical provider as the anchor tenant, creating a long term valued asset providing better than average returns.

In the fourth quarter of 2012, the vacancy rate for medical office properties nationwide averaged 11%, according the research by Newmark Grubb Knight Frank.  The national vacancy rate for traditional office properties was 15.7 %.  Of course part of the challenge for healthcare real estate is that the market is in its infancy stages of development.  With only approximately 10 percent of the medical office properties trading in any given year, it can be a challenge for an investor to get in because of limited access to deals, and obviously to get out because of the lack of liquidity.  But the market is maturing and the trend with respect to deal flow continues to be strong.

Lastly, during the month of April (2013), the healthcare industry continued to add jobs, gaining 19,000 new positions, according to the new employment data released by the Bureau of Labor Statistics.  The largest healthcare job gains were in ambulatory care services with 14,000 new jobs, followed by home healthcare services with 6,100 and physicians’ offices with 5,400.  Over the last 12 months, the healthcare industry has added an average of 24,000 new jobs per month.

So the fundamentals continue to show solid improvement and demand for healthcare space will only grow stronger.

“Experience, expertise and our commitment to excellence are what drive positive results for our clients.”

Mark H. Caulton is president and managing principal of Princeton Realty Advisors, LLC, a Charlotte, NC-based diversified commercial real estate company with an emphasis on healthcare real estate.

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About Princeton Realty Advisors, LLC

Princeton Realty Advisors, LLC (PRA) is a diversified commercial real estate company with an emphasis on healthcare real estate.  PRA was founded in 2006 by Mark H. Caulton, its president and managing principal.  It has three primary lines of business: Tenant Advisory Services, Finance & Development, and Investments.  The company is located in Charlotte, North Carolina and has client relationships in Virginia, the Carolinas, Georgia and Florida (www.princetonrealtyadvisors.com)

New Market Tax Credits Offer Alternative Financing Vehicle for Federally Funded Community Health Centers

In May of this year Kathleen Sebelius, U.S. Secretary of Health and Human Services announced awards in the form of grants totaling $728 million that will support the construction and renovation of more than 300 Federally Qualified Community Health Centers (FQCHCs) nationwide. It is part of a $1.5 billion commitment by the federal government, made possible through the Affordable Care Act, for the purpose of increasing access to healthcare for millions of Americans. The competition for the grants is very competitive, and as you can imagine there are those FQCHCs that were elated to have won and those that were disappointed at not having been selected.

 As we talk about New Market Tax Credits (NMTC) our focus is to encourage those FQCHCs that have new projects or significant renovations on the drawing board and were not successful grantees, to continue to seek alternative financing vehicles to move their projects forward. We believe the NMTC program is one such vehicle. What is interesting is that prior to working with a number of our healthcare center clients, they were under the impression that because they were non-profits that they were not eligible for the NMTC program-not so. In fact, because of the location of most FQCHCs and the populations that they provide service to, there can be a natural synergy that makes NMTCs a very attractive funding source. According to the June, 2012 Progress Report by the New Markets Tax Credit Coalition, 11% or approximately $290 million of the $2.3 billion allocated in 2011 went to healthcare related uses.

The NMTC structure generally involves three levels, the Fund level, the Community Development Entity (CDE) level, and the Borrower level.

The Fund is a for-profit entity created specifically for the project. In a leveraged structured NMTC transaction, the Fund is owned by the equity investor who contributes capital to the project by buying the tax credits. The CDE is the investment vehicle for the NMTC.  The Borrower leverages the commitment from the equity investor to source additional capital if necessary to support the overall project cost.

Since the CDE is the source for the NMTC, it has to qualify the project. Once the project is approved by the CDE it becomes a Qualified Equity Investment (QEI).  The CDE receives the QEI from the Fund and allocates tax credits equal to 39% of the QEI to the Fund. The CDE pays all the closing cost, fees and loans the balance to the Qualified Active Low-Income Community Business (QALICB).

The health center or an entity solely created for the purpose of the transaction becomes the QALICB and functions as the Borrower during the seven year period. The Borrower receives the  funds from the CDE and uses them to build or renovate the health center. Over the seven-year tax credit compliance period, the  Borrower makes interest and fee payments to the CDE. After keeping a portion of the Borrower’s payments to cover cost, the CDE passes the rest up to the Fund. The Fund pays the debt service on the loans.

Without getting too much into the weeds let’s use a hypothetical scenario to bring the NMTC structure to life. New Market Healthcare Center (NM Health) was not a successful grantee in the latest round of funding from the Department of Health and Human Services (HHS). They were hoping for a grant from HHS in the range of $3-4 million to help cover the cost of the $9 million expansion and renovation of their existing health center which the board of directors approved 2 years ago. The $9 million represents the “hard and soft cost” including fees/cost associated with the NMTC structure. NM Health has been working with the CDE in their city and the CDE has agreed to sponsor the project. NM Health meets all the qualifications for the NMTC program. In this scenario NM Health is the Borrower.

