MOB Seminar 2008 Executive Summary 

2008 Presenting Sponsor

Mark Your Calendars!! Medical Office Buildings & Healthcare Facilities Conference. June 25-26, 2009 Philadelphia Marriott Downtown Philadelphia, PA Information is available at www.bomaconvention.org click on Medical Office Buildings Seminar! BOMA’s MOB Resource Library: "Developing, Leasing and Managing Healthcare Real Estate: A BOMA publication" MOB highlights in the EER Includes valuable operating income and expense data on MOBs Information Contact: Emily Naden Education Project Manager BOMA International 1101 15th St, NW 202-326-6326 enaden@boma.org

With the economic crisis looming, healthcare real estate is carefully assessing its strengths and vulnerabilities, and assessing the pulse of the industry in order to set itself up for success. BOMA’s 2008 Medical Office Buildings & Healthcare Facilities Conference in Denver examined the implications of these issues and explored trends in building systems, property management, and joint ventures. For a more detailed overview of the education sessions offered, click on the title below.

General Sessions
• Ambulatory Strategy: What the Future Holds
• Industry Scan: A Diagnostic View of Healthcare
• The Health of the Capital Markets
• Practical “Green” for Hospitals and MOBs

Ambulatory strategies Sessions
• It's Not Brain Surgery Or Is It? Creating a Successful Joint Venture
• Stark III: Revisions and Implications
• Ambulatory Models: Medical Malls and Healthcare Villages
• Ground Leases

Capital Markets/Investment Sessions
• The Prognosis for MOBs: The Lenders’ Perspective
• The Prognosis for MOBs: The Investors’ Perspective
• Anatomy of Market-Leading Medical Office Deals
• Financing Higher Acuity Facilities

Leasing and Management Sessions
• To Outsource Property Management or Not? Getting the Right PM Fit
• Creating the Right Tenant Mix
• Best Practices for Managing and Leasing MOBs
• The Rx for Compliance: What PMs Need to Know

General Sessions

Ambulatory Strategy: What the Future Holds
Laura Kaiser, President, Non-Acute Care Operations, Ascension Healthcare and COO, Sacred Heart Health System, Pensacola, FL

• The future of healthcare is ambulatory care, as most health systems are preparing for a shift in the delivery of care, to 80% outpatient/20% inpatient in next 20 years. Enrollment in the Medicare Program is projected to nearly double between 2000 and 2030 and by 2015, approximately 150 million Americans will have at least one chronic condition. These statistics will drastically change how our healthcare models are structured.
• The concept of “Healthcare for Life” is to be able to serve patients throughout their numerous life cycle changes; the healthcare industry must adapt to this type of care and begin to prepare to provide a “continuum of care” throughout a patient’s life.
• Ascension and other health systems are working to provide “Life Cycle Care,” which includes helping individuals navigate healthcare options and resources, developing the means to encourage lifetime relationships, extending successes in the acute environment to outpatient and chronic disease management, and into the community, creating connectivity across the health system, its partners and those served. The goal is to be where healthcare is needed, how it’s needed to be there, to meet the evolving health needs of those served.

Industry Scan: A Diagnostic View of Healthcare
Cindy Alloway, Chief Operating Officer, Alegent Lakeside Hospital, Omaha, NE; David Whelan, President, Stroudwater Associates, Atlanta, GA; Murray Wolf, Publisher, Healthcare Real Estate Insights, Deephaven, MN

• Government scrutiny of hospital/physician relationships is increasing, as exhibited in the examination of referral patterns, overutilization of diagnostic testing, leasing arrangements and other joint venture structures.
• Physician employment by hospitals is on the rise, as physicians face decreasing reimbursements and seek more secure income flow. Hospitals, seeking realignment to ensure greater patient volume, are demanding that practice acquisitions have incentive structures in place. MOB owners may be affected as once independent physician practice tenants may in the future become a hospital tenant. Though on its surface that seems like a benefit, a hospital CFO will evaluate his costs to borrow vs. lease and could potentially move those physicians out of your building when the lease expires into one financed with low-cost debt.
• Construction on hospital campuses has been steadily rising throughout the decade. Aging and obsolete facilities; operational efficiencies; advanced treatment methods and technologies; consumer demands for convenience and private rooms; and an aging Baby Boomer population are driving this trend.
• The construction boom is being tempered by ever-increasing financial constraints, and as consumers bear a greater burden of the cost to receive healthcare services, they are exploring medical tourism and will have a greater say in the direction of healthcare delivery

