by recentricrealty | Feb 23, 2018 | Uncategorized
Picture this: A multi-tenant medical office building has been the home of several medical practices for decades. The owner of the building happens to also be the owner of one of the practices operating in the building, and they are ready to sell the building to provide liquidity for their practice. Here are three reasons to sell to an experienced health care real estate firm.
- Your patients are the lifeblood of your practice and their customer experience is paramount. This experience starts with pulling into the parking lot. The parking lot needs to be managed on a daily basis to make sure there are enough parking spaces directly in front of your practice or entrance to the building. The property manager must be the bad guy and enforce strict parking rules such as designating employee and service vendors to park in the back of the parking lot. Also, trash on the ground in any form can leave patients with a bad experience. The common areas need to be clean, and nicely maintained. Additionally, snow and ice must be cleared at all times.
- Reimbursable expenses must be kept in check! If the leases are structured as triple net, closely monitoring operating costs which get passed through to the tenants is a very important part of keeping the costs down for the practicing tenants. There are some items out of the landlord’s control, such as property taxes. While property taxes can be reduced through protest, the government has the last say in what will be charged and you cannot shop that item. All other items pertaining to the maintenance and upkeep of the building, including insurance, should be shopped around on an annual basis. A health care real estate firm will work very hard to keep these costs in check.
- Health care real estate firms understand your business. They understand the sensitivity of your patients with HIPAA compliance and privacy to the cleanliness of the building. The right landlord will search for tenants that are synergistic to your practice. They are involved in the health care real estate market and often have the first opportunities to find the best tenants to fill vacancies. They understand that your success equals their success.
In July of 2017, Physicians Realty Trust, a publicly traded health care REIT (PRT) announced the purchase of $735 million of health care properties from Catholic Health Initiatives, an Englewood, Colorado based health care provider in 10 states. It turns out PRT wasn’t the highest bidder among the other buyers. Catholic Health Initiatives chose PRT because they were specialized in the health care space and the right fit for their company.
While it might be tempting to take the highest bid from any buyer who is trying to 1031 out of a five Taco Bell portfolio to get into health care because they heard it’s a good investment, your practice and the practices around you may end up suffering instead of thriving.
by recentricrealty | Jan 25, 2018 | Uncategorized
The Tax Cuts and Jobs Act was signed into law on December 22nd, 2017, becoming effective January 1st, 2018. This legislation is broad, sweeping and fortunately, a boon for commercial real estate investors. Here are my top three tax reform changes impacting our business:
Number 1:
The elimination of the individual mandate requirement from the Affordable Care Act will be a negative to neutral impact on health care real estate. According to John Chang of Marcus and Millichap, this change to the law will reduce the number of insured by 13 million people by 2027, which will reduce demand for medical services by an estimated 5 percent. The actual impact on medical office spaces and senior housing should not be too impactful, Chang notes.
It is my belief that the overall demand will not reduce, as patients will be displaced to hospital emergency room and urgent care facilities. Whether the tax reform has provided them with enough pocket cash to pay their health care bills may be the difference.
Number 2:
Tax reform has created a major tax decrease not only for major corporations, but also small business structures such as limited liability companies. Any qualified business operating in a pass-through entity are able to deduct a percentage of their income, up to 20% from their personal taxes, with some limitations. This encourages reinvestment of those dollars back into their businesses because each future dollar invested gets to enjoy a repeat deduction for the following year.
If you are a medical office building owner and your tenants are a qualified pass through entity, this part of the tax law will make it easier for them to pay rent, market for services or expand to another location.
Number 3:
Tax reform has hit certain states harder than others. If you live in New York or California, you are now limited on how much you can deduct for state and local tax and mortgage deductions. The closing of these loopholes in certain states will likely cause a migration of homeowners to states with lower taxes. From a CNBC interview on Dec 1, 2017, financial advisor David Edwards, President of wealth management firm Heron Wealth in New York City, said all of his high-income clients are looking at a tax increase after they lose these deductions. “It’s pretty brutal and there’s no way to hide other than moving to Utah or Nebraska,” Edwards said.
Given this is such a significant impact on personal tax returns, I predict a shift in migration to lower taxed states such as Arizona, Florida, Utah. This will provide a new wave of higher end patients for health care real estate located in those states.
The fact that President Trump and the GOP were able to successfully pass this legislation in such a hostile political climate is a clear signal to businesses that this government is pro-business. The road map for commercial real estate investors is much clearer and should pave the way for a continued healthy outlook in the health care real estate sector.
by recentricrealty | Nov 30, 2017 | Uncategorized
Technology is changing the landscape of markets in ways we never thought possible. For example, Amazon is at breakneck speed to dominate the U.S. retail world while leaving a graveyard of obsolete strip malls in its wake. Uber has transformed the way people are transported, while disrupting the traditional taxi model in a few short years. The health care industry is being touted as the next Silicon Valley hopeful, however we don`t agree with the venture capitalists and we believe health care real estate will remain a strong asset.