Over the past 2 years NM Health has raised over $2.4 million through capital campaign fund drives. It knows that their $9 million project qualifies for $3,510,000 in tax credits (9,000,000 X 39% = $3,510,000). Wells America Bank has committed to buying the credits for 72 cents on the dollar or $2,527,200 and in effect becomes the equity investor and owner of the Fund. Since it was not approved for a HHS grant NM Health has had to reconfigure its capital structure to include a conventional commercial real estate loan. MH Capital has agreed to loan NM Health $4,000,000, interest only at 4% annually for 7 years.

So let’s recap the capital structure at this point. We have a $9 million project cost, our source of funds includes $2,527,200 equity investment from Well America Bank, $2,473,000 raised by NM Health through capital campaign funds, and a $4,000,000 commercial real estate loan from MH Capital (Loan A).

The mechanics of the NMTC funding structure is as follows:

•  The funds that NM Health raised  ($2,473,000) is loaned to the Fund (Loan B).
• .The Fund takes the combined equity and loaned funds ($9,000,000) and invests it into the CDE. The $9,000,000 becomes the QEI.
• The CDE receives the QEI from the Fund and allocates tax credits equal to 39% of the QEI or $3,510,000 (Loan C).
• The CDE pays all the closing cost and fees, and loans the balance of the funds to NM Health. NM Health uses the funds for the expansion and renovation of the health center.

During the 7 year life of the NMTC leveraged loan structure; NM Health makes annual interest payments to the CDE on Loans A, B & C. The CDE passes the payment on Loan A directly to MH Capital. Loan B which would typically carry an interest rate of 1%, is in essence NM Health paying itself on the monies it raised and loaned to the Fund. Loan C is the net amount of the tax credits to Well America Bank. Although structured as a loan, the intent is to provide the CDE with an annual management fee to cover its cost. The annual fee in this scenario is $45,000. It is calculated at .5% of the QEI ($9,000,000 x .5% = $45,000/$2,527,200 = 1.78% interest rate ).

At the end of 7 years through a “put/call” option, NM Health buys back Wells America’s interest in the Fund (Loan C) for a nominal amount, say $1,000, Loan B, which is basically a loan to itself is liquidated. And the loan from MH Capital (Loan A) is due and payable. In most cases the MH Capital loan would be rewritten with an extended term to include principal and interest payments based on stronger financials for the health care center, the significant capital improvements made, higher appraised value and an increased equity position in the building.

The NMTC leveraged loan structure is a very nuanced, sophisticated financing vehicle. The process can be challenging and certainly time consuming. The cost/benefit analysis on the part of a FQCHC considering the NMTC program should be extensive. The information provided in this article is merely intended to give the reader a basic framework from which to understand the NMTC financing structure.

“Experience, expertise and our commitment to excellence are what drive positive results for our clients.”

 Mark H. Caulton is president and managing principal of Princeton Realty Advisors, LLC, a Charlotte, NC-based diversified commercial real estate company with an emphasis on healthcare real estate.

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About Princeton Realty Advisors, LLC

Princeton Realty Advisors, LLC (PRA) is a diversified commercial real estate company with an emphasis on healthcare real estate. PRA was founded in 2006 by Mark H. Caulton its president and managing principal; it has three primary lines of business, Tenant Advisory Services, Finance & Development, and Investments. The company is located in Charlotte, North Carolina and has client relationships in Virginia, the Carolinas, Georgia and Florida (www.princetonrealtyadvisors.com)

The Impact of Accountable Care Organizations on Healthcare Real Estate

 An Accountable Care Organization (ACO) is a type of health system in which physicians and hospitals are held accountable for the continuum of health for the patients in the health care network in which they serve.  Instead of receiving pay for services which is the predominant current pay model, ACO’s receive a flat fee per patient from the patient’s insurer or employer for a number of health services. As part of the Affordable Care Act (to be fully implemented in 2014), an ACO would agree to manage all of the healthcare needs of a minimum of 5,000 Medicare patients for at least three years.

The ACO initiative which was launched in January of this year has physician’s practices, hospitals and insurers across the country announcing their plans to establish ACO’s, not only for Medicare patients but for patients with private insurance as well. The objective of an ACO is first and foremost to deliver seamless quality care to their patients. Second, increase physician communication across the different medical specialties, and third to provide these services in the most cost effective manner possible. It is a model that is designed to be much more proactive with respect to patient care with the intent of reducing hospital readmission rates. There was a good article in the New York Times on March 12, 2012 written by Bruce Japsen titled Small Picture Approach Flips Medical Economics. It does a great job of detailing the structure and the potential benefits of an ACO using an ACO in Chicago as an example.

