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).

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)