Humans are creatures of habit, and those habits are not so good. According to the Centers for Disease Control, 86% of all health care spending in the U.S. is for treating chronic illness – such as emphysema and arthritis. In the long run, Americans need to better care for their own health with a change in habits, healthy eating and exercise. High tech intervention to adjust these human behaviors has not been successful.
The University of California recently studied 1500 patients diagnosed with congestive heart failure. These in-home patients were given high tech remote monitoring equipment such as wireless scales, blood pressure cuffs and symptom monitoring devices. The results posted in JAMA in March 2016 showed that within six months, half the patients were re-hospitalized.
High tech gadgets such as Fitbits have failed to encourage people to take better care of their health. From a 2016 paper in the journal, Lancet, researchers at the Duke – NUS Medical School in Singapore randomly grouped employees into 13 organizations to encourage exercise. All organizations were provided with a Fitbit, and either a cash incentive or no incentive. The study found that the Fitbit device increased activity by 20-30 minutes a week after the first six months, but only when cash was in play. When the cash incentive was removed, activity returned to pre-intervention levels.
Technology is an amazing tool to aggregate data and turn it into useful information, for example, in cancer research. However, this lack of data is not a barrier to bringing high quality health care at an affordable price. The real problem is changing human’s health behaviors before or after a problem is identified. Telling someone they shouldn`t smoke, or telling an obese person they shouldn`t eat poorly does not alter behaviors.
The Health Care real estate industry is dependent on patient`s physical presence in their buildings. While we do believe technology will make an impact on the health care industry, we don’t believe it will replace the doctor`s office as a higher quality, more cost-effective option for the large majority of Americans.
by recentricrealty | Oct 17, 2017 | Uncategorized
What’s the best defensive sector of commercial real estate in a downturn?
The Denver Broncos have one of the best defenses in the NFL football league. I would compare their position in the NFL with health care real estate in the commercial real estate sector. Health Care real estate is a very defensive asset class because people always use health care and health care facilities regardless of the economy. As the population grows, demand for health care increases hence more demand for health care related real estate in well located areas. Here are a few examples why.
- According to The Intelligent REIT Investor, rising unemployment, decreased corporate spending and decreased consumer spending do not have any impact on the demand for health care real estate space.
- The total returns of different property types during the 2007-2008 global financial crisis ranked as follows:
- The worst: Mortgage and Hybrid REIT’s at -46%.
- Second worst: Hotels at -41%.
- The best: Health care real estate with only a -5% return during that period. (NAREIT)
- Tenant retention in the health care space is typically very strong. The mix of tenants can differ widely from one location to another. It is important to find the right mix of tenants to occupy a medical building. Regardless, once the right tenant mix is achieved, tenants are highly unlikely to leave, since the synergies they have created with each other cause them to rely on one other in order to provide services to their patients. In addition, build out costs and client loyalty encourage medical practices to stay in the same location.
So, while your quarterback is out scoring touchdowns in the form of income producing returns, make sure you in the most defensive commercial real estate for a great hedge against an economic slowdown.
by recentricrealty | Sep 11, 2017 | Uncategorized
Recently, while driving south on Interstate 25 through the heart of Denver, traffic was very busy, as usual. Since I had time to observe the city skyline, I counted 15 cranes in the process of reshaping the Denver horizon. This city is truly boomtown! Many people complain about the surge of population into Denver. Not us. We are thrilled, and here’s why.
- Population growth: According to our State Demographer, Colorado’s population is predicted to grow to 8 million by 2040. That is a 50% increase in the number of people that will require health care. Medical office buildings that are positioned in these high growth areas will benefit from higher demand for lease space.
- Baby Boomers in Colorado: Experts are calling it “The Silver Tsunami.” Colorado is expected to double its Baby Boomer generation by 2030. Specific counties in Colorado will be impacted more than others such as Jefferson County, the state’s largest Baby Boomer community, and Douglas County, which hosts the fastest growing group of people over 60 years old, according to the Denver Post.
- The Millennials have arrived: Millennials for the first time outnumber Baby Boomers, according to a 2015 U.S. Census Bureau report. Colorado millennials — people between the ages 20 to 34 — number 1,107,469. Compare this to Baby Boomers — people from 55 to 74 years old — which number 958,289, according to 2013 Census data which is the most recent data available. In Denver, millennials account for 176,458 of the population, while Baby Boomers make up 99,095 of it. Preferences for health care are far different for millennials. They are the mobile phone generation, and would much rather park at a Starbucks so they can walk next door to their physician.
Denver is a very popular state for many good reasons. The climate is dry and warm, the recreational opportunities are endless, and the cost of living is comparatively very cheap. Recentric Realty Capital has a very favorable outlook for medical office buildings in Colorado and will continue to build on its success with future acquisitions.
by recentricrealty | Feb 19, 2017 | Uncategorized