What we are seeing in healthcare today is hospitals bulking up into huge healthcare systems, merging with other hospitals to build extensive networks. According to a December 12, 2011 article in the Wall St. Journal, the number of hospitals acquiring other hospitals in 2009 was between 55-60, 78 in 2010 and more than 80 at the end of 2011. Many of these mergers and acquisitions are the results of some hospitals pooling resources to remain economically viable, and for others it is a way to aggressively expand their network and capture a larger share of the healthcare market in their region.

It is clear that hospitals are hiring and/or partnering with more and more primary care physicians and large specialty medical groups to ensure that they have a network of patient care services. Primary care physicians are the access point for the ACO model. According the same Wall St. Journal article, in 2005 there were approximately 475,000 independent primary care physicians nationwide; that number dropped to 375,000 in 2009 and is projected to be 250,000 by 2013. Certainly the drop in independent physicians is happening for a number of reasons, but the continued contractual alignment by independent physician’s and hospitals is a significant factor.

So what does all this mean for healthcare real estate? What we are seeing in our own firm is the increasing demand from our physician clients for expanded tenant advisory services in the area of lease negotiations between them and the hospital. These services include structuring an acceptable financial agreement which takes into consideration their existing space lease and the proposed contractual arrangement for new space and all that includes.  In addition, where our clients own their own medical building or are the majority owners, we are advising them on value considerations for the real estate and their partnership interest. As well as creating successful exist strategies that allow them to sell the real estate if/when appropriate.

I anticipate that the demand for quality healthcare advisory services will increase over the next 5 years as our current healthcare model evolves. We will continue to see community ambulatory care centers increase. In addition, as practice groups add doctors and hospital buy practices the trend will be to merge these smaller groups into larger or multi-specialty space, which means larger floor plates for medical office buildings.

“Experience, expertise and our commitment to excellence are what drive positive results for our clients.”

 Mark H. Caulton is president and managing principal of Princeton Realty Advisors, LLC, a Charlotte, NC-based diversified commercial real estate company with an emphasis on healthcare real estate.

_________________________________

About Princeton Realty Advisors, LLC

Princeton Realty Advisors, LLC (PRA) is a diversified commercial real estate company with an emphasis on healthcare real estate. PRA was founded in 2006 by Mark H. Caulton its president and managing principal; it has three primary lines of business, Tenant Advisory Services, Finance & Development, and Investments. The company is located in Charlotte, North Carolina and has client relationships in Virginia, the Carolinas, Georgia and Florida (www.princetonrealtyadvisors.com)

More and More Shopping Centers are Attracting Healthcare Tenants

A few years ago it was out of the ordinary to see a healthcare clinic, dentist or doctor’s office located in a shopping center, it just wasn’t what we were accustomed to. Times are changing very quickly and there are a number of factors at the heart of what’s happening. First, the delivery model for the healthcare industry over the past 10 years led by healthcare systems throughout the country have been moving closer to where their patients live through the establishment of neighborhood ambulatory care centers. Second, as consumers, with our busy lifestyles we want the ability to visit our health clinic, doctors or dentist office and then go grocery shopping or take care of other consumer needs all with in a convenient location. Third, shopping center landlords have become more comfortable with healthcare tenants, understanding their business model and how to successfully integrate them into the tenant mix. In addition to the positive impact they can have on a shopping center through increased foot traffic and as a stable tenant often committing to a minimum a 5 year lease term.

The past 5 years have been absolutely brutal on the commercial real estate industry in general and retail shopping centers in particular. If you drive by any shopping center in any city in the country the first thing you will notice is the number of vacant store fronts. At the end of the third quarter of this year the national vacancy rate for retail shopping centers (neighborhood and community) was 11%, the highest in 21 years. Contrast that with a average job growth rate of 3% in the healthcare sector over the same period of time and you begin to see the demand factors driving the space needs of the healthcare industry. So for those shopping centers that have the right tenant mix, visibility, traffic count, parking and close proximity to other general healthcare services, a shopping center location can be a very good fit.

Economics drive any business decision and commercial real estate is no exception. In the third quarter of this year the national per square foot average rent for medical office space was $24.00 compared with $15.00 for shopping centers. In 2010 retail space sold on average for $170 per square foot and leased for $17.00 per square foot, while medical office space sold for $210 per square foot and leased $25.00 per square foot.

