Which of these three buildings is most expensive to build and outfit: a hospital, a shopping mall or an apartment building? Many people probably would guess the hospital, and they would be right. A large shopping mall might cost more to build initially than a 120-bed hospital, but it is unlikely the shopping mall will use as much energy as the hospital in the long run.
It is also more expensive to maintain hospitals due to compliance standards and the need to run 24/7/365. Hospitals require a great deal of real estate, and the conversation of whether to buy or lease an existing facility is complicated. Below are some initial considerations healthcare real estate teams should consider, as well as suggestions on how to incorporate facilities teams.
Location, location, location
Everyone knows that location is everything in real estate. This is as true for healthcare real estate as it is for single-family homes. But most people would believe this means that when looking for healthcare real estate, the goal is to find the most visible, highest-traffic, center-of-population-growth property available. While this might be the case for specific healthcare operations, not all medical offices or clinics need to be located at the corner of Central and Main.
Highly visible, centralized locations are usually the most expensive with the most demand, so they can take longer to find, take longer to put a deal together and cost more. All of these issues eat away at healthcare facilities’ already low margins. Operators need to consider the right type of visibility, convenience and access that the facility’s specific uses require. There is no reason to pay more if it is not necessary.
Buy or lease?
Unfortunately, there is not a one-size-fits-all option for determining whether to own or lease a property. The answer really depends on the individual project. A benefit in one case might be a drawback in another.
This is the reason it is so important to assess every project at a high level to look for potential opportunities and determine if a detailed lease-versus-own analysis should be performed. Depending on the situation, there could be advantages related to tax, control, cost, flexibility and even the potential to generate income. Real estate teams need to consider the health system’s short- and long-term goals and factor those goals into their assessments.
One important consideration is the healthcare system’s model, i.e., for profit or not for profit. Not-for-profit lease models have worked well in education and student housing real estate ventures, where they have been able to generate millions of dollars in savings on a property. This model has recently made its way to healthcare, and some systems might find similar savings.
There is also no one-size-fits-all lease. Every lease is different, and everything is negotiable, from maintenance responsibilities to utilities to operating expenses and beyond. When an organization has dozens, hundreds or even thousands of leases, keeping track of all these responsibilities is daunting for real estate and facilities teams.
Who to call, who pays, what permissions do we have, can we implement savings initiatives or projects — the list goes on. Owning a building creates more consistency, but how long will the organization be there? Two years? Twenty? Assessing needs is key.
Incorporating facility managers
Facility managers are experts in understanding the way a building’s systems and components operate most effectively and efficiently. They understand system lifecycles, maintenance requirements and associated costs that must be considered and incorporated into a lease-versus-own assessment. This depth of understanding can save an operator from making a costly mistake. Real estate teams should always consult their facilities experts, regardless of whether a lease-versus-own assessment is being considered.
On a simple lease, a landlord might try to push responsibility for a certain maintenance or replacement cost onto the tenant. The facility expert can assess that system and provide valuable insight into the likelihood of replacement during the lease term or regular maintenance cost — information the real estate teams can use to negotiate a better position for the health system and potentially avoid a costly expense.
Healthcare facilities have a multitude of factors to consider, whether it is to own or lease a property or where it should be located. These are decisions that should not be taken lightly and require input from experts, like facility managers, to ensure an expansion is successful.
Ron Brown is the vice president of real estate for Medxcel, leading the company’s real estate portfolio strategy in property acquisition, leasing, disposition, asset management and lease management. He has over 14 years of healthcare facilities management, construction and real estate experience.