Real Estate, Third Parties, and the Mission

Posted on May 22, 2012


By nature of the crowd and organizer, the BOMA Medical Office Building conference a few weeks ago was bullish on outside capital investment and real estate management in healthcare. What I picked up was an undercurrent of hesitance by healthcare systems to ‘go outside’ for financing and help managing their real estate, unless it was a last resort.

On one hand, hospitals feel intense pressure to maximize resources, and outside management puts things in the hands of professionals. On the other, hospitals are historically risk averse and dubious of the outcome from giving up ownership of what might be their only asset(s).

Many hospitals and even larger systems do not have an internal real estate manager. It was argued during one panel discussion this is a perfect reason to seek outside help to manage, and perhaps to finance as well. Here are some issues with which a third-party can help a healthcare system:

  • Maintenance issues with property.  Age and deferred maintenance sneak up on hospitals and quickly become reasons for lessors to bolt for more attractive space and rent off-campus.
  • Leases not accurately calculated.  Many costs for a building can slip through the cracks and go unallocated or under-allocated to lessors, inadvertently subsidizing leases and eroding hospital income streams.
  • Real estate is a money hog.  Capital, which could be better used elsewhere in operations or capital projects, often gets tied up in land acquisition, tenant improvements, and unexpected expenses. 
  • Diversification of risk.  Many legal issues can be shifted to an outside party more conversant in real estate ownership and management.

One hospital CFO related he needs to see 10-15% savings in order to outsource anything.  Quantifying benefits is possible on some angles of real estate; however, other aspects will be more of a gut feel for hospitals.  How can you quantify the benefits of not feeling overwhelmed?  Can you put a monetary value on lost freedom and control over property?

A CEO noted in another session:  decisions should be mission-driven. As the economics of healthcare get infinitely more complex post-reform, hospitals must ask themselves what many companies at a crossroads ask:  what business am I in? Although hard to stomach, hospitals may find that to best fulfill their mission,  they should not be in the real estate business.