Real Estate in the Downturn

Ambulatory surgery centers (ASCs) are comprised of two distinct parts that are forever connected. The first is the business that operates the ASC, and the second is the facility that the surgery center occupies. The real estate project, whether it is ground-up construction or a renovation of an existing building, will need to follow a clear path in order to be successful.

My primary function as a consultant to physicians is to help navigate the feasibility of both the business and the real estate. And in today’s changing market, there are unique twists and turns as it relates to real estate and financing.

The downturn in the economy has had a direct impact on real estate projects. Vacancies are at a high level and owners are attempting to fill their buildings with various incentives. Some of these include rate reductions, free rents for up to six months, higher than normal tenant improvement allowances and shorter lease terms. These incentives — either in part or taken as a whole — will have a positive impact on the profitability of your ASC. The lease amount and tenant improvement loan amount are two of the higher costs in the pro forma for an ASC, and thus reductions to these line items go right to your bottom line profitability.

The second aspect of potential savings in a construction project is also a direct result of the economic times. As there are fewer projects occurring on a global basis, there is more competition for medical projects. Pricing as well as profit margins that construction companies are willing to accept are also decreasing, and creating a positive impact on an ASC project. You need to be cautioned that there are many more bidders but you still need to stay away from unqualified construction companies in regards to their experience in medical projects as well as their financial stability as a company. I cannot stress this enough: that the price is important but the qualification and financial strength of the contractor is more important.

Financing is also changing. The financing sources for ASC real estate projects, whether from the ground up or a tenant improvement project, have been negatively impacted from the credit market consolidation and restructuring over the past year. Lenders are being more conservative in their lending practices. In most cases, appraised values are going down, down payments are increasing and there are fewer lenders available. Traditional sources like local banks are more competitive than ever due to decreasing interest rates as well as other long-term lending sources like life insurance companies and conduits tightening their lending criteria. Now is the time to lean on your local banking relationships for your best deal.

Times are changing, but this does not mean that your real estate projects will not be successful. It is critical to hire the right consultants to help navigate the changing environment so that you can take advantage of the positive changes without taking additional financial risk.

Gordon J. Bruinsma, CPA, is principal of Byron Center, Mich.-based Physician Planning & Consulting. He can be reached at gbruinsma@physpc.com.