NEWMARK KNIGHT FRANK

WHAT TO LOOK FOR IN A HEALTHCARE REAL ESTATE AGENT

What should a healthcare provider look for when selecting a real estate agent to represent his or her organization? It’s a great question… one that a doctor or practice manager somewhere asks every day. It’s also a vitally important question, as agent selection (favorable or not) impacts costs, revenues, compliance, and even capitalization strategies for years to come. A knowledgeable medical real estate agent can bring clarity to the “buy versus lease” decision, insure that all viable options are considered, secure the best possible pricing, garner the best possible contractual terms, and protect all parties from hidden regulatory pitfalls.

Flawed Strategies

There are definite criteria a healthcare provider should consider when selecting an agent to represent them. Let’s begin with how NOT to proceed. The most prevalent of the flawed agent selection strategies are (1) not using an agent at all, (2) calling the agent on a listing sign and allowing that agent to handle both sides of transaction, and (3) working with a non-specialized agent. While these strategies seem reasonable on the surface, there’s a glaring problem with each:

Flawed Strategy 1: Not using an agent. Because practitioners know who their peers are, they also tend to know of at least one available space that could work for them. Or if they don’t, it only takes a call or two to find something. Unfortunately, this approach fails to consider all possibilities so that the best option can be pursued AND so that competing options can be leveraged to gain the best pricing and terms. This mistake is becomes a frequent precursor to the effects of mistake #2, when the doctor who owns the property of interest introduces the tenant/buyer to his listing agent to “set it all up.”

Flawed Strategy 2: Relying on the listing agent. Good listing agents are a pleasure to work with, and they’re happy to handle both sides of a transaction for an unrepresented tenant/buyer. They will provide market data, help plan the space, provide legal documents, and even work to accommodate pricing and term change requests. But they are not neutral… they are contractually committed to protect the owner’s interests. They do not point out things that the tenant/buyer overlooks, they do not point out better alternatives for the tenant/buyer, and they insure that gray areas swing in favor of the landlord. That is their job as the listing agent.

Flawed Strategy 3: Working with a general agent. Medical transactions have many atypical elements. First and foremost, healthcare market and industry trend knowledge are critical. Hospital affiliations, competitor activities, geographical market shifts, compliance law changes and even owner personalities (quirks?) impact outcomes. What’s more, construction budgets are very different and tenant/buyers must pay attention to a unique set of factors (a few include hours of operation, parking ratios, competition, guarantees, partner death/debilitation, and signage). It’s simply not possible for a general agent to stay current on these matters without constant unwavering focus.
One other note on how not to proceed: When practitioners don’t use an agent, it’s often because they believe they’re removing cost from the transaction, resulting in better pricing. In a direct lease, with no agents involved, this may be true – no agent fees apply, but legal fees will almost certainly be higher and the tenant/buyer fails to consider ALL market options. However, once a listing agent is involved, the owner is contractually obligated to pay a fee… the only question is whether that fee goes solely to the owner’s representative or is shared between the owner’s representative and the tenant/buyer’s representative. Money is not saved, and only one party’s interests are protected.

Factors to Look For

So what should a practitioner look for when choosing a commercial real estate agent? We in the Global Healthcare Services group have identified four key factors…

Factor 1: Experience – Recent, Relevant, and Lots of it. The only way to truly stay current on the healthcare real estate marketplace is to be an active participant. There are so many factors working in any given submarket that one must be an active participant to have the best information. Hospital strategies, practices moving into and out of markets, physician alignments, and demographic shifts are but a few of the changing factors that can make the difference between a good decision and a bad one. Similarly, contract content is constantly evolving. Something that would not have been accepted 6 months ago may be acceptable today if one is aware of industry trends and precedents. It’s important to note that the knowledge gleaned from such experience comes best through a team environment, where several agents work together and the number of transactions is great enough to insure a broader look than any solo agent could provide.

Factor 2: Financial Savvy – to minimize the guesswork. Real estate decisions always involve some degree of subjective evaluation (aka predictive analytics), but there are many factors that can be reviewed objectively as well. The more objective criteria that an agent can quantify for comparison, the less subjective guesswork is required. And less subjectivity means less uncertainty. A few examples of the metrics an effective healthcare real estate agent can provide include:

  • Net Present Value of competing lease options (including factors such as relocation, construction, utilities, etc.) simmered to $-per-SF or averaged annually.

  • Net Present Value of competing lease/purchase options including construction, appreciation, lease-up and even exit strategies.

  • Internal Rate of Return analyses

  • Cash on Cash Returns

Factor 3: Industry Connections – for Predictions and Execution. The are two key reasons that industry connections are critical for success in high-quality medical real estate agency. One is accurate predictive information and the other is project execution.

  • Predictive Information. If recent years have proven nothing else, they have proven that the business side of healthcare is not static. Legislation, reimbursements, mergers and acquisitions, accounting practices, etcetera require constant attention to insure that the decision made today aligns with the direction the industry is poised to take tomorrow. Similarly, factors as simple as construction costs shift with economic conditions. Solid decisions require current information, and the best way to remain current is via an ongoing dialog with professionals working in that particular sector.

  • Project Execution. Whether one needs regulatory approval for a Surgery Center, the best contractor(s) for a particular project, or the CPA firm with the most relevant knowledge, it’s important that the medical agent be able to quickly facilitate introductions to the right resources at the right time.

Factor 4: Service Breadth – provides Insight and Continuity.

  • Insight. The commercial real estate is a fragmented industry… an agent that helps tenants and buyers has a very different focus, job description, and mindset than one that primarily lists property for lease. And those who work with investors operate in another world all together. Ironically, however, the best results in any ONE sector come through a solid understanding of the activities, trends, and mindsets in ALL sectors. To be a good tenant rep, for example, it helps greatly to understand how an owner’s asset manager evaluates a leasing proposal. Members of an integrated team have direct access to such healthcare-specific cross-sector information on a real-time basis.

  • Continuity. Medical organizations frequently touch many areas of the real estate services continuum. A hospital or large practice may be a tenant, landlord, buyer, seller and even investor. Without service breadth, the healthcare provider is guaranteed that they will eventually either have to compromise on outcome quality by bringing their agent outside of that agent’s specialty or develop multiple relationships. With an integrated team, the provider is able to gain best of breed capabilities without creating and managing multiple relationships.

In conclusion

The selection of a healthcare real estate agent is vitally important to a medical organization’s bottom line goals. Today’s climate is simply too volatile to leave minimizing costs, maximizing revenues, remaining compliant, and accessing capital to chance. An effective agent will add clarity to decisions and oversee their execution, ultimately allowing the healthcare provider to move ahead effectively while not losing focus on their first priority – the patient.

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2017 Healthcare Real Estate Outlook