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Business Advisor
The Joys of Owning Medical Real Estate
Denny Freudman
Publish Date: October 10, 2007

As more hospitals invite doctors to invest in outpatient facilities and medical office buildings that they're constructing away from the main hospital campus, the days of hospitals being landlords to physicians may be in full wane. Consider:

  • Physicians obtain their space and a piece of the real estate action at a lower price.
  • Hospitals get long-term commitments from physicians who won't be competing against them, all while reducing cash needs and keeping debt off the balance sheet.

Better to own than to lease
For physicians, office space is a significant fixed cost that continues to increase. The value of long-term real estate growth and the favored economics of owning versus leasing space has led many to pursue new options for building ownership and development - ranging from condominiums and air-rights leases to full building ownership.

A key to creating a successful ownership model is identifying the location that will support a physician's practice as well as the hospital services located in the building. Case in point is the O'Bleness Memorial Hospital in Athens, Ohio. In 2002, the hospital developed a new ambulatory facility in a joint venture with physicians. Three joint ventures, actually: one in the ASC, another for cancer services and physician ownership in their individual spaces.

The result is the Castrop Center, an ambulatory healthcare center that houses ambulatory surgery, physical therapy, cancer treatment, imaging, lab services, pharmacy and about 40,000 square feet of office space for physician practice groups. The office suites are consistently occupied at or above the 90 percent level. This success was created using an air-rights lease model, which let each physician own his office space while letting the hospital maintain control of the facility.

Another case in point is Baptist Health Care in Pensacola, Fla., and its success story with the Andrews Institute in Gulf Breeze, Fla. This 87,000-square-foot facility houses an orthopedic ASC, which is a joint venture between the hospital and surgeons. The hospital located key imaging and ancillary services in the building while creating ample office space for physicians, resulting in convenience for the physicians and the patients. The Andrews Institute offers ambulatory surgery, a hospital-owned imaging and physical therapy center and office space owned by the individual physicians. The center is expected to have a national draw of patients requiring orthopedic and rehabilitation services.

Still others have benefited from a scenario in which the hospital leases the land it owns to a developer, which then establishes a real estate joint venture with the participating physicians.

Joint venture with a twist
In real estate deals such as these, the hospital benefits by maintaining control over the facility and usage as well as the third-party capital used for development. Further, the hospital delivers services that are supported by the physicians. Meanwhile, the physicians are able to increase revenue opportunities with operational joint ventures and enjoy the financial benefits of real estate ownership. As these alignments continue to result in successful outpatient centers, the future is likely to include other variations of these scenarios.