Healthcare space in a shopping center can be 5-10% less than that of traditional medical office space. Of course when transforming existing shopping center space to accommodate a healthcare use the  per square foot cost will increase because of the additional tenant improvements needed. One of the more significant expenses can be plumbing. Most of the time the existing concrete floor will need to be torn up to provide for more plumbing lines, electrical systems need to be upgraded to service sophisticated medical equipment, and interior walls enhanced with additional sound proofing to satisfy patient privacy concerns. The additional cost could range between $30-40 per square foot, and add $5-6 per square foot to the annual cost of the space depending on the lease term. If the economics work, the landlord gets a stable tenant for the center committed to a 7-10 year lease term and will hopefully increase traffic flow to the center. For the healthcare tenant it gives them affordable space relative to what they would pay for traditional medical space, easy access their clients and the potential to attract a larger group of clients.

Healthcare space users are also taking full advantage of single tenant retail buildings that have become causalities of the economic downturn. They include video stores, bank branches and even car dealerships. The common tread that runs through all of these buildings is affordable cost per square foot, visibility, signage, drive by traffic, great ingress /egress and ample parking. Some cities won’t allow a healthcare uses in a former retail space, so due diligence needs to be performed up-front to insure that the zoning does not prevent it.

“Experience, expertise and our commitment to excellence are what drive positive results for our clients.”

 Mark H. Caulton is president and managing principal of Princeton Realty Advisors, LLC, a Charlotte, NC-based diversified commercial real estate company with an emphasis on healthcare real estate.

_________________________________

About Princeton Realty Advisors, LLC

Princeton Realty Advisors, LLC (PRA) is a diversified commercial real estate company with an emphasis on healthcare real estate. PRA was founded in 2006 by Mark H. Caulton its president and managing principal; it has three primary lines of business, Tenant Advisory Services, Finance & Development, and Investments. The company is located in Charlotte, North Carolina and has client relationships in Virginia, the Carolinas, Georgia and Florida (www.princetonrealtyadvisors.com)

Sale/Leaseback Structure Gaining Momentum in Healthcare Real Estate

November, 2011

Several weeks ago I was having a conversation with a colleague of mine who is head of one the leading global commercial real estate brokerage firms located in the United States.  As the conversation moved back and forth we started talking about the trend in healthcare real estate towards the monetization of real estate assets primarily through various forms of the sale/lease back structure (Structured Finance Leases, Credit Tenant Leases, etc.) My colleague made a simple yet accurate statement talking specifically about hospitals and health systems. He said for years hospitals and health systems primarily looked at their real estate assets as the infrastructure by which they delivered quality care to their clients, nothing more nothing less. Detailed financial modeling with respect to the cost of the asset as it relates to overall return on investment was the exception as oppose to the rule. Those days are gone! Today hospitals and healthcare systems have become much more sophisticated and strategic with respect to their real estate holdings. Identifying core and non-core assets and deploying various sale/leaseback strategies; reducing their role as owner/landlord, freeing up capital for future projects and participating in ownership structures that create the opportunity to share in the upside profitability of the asset.

To be clear, much of the hospitals and health systems strategy to increase liquidity and generate capital (sale/leaseback) is borne out of the 2007 municipal bond insurance downgrades and the shutdown of the tax-exempt bond market in late 2008 into 2009 with the Lehman bankruptcy. The lesson, easy access to the tax exempt debt markets has ended. The days of multiple borrowing options can no longer be taken for granted.

Beyond hospitals and health systems, given the positive performance of healthcare real estate over the past 3-4 years in a very difficult economic climate, and the projected supply/demand needs of the healthcare sector in general in the next 10-15 years, investors are becoming more and more comfortable with healthcare real estate as an asset class. The sale/ leaseback structure continues to gain momentum for single tenant physician owned facilities where the medical group has a strong financial practice, a long track record of quality patient care, has owned the asset for at least 5 years and want to sell all or part of the ownership.

 SALE/LEASE BACK STRUCTURE

The owner (seller/lessee) of the building sells the property to the buyer/ lessor and leases it back. Sale/leaseback transactions typically have lease terms that can range from a minimum of 10years to a maximum of 30, and the seller/lessee is usually required sign a triple net lease, whereby seller/lessee is responsible for all costs associated with the property including maintenance, repairs, and taxes. The transaction is often structured with bank or other institutional financing that can range from 50% to 90% of the property value, with the remaining capital provided by the buyer/lessor. Unlike other models, in a typical sale/leaseback transaction the buyer/lessor structures its third party financing independently from the seller/lessee, so the financing terms are strictly between the buyer/lessor and its lender. At the front end of the transaction, the net proceeds from the sale of the property, after transaction costs and repayment of any outstanding debt will accrue to the seller. An advantage of a sale/leaseback transaction, which is also true for other net lease models, is that the seller/lessee continues to control and have full use of the property during the term of the lease. However, different from other net lease models, the lease and rent structure of a typical sale/leaseback can be flexible with negotiated lease terms, rent escalations, and renewal or purchase options. A potential disadvantage of the sale/leaseback structure compared to other net lease models is the lower sales proceeds generated from the transaction if there is a shorter lease term and a lower mortgage loan to value for the investor. Terms of these transactions will often include an option for the seller/lessee to buy the property back from the landlord at the end of the lease term at the then fair market value. If the seller/lessee wants to continue to occupy and use the property, it will either buy the property back or enter into a renewal or “new” lease with the landlord.

