Andrew Dick: I am Andrew Dick. I’m an attorney at Hall Render. I lead our firm’s real estate service line, and I’m joined by my colleagues, Danielle Bergner who’s a real estate attorney in our Milwaukee office, John Marshall, who is a consultant through Hall Render advisory services, and Jerimi Ullom who should be on shortly, who is an attorney in our finance service line. And what we thought we would do is provide an overview of some of the macro trends that we’re seeing in healthcare, real estate and cover some of the headlines, cover some regulatory trends, cover financing trends and then cover some housing intervention strategies and trends. And so I’ll kick the presentation off. This is supposed to be an informal style of presentation, so your participants are more than welcome to chime in, ask questions and stop us along the way. We have slides, but most of the slides are high level concepts.

Andrew Dick: So, I’m going to start the presentation then I will hand it off to John and Jerimi to cover some financing trends, and then Danielle will wrap up with some housing trends. So, thanks everyone one for joining us. We know this is a very busy time of year. We appreciate your time and look forward to a lively discussion. So, the past 12 months has been really interesting from a healthcare real estate perspective. There have been an awful lot of activity in a number of different areas, and we’re going to focus on really hospital, hospital type projects, MOBs, ASCs. We’re not going to hit a lot on senior housing. Danielle will talk just a little bit about it, but we’re going to try to cover just level trends. So, a couple of the trends I’ve noticed over the years, over the past 12 months, I should say, are in the area of academic medical center growth, growth in the ambulatory surgery center market, and a number of changes in certificate of need laws that are really driving growth in a couple of states.

Andrew Dick: I’m also going to talk a little bit about telehealth and the impact on healthcare real estate, property tax exemptions, and then government intervention. So, if you look at some of the trends over the past year or so, you will see that most of the major hospital projects around the country are really sponsored by academic medical centers. And if you look at some of the data, just over the past 12 months, it’s really impressive to see the size of the projects and the growth in the academic medical center sector. It’s really, really impressive. And it’s not just in one part of the country, it’s all over the country. In terms of academic medical centers, what do I mean by that? Usually that means a healthcare institution that’s sponsored by a university or a university medical center. And there’s been tremendous growth in that sector primarily because academic medical centers employ most of the specialists in various parts of the country.

Andrew Dick: So, they’re usually based in urban areas, major metropolitan areas, and they have all the specialists that most regional medical centers or rural or critical access hospitals that don’t have the resources, or enough patient volume to employ the specialists. So, I’ve got a picture here of UC San Diego talking about one of their major multi-billion dollar projects. And by the way, the University of California health system, this is just one of their major capital projects going on right now. There’s a number of projects in Irvine that UC has sponsored along with a number of other markets. Here are some trends about the size of these projects. And the reason why they’re noteworthy is just because how big they are. Most of them, when we talk about them, they’re very expensive on a price per square foot basis.

Andrew Dick: And most of these projects are in the billion of dollars to complete, and that have anywhere from a five to 10 year construction timeline. Major projects, phase projects, many of them are mixed use projects. Many of them have a million square feet or pushing a million square feet, and include pretty significant bed tower projects along with outpatient facilities, really all built into one. And so these are the major projects we’ve been tracking over the past really two years, I would say. Other trends, the big news if you’re watching, is the growth in the ambulatory surgery center market. And for many years, some of our hospital clients would dabble in surgery centers either through joint ventures or they would pick up or build a surgery center, but they didn’t really put a lot of emphasis on the surgery services that were offered there primarily because the reimbursement wasn’t there years ago. Fast forward today, more procedures can be performed in a surgery center.