The Health of the Capital Markets
Bob Bach, Chief Economist, Grubb & Ellis Healthcare REIT, Chicago, IL; Malcolm Sina, President, The DASCO Companies, Palm Beach Gardens, FL; Jim Moloney, Managing Director and Head of Real Estate, Cain Brothers, San Francisco, CA; Jeff Cooper, Executive Managing Director, Savills Granite LLC, New York, NY; Moderator: Jonathan Winer, Executive Vice President, Seavest, Inc., White Plains, NY

• Aging baby boomers aren’t the only drivers in MOB growth; physician office visits are increasing for all age groups every year. National healthcare expenditures are projected to go up, by 2017 20% of GDP to be spent on healthcare and healthcare occupations are expected to rise, creating demand of all types of medical facilities.
• In June (at the time of the conference), MOB leasing and capital markets remained generally unfazed by economic issues, and were predicted to continue rising unlike regular real estate types which are cyclical. Market tightening was predicted, if capital for construction becomes more limited. Rental rates have been rising gradually as well, unlike the large swings that occur with general office space.
• MOB Cap markets peaked in 2007, but are down 10% (as compared to 71% in other types of Real estate) as of the first quarter of 2008. Cap rates have leveled out for MOBs in the last 5 quarters. Rates are lowest in the Western US, and highest in the Southwest and Southeast. Demand remains strong in western US and East cost due to larger populations.
• Net buyers and sellers of MOBs in 2007, private in-state owners were the biggest net seller, private out-of-state and REITS were the biggest buyers. The stability of the MOB market is a good indicator of its strength and resistance to economic downturn in the coming years.

Practical “Green” for Hospitals and MOBs
Tom Foster, Vice President of Hospital Development, Muskogee Community Hospital, Muskogee, OK; James Turpen, Aardex, Denver, CO; Drew Garst, Principal, Boulder Associates, Boulder, CO

• Profiled three different “green” healthcare projects. Boulder Community Hospital chose to focus on one major green initiative that can be seen outwardly—photovoltaic arrays which use solar energy. Namaste Solar, a local Boulder company, provided the panels and acts as their owner, as part of a community outreach project. In exchange, energy rates are locked in for the facility which acts as the host for the next 20 years. Hospital can purchase the panels after 10 years if they wish, at an appreciated value. The energy produced the annual electricity savings is about $5000. They hospital can also now boast that they provide green power to the city of Boulder.
• St. Anthony North Medical Office building (Westminster, CO) is tracking LEED Gold and uses an under-floor air delivery system that saves energy since the air comes through at 65 degrees instead of 55, saving energy on heating. Using supply air and radiant heat from the floor, duct work and VAV boxes are virtually eliminated.
• Muskogee Community Hospital (Muskogee, OK) is the nation’s first ground source geothermal hospital, and is tracking for LEED Gold. 55% of building is made of recycled materials and 78% of construction material refuse will be recycled when building is complete. Hospital will be delivered at about 80% cost of what traditional hospitals are completed. Ground source heat pump is a 50-year term system with a 38% annual energy consumption savings as opposed to the 4-pipe system.

Ambulatory Strategies Sessions:

It's Not Brain Surgery Or Is It? Creating a Successful Joint Venture
Robert Goldfarb, M.D., Neurosurgeon, President, Western Neurosurgery, Tucson, AZ; Jeff Hatfield, Vice President, Development, The Graham Group, Des Moines, IA; Andy Cosentino, Vice President, Development, Carondelet Health Network, Tucson, AZ

• Navigating a successful three-way joint venture required the time and cooperation of a surgeon, developer, and hospital CEO.
• Western Neurosurgery Ltd. and St. Josephs Hospital came together because there was an essential need in the Tucson community for a full service neurological medical center. No facility that provided neurological and neurosurgical care was servicing the one million person population of southern Arizona.
• Perspective, flexibility, and the open relationships among all involved are essential to a JV

Stark III: Revisions and Implications
Diane T. Carter, Esquire, Partner, Brown & McCarroll, Austin, TX; Neil J. Carolan, Chief Physician Development Officer, Carondelet Health Network, Tucson, AZ

