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Healthcare real estate: The pros and cons of buying versus leasing

Real estate is increasingly becoming an avenue for providers to increase their revenue and footprint in the community.

Jeff Lagasse, Associate Editor

Delivering care is of course the primary business of any healthcare provider, be it a hospital, physician's office or large health system. But a secondary business for these organizations is real estate, and the healthcare real estate picture is starting to change.

Healthcare is transitioning more toward ambulatory care services, and it's happening in conjunction with the rise of younger generations and their specific healthcare needs. Rather than being consolidated at large hospitals or centralized facilities, healthcare is moving out into the community, with retail clinics and urgent care clinics creating a more decentralized landscape.

"Healthcare real estate is hot," said Stephen Timoni, a partner at Lindabury, McCormick, Estabrook and Cooper. "It provides investment opportunities for healthcare providers, whether an individual physician or a health system, and it also provides great opportunities for healthcare investments. It's more of a growth area, and continues to be a growth area as compared to other areas of real estate."

One important question faces providers looking to delve deeper into the waters of real estate: To lease or to buy?

That all depends.

The major difference is also a fairly obvious one -- buying is more permanent. The best strategy depends on the specific needs of the organization, with Timoni generally encouraging smaller physician groups to lease because they tend to have a shorter time horizon.

By contrast, those thinking of buying are likely looking at about 10 to 15 years of practice, which allows them to pay the mortgage down and increase their equity over time.

"Leasing is obviously less money than buying, and it's safer for shorter periods of time," said Timoni. "Lease time is relatively short, and you're able to choose your location because there are typically more options available for lease than to buy. A desirable space for a healthcare provider is usually costly to buy, but more available to lease."

With leasing, organizations are reducing their risk of taking any downturns along with the economy. Costs are also lower, especially in the early years, and maintenance charges -- such as for snow removal -- tend to be less, especially when it's negotiated prior to the lease. Then, when the lease is over, the organization can walk away.

On the flip side, the advantage of buying is that it gives a healthcare organization more control over its costs.

"For long-term appreciation, we continue to see real estate values go up," said Timoni. "Long terms are generally more favorable to healthcare providers because providers usually have a good credit history. They're in the business longer, they're more stable."

THE OPPORTUNITIES

Owning real estate can be a great recruiting tool, and can lure physicians into a larger practice, Timoni said.

"They become a partner in the practice, but they also offer them a buy-in into the building," he said. "That's very interesting for a young physician because, down the road, what physician groups may be doing is they'll sell their building for a gain to a real estate investment trust or hospital system, and then they'll lease the building back from the hospital. So they cash in on their equity."

Another option for physician groups is to retain the real estate and lease it back to the health system for additional income -- providing better overall economics, largely in the form of tax benefits.

The appropriate real estate philosophy is largely dependent on the type and size of the organization. For larger health systems, it might make more sense to approach investors and convince them to sell an ancillary building and then lease it back to bring cash in -- and to get them out of the real estate management business, which can be costly.

What's inescapable is that some kind of coherent strategy is necessary, particularly since demographic changes in the U.S. are resulting in the need for sound real estate practices.

"You look at the baby boomer generation -- those are the people entering the 65-and-older population, and that population segment is growing very rapidly," said Timoni. "And it's a high percentage of our population. So I think by the year 2025 or 2030, you're going to have maybe a quarter or a fifth of the population aged 65 or older. Those people require healthcare, so that's driving, right now, the need for healthcare real estate. A lot of healthcare real estate is in the ambulatory setting, in the clinic setting. You'll see this growth."

Another driver of real estate is the cost of healthcare, which Timoni projects will soon comprise roughly 20% of the country's gross domestic product -- a figure backed up by research. Combine that with the industry's ongoing decentralization and providers are looking for more flexibility to expand their footprint and move into the best possible locations.

"Every situation has to be analyzed thoroughly," Timoni said "Consumers' expectations are higher and they want the provider to be convenient, so people are looking for someplace close to where they live to pop in and pop out and get treated. That changes the dynamic."
 

Twitter: @JELagasse

Email the writer: jeff.lagasse@himssmedia.com