Single tenant net lease models are not new to the real estate industry The primary benefit of the sale/ leaseback structure for the seller is to turn their equity into cash through the sale of the asset. For the buyer, it’s a predictable income stream from a quality credit source with the potential for the asset to increase in value over time. Whatever the sale/ leaseback structure, detailed financial analysis and due diligence on the part of the seller and the buyer is required to confirm that the goals and objectives of each are being achieved.

“Experience, expertise and our commitment to excellence are what drive positive results for our clients.”

Mark H. Caulton is president and managing principal of Princeton Realty Advisors, LLC, a Charlotte, NC-based diversified commercial real estate company with an emphasis on healthcare real estate.

_________________________________

About Princeton Realty Advisors, LLC

Princeton Realty Advisors, LLC (PRA) is a diversified commercial real estate company with an emphasis on healthcare real estate. PRA was founded in 2006 by Mark H. Caulton its president and managing principal; it has three primary lines of business, Tenant Advisory, Finance & Development, and Investments. The company is located in Charlotte, North Carolina and has client relationships in Virginia, the Carolinas, Georgia and Florida (www.princetonrealtyadvisors.com)

Demand for Medical Office Space Creates Equity Opportunity for Physicians

January, 2012

For decades physicians in private practice have owned their own medical office buildings (MOBs). They typically purchased their buildings either as a sole investor or with other physician partners, primarily because it allowed them the autonomy to control space that was efficient and productive as well as having some predictability of their fixed expenses on an annual basis. In addition they were able to take advantage of the tax benefits associated with real estate ownership along with the expectation that the value of their equity position would increase as the building appreciated in value over time. And as owner physicians they did not have to worry about a landlord forcing them to leave a thriving practice location when the lease expired.

About thirty years ago hospitals recognizing the need for medical office space to service a growing population of new physician practices and their patients, began to develop medical office space on their campuses or in off campus locations within close proximity to the hospital. These MOBs were rarely undertaken as a real estate investment, but as strategic initiatives to allow physicians to rent space close to the hospital so that their patients could have convenient access to hospital services. So more and more physicians found them renting medical office space affiliated with hospitals or health systems,

Ten years ago a confluence of events starting happening with respect to hospitals and their on and off campus MOBs. Hospitals realized based on the number of facilities that they owned and operated that they were in the real estate business. They also realized that they were not particularly good at being landlords, not to mention the potential of on-going conflicts of interest with their physician tenants.  About the same time healthcare assets began to get a lot of attention from the investment community as an asset class, particularly MOBs. Recognizing the value of their MOBs, hospitals with the assistance of advisors began the initiative of selling some of their existing medical office building to experienced medical real estate investor/operators freeing up cash for operations and outsourcing the development of new MOBs to third-party real estate developers.  It is with these newly developed MOBs where physicians are being enticed with equity participation.

Physician tenants of an MOB are now in a unique position to increase the value of a project when they sign a long term lease of 10 years or more. As MOBs are increasing being developed by third-party developers without the support/credit worthiness of a hospital to strengthen the sponsorship of the project, financial institutions are requiring substantial preleasing requirements that emphasize stable, predictable cash flow which places a high value on long term leases.

New ownership models (Direct Cash Equity Contribution, Rent-Amortized Ownership and others) allow physicians to invest in MOBs more like equity shareholders than direct owners of a particular piece of real estate. The physician’s exposure with this structure is typically limited to the equity invested. As an equity investor, a physician can participate in two cash flow components based upon his or her proportionate equity interest. The first is periodic distribution of net cash flow, which is essentially net operating income attributed to the property less capital expense and debt service payments. In some instances, net operating income after debt service may not be sufficient to offset capital expenditures necessary to maintain the MOB. In these cases the property owners, including physician tenant-owners, may be subject to a “capital call” and, therefore, be required to contribute cash out of their pockets. Some sponsors may limit this responsibility for capital calls. Net cash flow distribution will vary from monthly to annually, depending upon the terms of the particular project.

The second cash flow component available to physician owners is participation in any net proceeds from the refinancing or a sale of the real estate to another owner, assuming that the value of the real estate increased during the time that the sponsor and physicians owned the MOB. Depending upon specific terms of ownership, the MOB owners’ receipt of proceeds from the refinancing or sale of the property would come after paying off the existing mortgage on the property and in some cases after capital expenditures.

“Experience, expertise and our commitment to excellence are what drive positive results for our clients.”