• Originally passed in 1992, “STARK” prohibits physicians from referring Medicare/Medicaid patients to clinical labs in which physician (or a family member) has a financial interest. STARK has since undergone a number of revisions and expansions. These regulations affect MOBs because real estate transactions (leases and/or ownership interests—debt or equity) constitute a financial interest.
• Under new STARK revisions, a owners of a physician organization “stand in the shoes” of his or her physician organization so the arrangement must meet a specific direct compensation arrangement exception. There is no longer an indirect compensation loophole.
• Leasing alternatives such as “per click” and “under arrangements” structures that allow a party to own diagnostic equipment, such as imaging equipment, lease it to physicians under a usage structure and bill the government are no longer allowed with new STARK regulations. Block leasing, in which a physician can rent dedicated time on imaging equipment owned by another party, is presently allowed but is also under scrutiny; the government is suggesting it is also subject to its anti-markup provisions which were established to avoid increased billing charges to the government. Hospitals and physicians are required to catalogue and review their joint venture, leasing and service arrangements to assure they are in compliance with these new regulations.
• New rules have expanded the definition of a designated health service (DHS) entity to include the entity that "has performed the services that are billed as DHS," even if that entity does not bill Medicare .This change will implicate many existing "under arrangements" ventures where a hospital acquires a previously unavailable service from, or contracts out the operations of an existing department or service line to, a company owned by physicians.

Ambulatory Models: Medical Malls and Healthcare Villages
Featuring: Tim Schlichting, Senior Managing Director, NexCore Group, Denver, CO; Robyn Dermon, Health Futures Development Group, Denver, CO; Carrie Knobloch, Vice President, Property & Construction, Metro Health, Wyoming, MI; Jarrad Pitts, Construction & Property Manager, Metro Health, Wyoming, MI; Tim McKevett, Senior Vice President, Beloit Memorial Hospital, Beloit, WI; Jeff Holzhauer, AIA, Senior Associate, Plunkett Raysich Architects, Milwaukee, WI

• Emerging models for ambulatory care have become popular, but are not always fully understood. Health systems are using these new real estate models to bring care closer to the patient. Medical malls allow the assembly of several physician practices and other types of healthcare services and products into one location, while healthcare villages bring those items together using a “village” model and may include services like spas and restaurants.
• Metro Health shared a case study on Metro Health Village, a "one stop,” health care village where the community can receive a wide variety of healthcare and other services. Made up of a 550,000 square feet hospital with 5 additional detached MOBs totaling 160,000 sf (Pain Management, OB/GYN, Cancer Services, Internal Medicine & Specialty Physicians, Dentistry), 20,000 square feet of retail, three handicap accessible parks (4+ acres) and an adult day care, they have created an accessible, convenient, sustainable healing environment.
• Health Futures Development Group shared a case study on St. Alexius Ambulatory Mall, which consists of 60,000 square feet of medical office space, a central registration area, a cancer center, breast cancer center, and heart center, a lab draw, comprehensive imaging, a JV ambulatory surgery center, as well as an education resource center, Starbuck’s Café, administrative support functions, and a parking structure. Since opening, sixty additional physicians were brought to the campus, the complex diagnostic volumes increased 61% in first year after opening, and inpatient admissions went up 14% since opening.
• Beloit Memorial Hospital shared a case study on NorthPointe, a health and wellness campus that includes a physician clinic, immediate care center, advanced diagnostic center, rehabilitation, aquatic center, medical-based fitness, assisted living – RCAC, and other components such as retail space and a community health education room/kitchen for health education and community events.

Ground Leases
Robert Hicks, Esq., Hall Render, Killian, Heath & Lyman, P.C. Indianapolis, IN

• The most important document governing on-campus MOBs developed and/or owned by a third party, the ground lease gives the hospital needed controls over tenancies while assuring the owner the right to lease and make a competitive return. 
• Ground leases generally have a long-term base term of 50 years, with renewals; total term is between 75 and 100 years; reversion for $0.00; a triple net rent structure, and leasehold financing (not fee) permitted.
• Creation of the issue list or term sheet and identifying the non-negotiable items are first in beginning the negotiation process. Legal and accounting impediments will bar certain terms, so you must identify the negotiable terms, and then you can prioritize the needs and wants of the parties involved.

