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How capital for hospital renovations can be freed by unloading medical office buildings, other real estate

Many hospitals and health systems are reluctant to relinquish control of medical office buildings, but doing so can free up much-needed capital.

Jeff Lagasse, Associate Editor

RWJBarnabas Health had a bit of a dilemma on its hands.

One of its hospitals, Clara Maass Medical Center in New Jersey, was aging. Renovations were needed to keep the building  modern and facilitate patient care, but paying for those improvements was a puzzle that needed to be solved.

Hospital leaders saw the final pieces of that puzzle in the form of medical office buildings that were located on the property. By unloading those buildings, RWJBarnabas could effectively free up the necessary capital for a much-needed intensive care unit to replace the one that was aging.

The system enjoyed the advantage of already having a partnership with Rendina Healthcare Real Estate, which took over control of the medical office buildings and implemented ground leases on the properties.

Hospital leadership has been pleased with the results.

PROPOSAL

Clara Maass moved to its current location in 1956, so a lot of the structure there was antiquated and needed renovation, particularly the ICU, which was not nearly as private as patients and staff would have liked.

"At the same time, we were fortunate enough to have three medical office buildings on the property that we managed," said Thomas Biga, president of the hospital division at RWJBarnabas Health. "When you look at invested capital, our goal is, 'How do we invest our assets in ways that benefit the patients?' So we struck up a partnership with Rendina."

By relinquishing the auxiliary buildings to Rendina, the system was able to replace the ancient ICU and also invest in a 180,000 square-foot entrance.

"They needed that new intensive care unit," said Stephen Barry, president of Rendina Healthcare Real Estate. "The one they had was a '50's-era ICU and totally obsolete for patient demands. They also needed physician office space. It's a relatively urban space and there's not a lot of room for expansion."

Barry credits the leadership team at RWJBarnabas for lighting on the idea of freeing up existing capital in this way.

"As we started to focus in, we realized there were going to be pretty significant campus costs that wouldn't be able to be borne by the new campus itself -- or else rents would be at such a place that people would find it pretty unattractive," said Barry.

By Biga's own admission, the system didn't have the resources or focus to do a good job of maintaining the medical office buildings. Maintenance improved once the buildings were under the management of Rendina. New common areas were installed in each of the three buildings, and other improvements were made, from new wall coverings and restrooms to new rooves.

Patients and staff at the main hospital and in the auxiliary buildings have raved about the changes.

RESULT

Unloading real estate to finance capital improvements isn't a totally unique idea, but it's still not very common. Biga sees that changing.

"I think hospitals in general are looking to unload what is not in their core mission," he said. "Real estate is not our core mission, so we don't have the ability to do it well. Shedding assets that don't provide value, or when capital may be needed -- you're seeing that change occur.

"It confirms that you don't need to own everything," he said. "In the past, hospitals thought they had to own everything."

Barry agreed, and chalked up that impulse to a desire for control.

"There's a perception that with ownership comes control, so some hospitals feel they need to (own)," said Barry. "Some of that comes down to education about how we structure our deals. … We don't buy, we ground-lease our properties. You need to make sure that from a competitive standpoint there's no duplication of services. The physicians need to be on staff and have staff privileges at the hospital."

Another reason health systems may be reluctant to take that step, he said, is because of compliance. Hospitals find it tricky to lease directly to physicians, and there are a lot of regulations regarding how physicians can lease space from a hospital, invoking anti-kickback, fraud and abuse laws. A ground-lease partnership through an intermediary can help avoid potential risk and liability.

Now, at Clara Maass, the structure more closely reflects RWJBarnabas' mission of catering to the modern patient's needs. Anecdotally, the reviews have been glowing.

"Patients love it," said Biga.

Twitter: @JELagasse

Email the writer: jeff.lagasse@himssmedia.com

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