 Mark H. Caulton is president and managing principal of Princeton Realty Advisors, LLC, a Charlotte, NC-based diversified commercial real estate company with an emphasis on healthcare real estate.

_________________________________

About Princeton Realty Advisors, LLC

Princeton Realty Advisors, LLC (PRA) is a diversified commercial real estate company with an emphasis on healthcare real estate. PRA was founded in 2006 by Mark H. Caulton its president and managing principal; it has three primary lines of business, Tenant Advisory Services, Finance & Development, and Investments. The company is located in Charlotte, North Carolina and has client relationships in Virginia, the Carolinas, Georgia and Florida (www.princetonrealtyadvisors.com)

Diversity in Healthcare Real Estate on Life Support

November, 2011

I know, I know it’s a shameless play on words, but the only other choice and perhaps the most appropriate word to use is ‘dead’. I thought the word ‘dead’ in the title would be a bit too harsh or morbid. Plus I want to believe that the patient has a chance to make a recovery.

Reading an article in the September-October (2011) of Pride Magazine, a regional publication based in Charlotte, NC a few weeks ago, I was compelled to write this article. Pride Magazine featured Carolinas HealthCare Systems (CHS) senior vice president of human resources. She was quoted as saying that CHS has a long-term commitment to supplier diversity…. It’s clear in reading the article that she is doing some great work at CHS and certainly deserves to be congratulated and recognized as such. CHSs’ commitment to supply chain diversity and diversity period appears to be one of their core values as referenced by the following statement on their website (under Diversity & Inclusion) by CEO Michael Tarwater  “Carolinas HealthCare System (CHS) takes great pride in its diverse work force. CHS promotes an environment wherein differences are valued and integrated into our organization’s operations. Diversity awareness is a business imperative that is important to our organization and to the community we serve. Diversity encompasses all the ways in which human beings are both similar and different. CHS has achieved success by creating a high-performance organization, leveraging the capacity and diversity of our total work force”.

 The focus for this article is supply chain diversity. As healthcare systems make decisions about their facilities- build, renovate, sell, lease, partner, etc, is supply chain diversity a part of that commitment as well? Too often African American commercial real estate professionals or companies are not included in the conversation or given the opportunity to participate in contracts worth millions of dollars.

Case in point, in 2008 CHS hired Cain Brothers, a national healthcare advisory firm to sell a portfolio of assets. According to Cain Brothers they sold 15 buildings representing 758,000 square feet to Healthcare Realty Trust, which generated $162 million in net sale proceeds to CHS. I suspect the timing of the sale is consistent with what was happening in the capital markets in 2008. With the collapse of the tax-exempt bond market and the Lehman Brothers bankruptcy and access to capital from financial institutions all but dried up, many highly rated healthcare systems monetized some of their real estate assets by using a sale/leaseback structure to increase liquidity and free up capital to fund on- going operations or other initiatives.

I have not doubt that Cain Brothers did a wonderful job for CHS and earned a multimillion dollar fee along the way for their effort. But let me take you back to a portion of Mr. Tarwarter’s statement “Diversity awareness is a business imperative that is important to our organization and to the community we serve”. I went out on the Cain Brothers website (cainbrothers.com), and from all I could glean about their company they appear to be a very sophisticated capable healthcare advisory firm and I can understand why CHS would hire them. But something else about their company was very glaring to me. Of the 73 employees that they list under their Our Team banner, not one was  African American. So if diversity is one of your core values, I would logically conclude that CHS would want the companies that it does business with to reflect their own core values. Does that mean CHS should not have hired Cain Brothers, absolutely not! I don’t know what other advisory firms were bidding for the assignment, but I do think it is important for CHS to send a clear and decisive message to companies like Cain Brothers-until and unless diversity becomes a priority to them, they should not expect to be doing business with CHS. And that message should be stated up-front and as a part of their due diligence before they make a decision to do business with a company. It’s the old golden rule theory-he who has the gold makes the rules. The same can be said for Healthcare Realty Trust (buyer). Just for fun, go out on their website, healthcarerealty.com.  If you see any person of color on their Board of Directors, Executive Officers or Management Team, I’ll buy you a steak dinner at Ruth’s Chris (just kidding). I suspect that lack of diversity in their executive ranks also transcends their staff personnel as well.

Cain Brothers and Healthcare Realty Trust are but one example of a multimillion dollar transaction where there is absolutely no diversity representation at all. The truth of the matter, CHS is in the real estate business just as much as it’s in the patient care business. With over 32 facilities listed and spending million of dollars each year under the Facilities line item, there appears to be amble opportunity for CHS to leverage their core value principals and apply the golden rule theory to companies that they do business with. The question is, are they?

