The Medical Fitness Imperative – Post 10

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Post 10 - Real Estate Development

THE MEDICAL FITNESS IMPERATIVE

AN IN-DEPTH SERIES ABOUT THE HOWS AND WHYS OF

MEDICALLY-BASED FITNESS AND WELLNESS

- Hervey Lavoie, F-MFA

 

When hospital leadership supports the creation of a medical fitness facility but capital resources are not available to fund the project, there is an entire industry of professional developers who specialize in Healthcare Real Estate.  Many of these companies have proven track records, responsible reputations, access to capital and can be called upon to deliver a fully financed, built - to - suit, completely turnkey building for lease back to the hospital.  The financing terms which drive the lease rates that these developers can offer are largely a function of interest rates available in the national financial markets and the credit rating of the hospital.  Therefore, development companies can only differentiate themselves in the competitive landscape by offering added value in the form of shared risk, how the deal is structured and/or the quality of development services offered.  

SHARED RISK: 

Hospital Executives are often attracted to the idea of consultants and development partners who are willing to put some "skin in the game" as opposed to the companies that simply provide services, collect fees and charge rent.  "Shared risk" can take many different forms and is only limited by the creativity of the parties involved.  Many developers who are focused on Medical Fitness real estate opportunities are teaming with Fitness Management companies and offering risk sharing agreements with operational performance thresholds that protect the hospital against operational losses or make portions of management fees contingent on profitable operations.

DEFINING SUCCESS

Selection of the right developer is the single most important decision a hospital will make.  The selected developer will be accountable for setting the wheels in motion and managing the work that will determine every aspect of the project outcome.  The process by which candidate developers are identified, evaluated and chosen must be carefully considered.

DEAL STRUCTURING:

The basic investment opportunity related to the real estate can be structured to include preferred return positions for the hospital and doctors who may choose to invest and/or lease space in the building.  Other points related to deal structuring can address ownership of the building, ownership of the land, lease termination options, rent guarantees, lease buyout options and tenant improvement costs.  

Developers who are experienced with the specific challenges of the Medical Fitness business will bring greater understanding to the negotiations and grasp the many ways in which a medical fitness project is a very different animal than the typical Medical Office Building.  

DEVELOPMENT SERVICES: 

When a real estate developer take the "turnkey" responsibility to deliver a project at a guaranteed lease rate on a guaranteed date, that developer must necessarily assume the full project management role from initial programming to opening the doors for business.  The duties of project manager are spelled out of the next page of this document.  This makes the developer accountable for quality assurance in the delivery of project management services including management of the A&E team, construction cost control, scheduling efficiently, program compliance, design outcome and other variables by which project performance will be measured.  The right developer will not only know how to sell a deal, they will know how to deliver an end product that exceeds all expectations.  

WHAT TO AVOID: 

  • Unchecked references - Working with companies that have left past clients unsatisfied.  
  • Skill set mismatch - Lack of Medical Fitness experience and no operational plan
  • Unshared Risk - Agreements with no incentives and no penalties 

 

Up next time...Post 11 - Project Management.