Capital Markets/Investment Sessions:

The Prognosis for MOBs: The Lenders’ Perspective
Featuring: Kevin M. Hanrahan, Senior Manager, Ernst & Young Transaction Real Estate, Atlanta, GA; Tim Couch, Managing Director, CB Richard Ellis, Dallas, TX; Bob Neyland, CFO, Montecito Medical, Jacksonville, FL; Tim Schier, Senior Vice President, Cain Brothers & Company, LLC, Houston, TX

• Credit markets have changed. A year ago, transaction volumes and pricing were up, and cap rates were down. Today, transaction volumes have decreased dramatically, while spreads are up tremendously. Effective spreads for various credit-rated bond tranches have moved up more significantly than they did in 1998 (LTCM/Russian debt crisis) or in 2001 (9/11). All-in debt rates, however, are still attractive on a long-term average.
• Medical office continues to be favorable transaction type. Lenders and investors prefer it over other property types due to healthcare sector dynamics, and stability of cash flows.
• “Lifecos” and pension funds have more deals coming in than they have allocated capital to lend. As a result, these lenders can be selective, and are tending to lend only on Class A, on campus, core assets at very low leverage.
• Overall, the construction lending environment is still good for MOBs. Overbuilding is not a problem since most deals have been significantly, if not fully, pre-leased. Some new deals have had slower absorption. Construction interest rate spreads are up, and leverage is down to match end financing leverage, which has decreased.

The Prognosis for MOBs: The Investors’ Perspective
Ray Lewis, Executive Vice President and Chief Investment Officer, Ventas Healthcare REIT, Chicago, IL; John Struble, Managing General Partner-Acquisitions, Provost Partners/BeerWells, Dallas, TX; Mark Degner, Executive Director, Morgan Stanley, Atlanta, GA; Danny Prosky, Executive Vice President, Healthcare Properties, Grubb & Ellis Realty Investors, Santa Ana, CA; Moderator: Scott Evans, Managing Director, Cain Brothers & Company, LLC, Atlanta, GA.

• Traditional MOB investors are looking at related types of assets, like senior housing, for opportunities since the aging population will peak in 2011 and Medicare policy drives outpatient treatment and services.
• Healthcare real estate is gaining institutional acceptance and the healthcare sector as a whole has long been viewed as safe haven in economic downturn. Some are beginning to think of it as a “core” asset.
• Comparing the first two quarters of 2007 and 2008, healthcare acquisition volume increased almost 40%.
  

Anatomy of Market-Leading Medical Office Deals
Don Bradley, Executive Vice President-Chief Investment Officer, Nationwide Health Properties, Newport Beach, CA; Philip J. Camp, Managing Director, Shattuck Hammond Partners, LLC, New York, NY; Mark Toothacre, Partner and Executive Vice President, Pacific Medical Buildings, San Diego, CA; Chuck Handy, Chief Financial Officer, Cogdell Spencer Advisors, Charlotte, NC; Scott Ransom, President & CEO, Marshall Erdman, Madison, WI

• Consolidation continues to play a major role in healthcare real estate. This session profiled two of the industry’s largest transactions in the last 12 months.
• Nationwide Health Properties (NHP) acquisition of a Pacific Medical Buildings (PMB) portfolio: Like other lines of business, the goals for consolidation are diversification and synergy. NHP agreed to acquire 21 PMB buildings between 2008 and 2010, and partner to acquire another 7 outpatient buildings, a transaction valued at an estimated $2 billion. Both parties describe the transaction as a perfect fit because of both its pricing model as well as its business culture coincided with PMBs needs.
• Similarly, when healthcare REIT Cogdell Spencer merged with design-build firm Marshall Erdman, the two firms sought three overlapping sets of criteria: shared values, a healthcare focus, and client relationships, all with the goal of improving investor value.
• Both of these transactions had a public entity (REIT) acquiring a private entity. These transactions are typically a long-time in the making and often follow an initial collaboration that has built up trust between the two parties.

Financing Higher Acuity Facilities
Brent T. Tharp, Senior Vice President, GE Healthcare Financial Services, La Jolla, CA; Dan Loftus, Senior Vice President, Health Care REIT, Indianapolis, IN; Jon Van Santen, Senior Vice President, Wellspring Partners; Fred Farrar, Executive Vice President, Health Care REIT, Indianapolis, IN

• As MOB investors look to related healthcare investments, higher acuity facilities such as psychiatric hospitals and outpatient surgery centers are good up-and –coming options.
• These types of facilities are often financed through tax exempt bond issuance, private debt, and REIT financing.
• The tax status of the facility operator and real estate owner as well as the speed and certainty of the execution of transaction are important factors in which financing method is available.