I could have substituted Novant Health for CHS or any healthcare system in the Southeast. As the healthcare industry continues to grow in response to the aging of the baby boom generation and the new healthcare law to be fully enacted in 2014, the opportunities in healthcare real estate will grow as well. Just recently CHS proposed a $77 million, 64 hospital in Rock Hill, SC, what will it’s commitment to supply chain diversity be on that project.

One simple message that I would like to express to the decision makers at CHS and other healthcare systems, if the companies that you are currently doing business with or anticipate doing business with say they cannot find minority talent, I say that’s nonsense. I know for a fact that there are very sophisticated capable African American individuals and companies in all sectors of the commercial real estate industry.

I use to be a fan of the science fiction television series in the 90’s called the X-Files. They would end each show with the tag line “the truth is out there” Well the talent is out there, but you have to want to find it.

“Experience, expertise and our commitment to excellence are what drive positive results for our clients.”

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About Princeton Realty Advisors, LLC

Princeton Realty Advisors, LLC (PRA) is a diversified commercial real estate company with an emphasis on healthcare real estate. PRA was founded in 2006 by Mark H. Carlton its president and managing principal; it has three primary lines of business, Tenant Advisory Services, Finance & Development, and Investments. The company is located in Charlotte, North Carolina and has client relationships in Virginia, the Carolinas, Georgia and Florida (www.princetonrealtyadvisors.com).

Real Estate Market Opportunity Could Save African American Doctors and Dentist Millions

September, 2011

African Doctors and Dentist are missing out on perhaps a once in a quarter century opportunity to lower the operating cost of their practices by not aggressively managing one their most significant business expenses-the cost of the space in which they do business. And with 73% of office administrators reporting an increase in operation costs in 2009, patient visits down and Medicare payments under pressure, this is a time to pursue all avenues to reduce cost.

Certainly African American Doctors and Dentist are by no means alone, but I find that as my company engages new healthcare clients, the professional representation that they are receiving from the commercial real estate brokerage community is not aggressively representing their interest.

There are approximately 22,000 African American Doctors in the United States and 25,000 Dentist. The number of practicing physicians and dentist is certainly significantly less but collectively they lease in excess of 2,000,000 square feet of space and conservatively represent approximately $45,000,000 in revenue to the commercial real estate industry.

Right now the commercial real estate industry is experiencing what I would call “a perfect storm”. Across property types-office buildings, retail centers, industrial buildings, etc- it doesn’t matter, real estate values are down 35-40% from their peak in 2007; vacancy rates are up and rental rates are down across all markets.  For example, if you research the office market for Boston, New York, Washington, DC, and Atlanta you will find the second quarter reporting for 2010 represents a significant decrease from 2007. The overall asking per square foot rental rate for Boston in 2007 was $55.00/sf, now its $40.00/sf; New York was $46.00/sf, now its $38.26, Washington DC in 2007 was $54/sf now its $51/sf and Atlanta was $25.00/sf and now its $20/sf.

Specifically as it relates to medical office space there is approximately 600 million square feet in the market. Occupancy peaked at 92% in 2007 and the annual asking per square foot rental rate increased on average by 4.5% in years 2005-2007 and decreased by 3% in 2008, 2009 and through the second quarter of 2010. Because of the over supply of general office space in the market that can be converted to medical space, and retail center landlords aggressively pursuing healthcare tenants, it is anticipated that medical office rents will stay flat through 2011 and show a modest increase in 2012.

Proactive tenants in the market are adjusting their current space requirements, extending their leases or renewing early under restructured terms. Landlords are accommodating their tenants by reducing square foot rent cost, increasing tenant allowance budgets and typically providing one month of free rent for each year the lease is extended

Now is the time for African American Doctors and Dentist to aggressively follow suit and take advantage of the current real estate environment to put their practices on a stronger financial footing.

  “Experience, expertise and our commitment to excellence are what drive positive results for our clients.”

 Mark H. Caulton is president and managing principal of Princeton Realty Advisors, LLC, a Charlotte, NC-based diversified commercial real estate company with an emphasis on healthcare real estate.

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About Princeton Realty Advisors, LLC

Princeton Realty Advisors, LLC (PRA) is a diversified commercial real estate company with an emphasis on healthcare real estate. PRA was founded in 2006 by Mark H. Carlton its president and managing principal; it has three primary lines of business, Tenant Advisory Services, Finance & Development, and Investments. The company is located in Charlotte, North Carolina and has client relationships in Virginia, the Carolinas, Georgia and Florida (www.princetonrealtyadvisors.com).

WHAT YOU DON’T KNOW CAN BE EXPENSE: ALWAYS UNDERSTAND YOUR LEVERAGE WHEN LOOKING FOR THE RIGHT SPACE FOR YOUR BUSINNESS

November, 2008

I recently had a meeting with a prospective client that I requested after reading a newspaper article about him and his business. I wanted to introduce myself and my company, Princeton Realty Advisors, LLC (PRA) to him, and understand his business model in more detail.

