Can You Afford to Build?Many of our physician clients ask us this question as they contemplate the risks and rewards of healthcare real estate. Although the complete answer depends upon the independent circumstances of each client, there are several fundamental and common factors to be considered. Among them are the following:
STRATEGIC BENEFITAny capital investment in a medical facility must produce a tangible return on investment that enhances the long-term profitability of the medical practice. Although this seems self evident, many times the physician practice may become more focused on the “glamour” of the project and pay less attention to the critical analyses of the economics and cost/benefit. A visible symptom of this fundamental error is investing too many dollars in architectural plans before the business plans are developed with real-life, actionable assumptions, including financing. Healthcare architects are necessary and very valuable resources for designing well-functioning medical offices; however, their optimal value is derived in schematic design and design development phases of the design process which should follow the development of a sound business plan. Once construction documents are completed, it is both difficult and costly to adjust to plan changes prompted by the critical business analysis.A common characteristic of successfully designed medical offices is that they focus on the patient experience first and then on the efficiency – or throughput standards – of the physician. Although cost containment is important for managing profitability, the ability to provide top notch healthcare in an environment of comfort and support for the patient is more important to the overall success and sustainability of the medical practice.
SIZE AND COSTThe overall costs of new construction (including site preparation) have never been higher. However, the demand for new medical offices continues to be strong as healthcare delivery trends move the patient care site from “institutionalized” hospital settings to more “ambulatory” settings such as physician offices. The construction cost today for a multi-story, multiple tenant, Class A medical office building, excluding soft costs (design, legal, financing, etc.), land and site work, is approximately $92 to $105 per square foot. A smaller medical clinic type facility will cost approximately $80 to $95 per square foot. Tenant improvement costs, in addition to the shell costs, are approximately $62 to $80 per square foot. Adding land and soft costs, the total costs for a new MOB can range from approximately $215 to more than $300 per square foot. CAN WE AFFORD TO BUILD? Realty Trust Group 525 Portland Street Knoxville, TN 37919 865.521.0630 www.realtytrustgroup.com Realty Trust Group Planning Finance Development Management Please call or e-mail Greg Gheen at 865.521.0630 or ggheen@realtytrustgroup.com if you would like additional information.Medical Group Management Association (“MGMA”) in their Cost Survey for Single- Specialty Practices: 2007 reports that Building & Occupancy Cost per FTE Physician is $36,375 for the median and $70,780 for the 90th percentile. The same report identifies a square foot per FTE physician range of 1,701 square feet at the median and 2,533 square feet at the 90th percentile. Although this cost survey is broad-based with information from across the country, it should be used as one comparative metric to help analyze the optimal/appropriate operating costs and size relative to the new investment.
OWNERSHIP AND LEASINGPhysicians understand all too well the downward pressure on their incomes due to changes in reimbursement. Owning their medical real estate is one way many groups have tried to strengthen the group’s overall potential for profitability. The logic stands that the group would prefer to pay themselves “rent” and build equity in an asset than pay rent to an external landlord. Typically this return, or profit, to the physician/owner is 9% - 13% on an annual, cash-on-cash basis. In addition to the cash-on-cash return, the owners are also building equity by retiring the principal portion of the mortgage through their monthly payments. However, it is important that the physician/owner understand the comparable market rents for leased properties and directly compare the costs of ownership to the market rent for a comparable leased facility in order to responsibly manage the group’s facility expenses. Market factors such as an over-supply of office space may make leasing costs extremely competitive. Careful analysis and guidance from a financial advisor or accountant concerning the risks of ownership (asset illiquidity, mortgage obligations, and facility maintenance) should be undertaken before a decision is made to own the real estate.
|