Leasing and Management Sessions:

To Outsource Property Management or Not? Getting the Right PM Fit
William M. Peacock, III, Executive Director, Operations Support Services, The Cleveland Clinic, Cleveland, OH; Jennifer Recker-Jones, RPA, FMA, Regional Director, Real Estate Services, Wheaton Franciscan Healthcare, Milwaukee, WI; David Domres, Senior Vice President, Irgens Health Care Facilities Group, Milwaukee, WI; Mark Johnson, Senior Vice President, The DASCO Companies, LLC, Oakbrook Terrace, IL; Moderator: Richard Ferraro, Irgens Health Care Facilities Group, Riverwoods, IL

• The Cleveland Clinic chooses to outsource its property management efforts in order to maintain a focus on their core business as well as accommodate geographical factors and leverage in-house resources for cost-reduction strategies.
• Wheaton Franciscan chooses not to outsource to make their implementation of a purchasing consortium inclusive all operational assets, to maintain a corporate centralization of support systems for all operating assets throughout affiliated systems, and to reduce expenses through the elimination of outsourcing fees from property management to legal fees associated.
• DASCO Companies uses a “blended method” combining in-sourced property management with an outsourced consultant. The consultant provides the property management analysis and benchmarking, as well as the management plan, operations manuals, staffing, and has a 6-month follow-up. The in-sourced property management handles the daily grind of accounts receivable, janitorial services, leasing procedures, and maintenance. This helped them to standardize lease agreements and documents as well as increase collection efforts.

Creating the Right Tenant Mix
Steve Hall, Senior Vice President, Leasing & Sales, HealthAmerica Realty Group, Atlanta, GA; Michael Browning Jr., Vice President -Research & Development, Montecito Medical Research and Analytics, Irving, TX; Pat Wassik, President, Health Connect Properties, Denver, CO; Moderator: Phil Mobley, Vice President, Kingsley Associates, Atlanta, GA

• The right tenant mix aids physician, hospitals, patients and the building itself by broadening the convenience of the services available and increasing value.
• Being mindful of potential use restrictions due to ground leases, exclusivity clauses and zoning as well as the owners’ goals are key success factors.
• Attracting and finding the right practices can be difficult; look for what need is currently underserved in the surrounding community and target. Make primary care practice decision with the knowledge that their revenue streams function in a different way than specialists.
• Networking between practices in the facility and joint marketing are potential ways to keep all business in your building flowing.
  

Best Practices for Managing and Leasing MOBs
Fred Scott, National Manager of Operations, DASCO Companies; Marilyn Kangas, Director of Real Estate Services, Lillibridge Healthcare Services; Eileen Doody, Vice President of Healthcare Services, PM Realty Group; Dave Narey, Vice President, Midwest Region, InSite Medical Properties, Buffalo Grove, IL

• Attract and retain honest, bright, overachieving people. Empower them with responsibility and expecting excellence in the results of their work and build leadership through five key points: Trust, Passionate people, Transparency, Trained Employees and Constant Improvement
• For best leasing strategies, know the market and share your knowledge and market reports to educate your staff. Be patient and provide support throughout the entire transaction. Rely on your team (space planners, general contractors, building engineers, property managers) and personally check out the terrain and understand existing tenants’ experience in the building. Physicians talk and network frequently; their positive experience is your next deal.
• Work Order Management (WOM) can provide more efficient management, but it’s important to examine the benefits of various systems (work orders, preventive maintenance, etc.) and establish a training program that will ensures proper and efficient use of whatever system is chosen.
• Regardless of which best practice you employ, measure your results: timeliness of completion for work orders; types / frequency of issues lead to modifying maintenance programs; employee turnover; tenant satisfaction; and repeat business.

The Rx for Compliance: What PMs Need to Know
Kevin Kucera, Director of Real Estate, HealthOne, Denver, CO; Drew Cressman, Asset Manager, HCP, Inc., Brentwood, TN; John D. Claybrook, Partner, Waller Lansden Dortch & Davis, LLP, Nashville, TN; Walter Neilson, Partner, Waller Lansden Dortch &Davis, LLP, Nashville, TN

• Three primary federal statutes impact hospital relationships, and ultimately MOB leases: Physician Self Referral (STARK), Anti-Kickback Statute (AKS) and HIPAA.
• Corporate Integrity Agreements are between health care providers (hospitals or physicians) who have reached a settlement with the Office of Inspector General (OIG) in the Department of Health and Human Services. Third party property management firms may be asked to provide documentation to demonstrate their healthcare/hospital clients’ compliance with a CIA.
• A violation of STARK could result in loss of federal reimbursements – a fatal result for a hospital system. In general, hospital leases with doctors must be written, for a one year or more and at fair market rents.
• Although STARK and AKS regulations apply directly to the hospital/physician relationship, property managers may have to certify annually that all leases are in writing; rent payable under lease is consistent with fair market value; lease terms are commercially reasonable; and appropriate collection activities are being pursued.