When meeting with a prospective client, our associates listen as intently as possible to understand their business plan/model and provide them with honest and thoughtful feedback to help them make the best informed decisions possible. It’s one our Core Values.

As I began to ask to the owner some general questions about the space he currently occupied such as, How the company identified the site as a potential location for the business; was his company represented by a third party (broker, lawyer, etc), did the lease negotiations result in what he perceived to be a fair market rent, and were the terms of the lease reasonable? As the conversation went back and forth it became clear to me that he did not fully understand his company’s leverage in negotiating the key “deal points” of the lease.

Let me describe the situation in more detail to put it in the proper perspective. The retail center that the business in question leased space in was a 60,000 square feet, unanchored shopping center, built within the last 12-18 months and had no tenants. The prospective client that I was meeting with was the first tenant to occupy the center. The developer was asking between $17-19 per square foot for rent, and required each tenant to sign at least a 3 year lease. The company signed a 5 year lease for 3,000 square feet at $18.50 per square foot.

Using the above-referenced scenario, let’s call this prospective client, ABC Company. If you are ABC Company or its representative trying to negotiate the best possible deal for your business (or client), here is what you must know to understand your leverage.

•  A developer when bringing new space to market, whether its retail, office or industrial, has an anticipated lease-up period. Lease-up being the timeframe to have signed leases and tenants in place occupying typically 95% of the leaseable space in the building, most often referred to as stabilization. As a condition of the construction financing, the lender and the developer will agree on the appropriate  lease-up period. Depending on the size of the building and market demand, the lease-up period can be anywhere from 6 to 12 months or more.

• Signed leases in a timely fashion at the proposed square foot rents not only confirm the developers market assumptions with respect to demand for that particular location, it also gives the construction lender comfort that one of  the most critical components of the project is moving forward based on what the developer represented in its proposal for financing. Ultimately the developer wants to pay off the short-term variable rate construction loan and put a long term fixed rate loan in place that maximizes the value of the property. That can only happen if the developer has significant signed leases with tenants in occupancy. Signed leases create an income stream for the property and that income stream creates value. No leases or limited number of leases results in reduced value and lower probability for permanent financing. All of which makes the construction lender concerned that his loan will not be paid off in a timely fashion.

HOW WOULD PRA HAVE ADVISED ABC COMPANY

Always have professional representation when negotiating a commercial real estate transaction, the owner of ABC Company did not. Commercial real estate is a  specialized business that speaks a very different language, literally. And what you don’t know, as in this case, can be very expensive. In addition, in most business transactions, you want to avoid direct negotiations. When you negotiate directly, personalities and egos can come into play, and a deal can sour for all the wrong reasons.

If you are the first tenant in a new center that is vacant, start your lease negotiations below what the developers per square foot asking rent is. This particular center, given its size and unanchored status was well past the lease-up period that the developer had agreed upon with the lender. Given a healthy market, the center should have reached stabilization within 6-8 months of being completed. Space in the center had been available for lease for more than 10 months before the developer began negotiations with ABC Company. As the first prospective tenant, ABC Company was a significant catalyst in creating exposure and energy for the center, and arguably had increased risk as a business for being the first tenant. Because the center had been vacant for an inordinate amount of time given its size, ABC Company should have started square foot rent negotiations below the developer’s $17-19 square foot asking range. In addition, it should have used its leverage to aggressively negotiate all aspects of the terms and conditions of the lease.

The longer the lease term the lower the per square foot should be. ABC company signed a five year lease, it should have been able to negotiate a per square foot rent of not more than $17. The $1.50 per square difference cost ABC Company $4,500 per year ($1.50 x 3,000/sf x12) or $22,500 ($4,500 per year x 5 years) over the term of the lease.

Whether its new space or existing space, retail, office or industrial, each transaction is different. As a prospective tenant in the marketplace, make certain you understand your leverage as you begin the process of identifying the right space for your business. What you don’t know can be expensive.

“Experience, expertise and our commitment to excellence are what drive positive results for our clients.”

 Mark H. Caulton is president and managing principal of Princeton Realty Advisors, LLC, a Charlotte, NC-based diversified commercial real estate company with an emphasis on healthcare real estate.

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About Princeton Realty Advisors, LLC

Princeton Realty Advisors, LLC (PRA) is a diversified commercial real estate company with an emphasis on healthcare real estate. PRA was founded in 2006 by Mark H. Caulton its president and managing principal; it has three primary lines of business, Tenant Advisory Services, Finance & Development, and Investments. The company is located in Charlotte, North Carolina and has client relationships in Virginia, the Carolinas, Georgia and Florida (www.princetonrealtyadvisors.com)