Andrew Dick: There has been tremendous growth in the surgery center industry. What’s really interesting is if you look at the top 10 surgery center owners on this slide, what you see is that number three, we have Optum UnitedHealthcare’s physician practice and surgery center arm, which is very interesting that they have such a big presence in surgery centers, which tells you that that’s the future of healthcare. But what I find to be the most interesting story is, Tenet Healthcare’s push into surgery centers. And Tenet owns USPI, which is the biggest owner operator of surgery centers. And if you’ve watched over the past few years, Tenet has exited the hospital market in a number of parts of the country, for example, South Florida, other areas as well. And what they’ve done is they’ve taken that capital and invested it into surgery centers. And if you look at their financial reports, a significant portion of their revenue is no longer coming from their hospitals, it’s coming from surgery centers. And when you see Tenet Healthcare make such a major shift, that’s something you should pay attention to.

Andrew Dick: This is the most recent story about Tenet USPI acquiring more surgery centers, investing $1.2 billion into this transaction to pick up 92 ASCs. And the pace and the size of some of these transactions has really been phenomenal. So, it’s something that’s worth talking about and worth watching. Other macro trends are changes in the certificate of need laws, which is really driving growth in the hospital industry that we haven’t seen in years past. And if you look at states like Tennessee and Florida, you’ll see pretty significant growth. Tennessee has made some changes to its CON law over the past 12 months, which allow for a little bit more flexibility when you’re trying to make your case for a new hospital project, that’s driving growth. The other significant change in Tennessee CON law is that there’s an exclusion for behavioral healthcare facilities, which means if you’re going to build an inpatient psych hospital in the state of Tennessee, the way that the rules are written now, you would not have to get a certificate of need.

Andrew Dick: So, those are pretty significant changes. But the headline story has been Florida. Florida rolled back at CON with respect to certain hospital projects. And I’ve got an article here that’s dated May 18th, 2021. Believe it or not, that’s a bit dated. That article covers a list of projects that we’re pending as of the date of that article, most of which are hospital expansion projects. And if you look at, as of may, there were something like 20 inpatient rehab hospitals being constructed, 12 new general acute care hospital projects, couple of freestanding EDs, new medical campuses, a behavioral hospital and ortho project. That was as of May. If you fast forward to today, I would bet that that number maybe close to double what it was in May. Almost every major health system in Florida has announced a major new hospital project or a major expansion that’s in the hundreds of millions of dollars.

Andrew Dick: And on this slide, we’ve got a couple of headline stories. Orlando Health announcing a number of big projects, HCA Healthcare just recently announced several new hospital projects. And then Advent Health has been very aggressively growing in the Florida market. It’s remarkable. And I think some of it is because not only the shift in population to the Sunbelt states like Florida, but also there’s been pent up demand in my opinion. If you go down Florida and you visit some of their hospitals, many of them in South Florida in particular are pretty dated. And so with the rollback of the CON law, I think we’re going to see substantial growth over the next five years. So, big headline news, we’re all watching it. But the other takeaway here is that a majority of the projects that were listed as of May, are inpatient rehab hospitals, which is a trend nationally with a couple of the big players building, we call them earths for short, building earths all over the country.

Andrew Dick: Other news. Telehealth, we get a lot of questions about telehealth. There’s been tremendous interest in telehealth from our hospital and healthcare clients all over the country. There’s been tremendous growth in telehealth, but the question I often get is, well, what will happen to the inpatient healthcare facilities or to medical office buildings long term? Is that going to reduce the demand for in-person visits? And the short answer is no, there’s been quite a few studies over the past 18 months talking about demand for telehealth and patient preference. And what you’ll find is if you read those reports, three out of four patients prefer inpatient visits. The only exception is that if you have a follow up visit with your physician, after the initial visit, there are some reports that suggest that follow visits are really ideal for telemedicine. So, keep an eye out for that.

