Business Advisor: Looking to Expand Your Surgery Center?

A sale-leaseback could help you pay for it.

Stamford ASC, an orthopedic and spine center in Connecticut, has grown steadily since opening in 2016 and they wanted that upward trend to continue. So they expanded from four to six operating rooms even though they weren’t close to capacity.

The expansion allowed the center to remain popular with the busiest surgeons in the area, says Ed Staunton, the ASC’s executive director.

“You can put up all the billboards in the world and market yourself as this and that, but a major differentiator is your ability to provide optimum OR time to busy surgeons,” says Mr. Staunton.

The Stamford facility was fortunate in that is was able to secure funding for the expansion project. But what about the physician-owners of ASCs who can’t or who want to avoid onerous lender terms such as personal guarantees? If they own the ASC real estate, an inexpensive solution is a sale-leaseback.

With more complex procedures moving to the outpatient arena, many physician-owners and administrators are finding that their capacity is an issue. Turning cases away or scheduling them into the future is not good for business or for an ASC’s reputation. Many ASCs need more operating rooms to handle current and projected business, including larger ORs that can fit microscopes, C-arms and extension tables some specialties require. Other sites may need a major renovation to allow for additional specialties or want to add additional locations.

The average gross cost of adding an OR to an existing ASC — including plans, infrastructure, tenant improvements and equipment — is $1.4 million, according to VMG Health. Adding two ORs and a procedure room could cost north of $3 million. A sale-leaseback transaction is an alternative to paying cash or taking out a loan to pay for ASC expansions. Real estate investors can also fund the construction and development of additional facilities.

The parties that sell the ASC real estate have full control to negotiate a beneficial long-term lease prior to closing. The owners sell the property to real estate investors for a competitive market rate and receive cash for the market value of the property sold and the capital they need to expand.

The mistake owners and administrators make is they wait until their OR utilization rate is 70% or 80% before they think to expand.
Ed Staunton

Then, the ASC can expand its OR space to grow its business without taking on more debt or providing personal guarantees for a new loan. The new larger capacity facilitates more procedures, revenue and profits.

The sellers receive cash upon closing that can be invested in better-yielding investments and can stop paying ordinary income tax on rent received. They can also pay down existing debt and remove loan guarantees. Sellers have the option to maintain full operating control of the property —and full control of their practice — and pay rent to a new landlord who provided the capital for expansion. Rent is deductible against the ASC’s taxable income. The arrangement often makes it easier to add new partners to the ASC.

Physician-owners retaining part of the real estate is also an option, as many healthcare real estate buyers that pay for expansion also allow for minority co-investment. This allows the physician real estate owners to stay on as minority partners in the real estate. Members of a larger group who do not want to sell can remain as owners while others seeking to sell and take assets off the table can do so. Other physicians in the group who do not already have ownership in the real estate are also given the option to co-invest.

Adding ORs or upgrading existing operating or procedure rooms will prepare you for the future, but it takes time and money. If your ASC is nearing capacity, now’s the time to plan for expansion or renovation to take advantage of the projected increase in outpatient procedures.

“I think the mistake many owners and administrators make is they wait until their OR utilization rate is 70% or 80% before they think to expand,” notes Mr. Staunton. “One of the best ways to differentiate your ASC and attract more cases is to create optimal OR availability for the surgeons. And if you need only one more OR, it is best to build and equip one and shell out a second, as you will likely need it in the future and this reduces construction disruption down the line.”

Moving procedures out of hospitals and into outpatient settings has generally been a positive development in health care — one that reflects advances in science, technology, and consumer and payer preferences. Outpatient surgery is more convenient and much more cost-effective than inpatient surgery. The Affordable Care Act promotes this sort of delivery system transformation because its goals are to make health care more accessible and convenient, while reducing costs and promoting quality and safety. Outpatient volume in ASCs in going to continue to grow and current owners should do everything they can to be ready as it does. OSM