September 2016 — Health Care Properties Quarterly —
Page 7
MECHANICAL ADVISORS
YOU CAN TRUST
For healthcare facilities
construction and service.
RK Mechanical
knows the keys to building a safe facility are rooted
in the upfront understanding of healthcare-specific requirements,
maintaining required or recommended contractor certifications and
investing in safety training for all project team members. Our team
has worked on several complex healthcare projects and we have the
knowledge and experience to keep your staff and patients safe ̶
and
your facility operational.
Need facilities services once construction is complete? Call
RK Service
for HVAC, plumbing, electrical and water treatment solutions.
Castle Rock Adventist Hospital, Castle Rock, CO
Advanced BIM and value engineering enabled RK to prefabricate 90% of the HVAC,
plumbing and piping before getting on the job site, saving time and money.
303.355.9696
MECHANICAL
SERVICE STEEL ENERGY WATER ELECTRICAL MISSION CRITICAL
Broker Insights
W
ith the continued growth
of medical office space in
the Denver metro area,
there also has been a
steady increase of ten-
ant representation brokers in
the medical office market. Of the
approximate 10 million square feet
of on- and off-campus health care
real estate in the Denver metro
area, most all transactions today
surrounding physicians or health
systems have representation – and
for good reason. There are several
nuances surrounding medical office
leasing compared to traditional
office leasing that make having rep-
resentation critical for tenants.
On the brokerage side, represent-
ing medical office tenants demands
a high-level understanding of the
health care industry and how it can
impact site selection. Issues like the
Affordable Care Act, patient privacy,
changes in information technol-
ogy, hospital system strategies and
the political climate of health care
all have the potential to influence
decision-making. Tenant represen-
tation brokers who stay informed
on these complexities will be more
successful in setting expectations
with their client and better able to
have educated discussions through-
out the decision-making process.
Here’s a closer look at some spe-
cific considerations that tenant rep-
resentation brokers may encounter
in the pursuit of space for a medical
office client.
Use.
Space that is available in a
building that your client desires
does not neces-
sarily translate to
being available for
your client’s use.
Many landlords
in nonmedical
office buildings do
not want health
care providers
in their building
for a number of
reasons, which
include: increased
traffic through the
building, impact
on parking, tenant
finish costs, inten-
sive property management issues
and stress on the mechanical sys-
tems. Additionally, landlords may
be concerned with providing Ameri-
cans with Disabilities Act require-
ments as well as the perception
of ill patients utilizing their office
building. In circumstances where
landlords allow the use, there may
be restrictions on competing prac-
tices in which exclusivities unique
to a particular practice type are in
place. This is very common on hos-
pital campuses where the system
will not allow competing uses to
compete with their employed prac-
tices, such as pharmacy, physical
therapy and others. Inquire about a
landlord’s willingness to lease to a
medical office tenant and explore
any competitive restrictions as soon
as possible upon site identification
in order to manage a client’s expec-
tations.
Timing.
There are several moving
parts that can impact timing, such
as selecting a space, negotiating a
proposal and getting all decision
makers aligned. In some instances,
the build-out process alone can
last four to five months or longer,
depending on how specialized the
requirements are and how long
it takes to obtain a permit. Addi-
tionally, physician groups may be
made up of several doctors, all with
an equal say on decision-making,
which can lead to lengthy intervals
of time before everyone can make a
decision. Using a practice manager
as an outlet for giving and receiving
information is key.
Tenant finish.
In most cases, one of
the most difficult terms to negotiate
in the proposal is tenant finish cost.
Depending on the existing condi-
tion of the space, the total job cost
can easily be $50 to $60 per sf and,
in some cases, in excess of $100 to
$110 per sf for traditional medical
office space from shell. In the event
there is a difference in the landlord
allowance and the total tenant fin-
ish cost, prepare your client for the
possibility that they may have to
write a check or obtain a construc-
tion loan from a bank.
Term.
Driven mostly by the high-
dollar tenant finish cost, the term
of a lease is generally seven to 10
years, and sometimes longer, for
both the landlord and tenant to
account for allowances. In shorter-
term leases, the allowance provided
by the landlord will cause too large
of a gap for the tenant to cover the
cost of construction. Amortization
of additional funds can be an option
to close the gap, but landlords are
in the real estate business and not
the banking business so this option
has its limits.
Creditworthiness.
The high-dollar
allowances that landlords give
make for an even greater impor-
tance for tenant creditworthiness.
Landlords giving an allowance are
not just providing a mechanism
for completing construction, but
ultimately they are investing in the
physician’s business. The payback
period on tenant finish and com-
missions can be as many as three
years, which is why landlords need
tax returns, balance sheets, profit
and loss statements, and an under-
standing of the physician’s business
plan. Brokers also need to discuss
the possibility of personal guaran-
tees with their clients, particularly
if the practice is a startup. Having
tenant financials and a good under-
standing of your client’s business
plan at the ready will only help
move the deal along smoothly.
Physicians should seek all the
counsel they can while searching
for space. Tenant representation
brokers are equipped to qualify
candidate properties, leverage bro-
kerage relationships and negotiate
to achieve market terms for their
client. However, educating your cli-
ent prior to their search and, most
importantly, setting expectations on
the nuances mentioned above will
increase the chances for success
and provide for a more seamless
transaction.
s
Naum Nasif
Senior associate,
CBRE Denver
Healthcare
Services, Denver
Tech Center