Andrew Dick: The other trend that we’ve noticed, JLL, CBRE and the major healthcare real estate groups have talked about the fact that with telehealth, we expect there will be an amount of demand for medical office space that’s equal to, or in excess of where we’re at today. Really because telehealth requires additional space that’s outfitted for the equipment and designed for clinicians to interact with their patients. Other news, we’re always watching property tax exemptions across the country, because nonprofit healthcare systems enjoy significant financial savings through property tax exemptions. And if those exemptions were to ever to be challenged or to be rolled back, most of the nonprofit clients, their margins, which are often pretty slim to begin with, somewhere around four or 5%, would take a major hit. And most of these clients or health systems, I should say, aren’t really prepared for a challenge to their exemption. But we’ve seen activity in a number of states primary early on the East Coast of late.

Andrew Dick: This is the most recent headline about a Tower Health Hospital where its exemption was denied. When I read the story, I was just shocked at the value of some of these hospital based property tax exemptions. They’re in the hundreds of thousands of dollars, in some cases, they’re valued at a million dollars. And so at any point, those exemptions are challenged or rolled back, the nonprofit healthcare provider has a major liability that it has to deal with that’s usually not budgeted. Other news, really interesting. Again, on the East Coast, for the past two years, there’s been a number of legal battles involving a hospital in New Jersey that’s operated by CarePoint. CarePoint at one point sold off it’s hospital and leased it back, and it’s caused a number of lawsuits challenging whether or not that was a legal transaction. The local community at one point threatened to use imminent domain to try to get control of the hospital assets.

Andrew Dick: And most recently, just a few days ago, there’s a New Jersey state bill that was proposed that would limit how and when the owner of a hospital can evict the operator of a hospital. The bill directly aimed at this CarePoint dispute that’s been going on for some. What’s also interesting is that in one of the neighboring states, Rhode Island, there’s also been the attorney general who’s hit the brakes on a number of transactions that would permit the sale and lease back of hospital facilities in Rhode Island. There are a number of reasons why the attorney general has stopped or tried to stop those transactions. But what we’re finding is that there are a number of private equity groups that come in to try to rescue struggling hospitals. And what they immediately do is separate the operations and the real estate. And in many cases, the private equity groups that own the hospital assets end up setting aggressive rental rates to get aggressive returns.

Andrew Dick: And what happens is the hospital operator sometimes struggles, and then the community gets upset when certain healthcare providers or services aren’t available. So, this is something to keep an eye on. I’ll do a brief regulatory update. A while back, this was a few weeks ago. The public health emergency was extended through January. Why is that significant? Because a number of other laws are tied to the declaration of a public health emergency. For example, those of you who handle stark and kickback compliance issues will know that the stark law waivers in many cases are tied to the declaration of a public health emergency existing. So, what does that mean? That means that for at least the next few weeks we’ll still have the benefit of a number of laws, including the stark law waivers that allow us to be a little bit more creative to deal with struggling tenants, and other issues between hospitals and physicians so long as this declaration exists.

Andrew Dick: And I wouldn’t be surprised if it’s extended again in early 2022. Other updates, we’re always tracking self disclosures under the CMS protocol and the OIG protocol that involve real estate. Here are some recent settlements. I don’t think there’s anything that’s new here other than these self disclosures are consistent with what we’ve seen in the past. Either there’s been a mistake in a leasing arrangement, or someone failed to document something properly and physicians or other referral sources received a benefit. And as a result, the providers decided to self disclose. But some of the settlement numbers are pretty significant here.

Andrew Dick: I show this chart and we update it every year or so. If you’re ever monitoring, where do the self disclosures, like where are the issues that providers are dealing with. This show based on historical data over the past probably eight, nine years, when there is a self-disclosure involving real estate, there was usually a mistake in one of these categories, fair market value, failure to get an agreement signed or failure to put it into writing in general, failure to collect rent. There was some additional space that wasn’t accounted for in some other kind of remuneration. Remuneration, meaning something of value that wasn’t accounted for in the arrangement. Other updates. We’ve been tracking closely the CMS and OSHA vaccine mandates. What’s interesting is, just as those came out and we’re ready to go into effect, a number of complaints were issued and then courts got involved and there was an injunction on the CMS and OSHA mandates.

