The Medical Fitness Imperative – Post 9

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Post 9 - Financing

THE MEDICAL FITNESS IMPERATIVE

AN IN-DEPTH SERIES ABOUT THE HOWS AND WHYS OF

MEDICALLY-BASED FITNESS AND WELLNESS

 

- Hervey Lavoie, F-MFA

 

Medical fitness centers are a capital intensive real estate investment.  "All-in" project costs, including land, construction hard costs, equipment & furnishings, development soft costs and operating capital reserve, can be expected to reach a level of $300 per SF for a facility that is likely to be at least 50,000 SF in size.  This amounts to a capital need of $15 million dollars.  Where does this money come from?    

SOURCES OF FUNDING: 

Most hospitals have an over-crowded wish list of capital needs for core acute care services and patient beds.  Despite this intense competition for capital, a large majority of hospital-based medical fitness centers built to date (more than 1000 and climbing) have been funded from cash reserves or direct loans guaranteed by the hospital.  In some cases, this self-funding has been supplemented by philanthropy and/or write-off of land values.

 

DEFINING SUCCESS

The medical fitness service line does best with integrated with a substantial offering of compatible clinical services and physician practices.  When the market will support 45,000 SF of membership driven fitness services, the building should be sized to accommodate an additional allocation of integrated clinical services comprising 20,000 to 50,000 SF of tenant space.   This mix of uses will deliver a critical mass of mutually beneficial "customer activity" and dilute the overall risk of the project.  

LACK OF UNIFORMITY IN FINANCIAL REPORTING:

The medical fitness industry currently lacks uniform standards for quantifying capital investment and reporting financial performance of medical fitness centers, so it is difficult to compare the financial metrics of one project case study with another.  CFOs and governing boards of hospitals that have give a green light to medical fitness investment have had to come to their own independent conclusions related to the analysis of the business case specific to their circumstances.  Such "green lights" are rarely based solely on the expectation of impressive financial returns.  Well planned and intelligently operated medical fitness centers can be financially self-sustaining, even profitable, but it is rare that they are true "cash cows".  

ALTERNATIVES TO SELF FINANCING: 

Some choices do exist for hospitals with strong credit.  A large sector of the commercial real estate industry is devoted to development and lease-back of healthcare facilities.  Very few of these developers, however, truly understand the medical fitness business and often impose unrealistic design limitations on the buildings, future convertibility to physician office space being the most restrictive.  Simply put, the architectural design characteristics that contribute to successful medical fitness environments do not lend themselves to conventional medical office space.  

WHAT TO AVOID: 

  • Over-reliance on performance data from other projects - Ignoring the specific assets, liabilities, and success potential of your own project
  • Expectations of out-sized return on investment - Financial gain as the main motivator for proceeding with development
  • Numbers-only decision- making - Cost/benefit analyses that ignore intangible paybacks
  • Designing for failure - When financing sources demand that medical fitness centers be designed for future conversion to medical offices, the outlook for success dims and the need for an exit strategy becomes a self-fulfilling prophecy 

Up next time...Post 10 - Real Estate Development.