Andrew Dick: But it’s interesting what we’ve seen. Even after those injunctions had stopped the mandates, there’s been a couple of trends you need to watch here. Some of our health systems in urban areas have started putting into their contracts, a requirement that all vendors comply with a vaccine mandate regardless of whether or not the CMS or OSHA mandates are upheld or permitted to move forward. So, that’s interesting. The other big headline that I didn’t put a picture of the story, but it’s really fascinating. It just came out a couple of days ago. A number of months ago, the major health system said, we’re going to require our employees who be vaccinated. Well, some of the big for profit healthcare providers have just rolled back the mandates. HCA and Tenet are the two big players who have said, we’re having trouble staffing our facilities, so we’re not going to require a vaccine in certain cases. And that just came out in The Wall Street Journal just a few days ago, which is really interesting. Real estate capital trends. I’m going to turn it over to John and Jerimi at this point.

John Marshall: Hey, before we get into any of this, I just would ping the crowd and the audience to see if any of these other experts that are joining the call today have something to opine on relative to telehealth or space utilization trends, or any of the other topics that Andrew covered. This is a good chance for somebody to take a break if you want to ask a question or dig into something you’re experiencing in your respective market or expertise. We’ll move on. This will be pretty quick. I do want to make a couple of notes on Andrew’s slides. As he was talking, I got to admit that I was multitasking a little bit, and I was reading a Becker CFO report email that came out as Andrew was talking. And here’s two things that we’re completely applicable to trends, one of which we didn’t touch on, but I think a lot of people here on the call today are paying close attention to, and that is behavioral health and new behavioral health facilities. In particular, an announcement of SCL and Acadia doing a joint venture project in Colorado.

John Marshall: And then about five minutes after Andrew was done talking about the HCA growth in Florida, there’s a Becker’s article here that says $3 billion investment by HCA into Florida. So, what’s interesting on the whole CON thing, and I’d be interested to hear from others that might be following it in their respective states. Florida’s been lacking for a long time, right? Think about the population growth over the course of years, and really the obsolescence in many cases of some of the hospital campuses and a lot of community hospitals that didn’t have the resources they needed. So, I think that’s going to continue to be an ongoing pressure relief valve, if you will, to get some more and newer facilities accommodated. One thing or I should say three things that they’re all unrelated that are not in the capital transection, before somebody asks. Supply chain issues, inflationary pressures from supply chain issues and labor, and how those three are all interrelated into the delivery of facilities, which we know is a real problem.

John Marshall: I think there’s enough economists out there and enough people that read The Wall Street Journal and other economic related publications that can probably attest nobody knows where that end is in sight. So, we’re not putting that on here just because nobody knows where it’s going, we just know it’s real, right? And so does everybody else who’s trying to deliver facilities these day. All right. So, end of the slide. Historic low interest rate, right? That continues to be a very good positive for people borrowing, whether you are a developer wanting to borrow, or whether you are a hospital. Certainly on the taxable and tax exempt issuance side of the business, there’s never been a more favorable time for hospitals to borrow money.

Jerimi Ullom: John, to your prior point, who knows. But I think most people expect the fed to raise rates next year two or three times. But even though that is expected, rates are down partly due to COVID surge, and new variants and the like. So, stay tuned if rates ever catch up and do in fact start moving up in part to combat inflation. And then secondly related to that, I would say there are two trends. One is we’ve seen a lot more taxable financing than tax exempt in the last year or so. Partly spreads are tight, so there’s not as much benefit to doing a tax exempt deal, but also I think people want to preserve their flexibility for future use of projects in real estate. So, unless it’s something that the health system is really intending to occupy and use, a new patient tower, et cetera, but a lot of these ambulatory facilities and the like, they might change that use down the road, even if they qualify today.

Jerimi Ullom: So, we see a lot more taxable debt these days. And then one thing that we’ve seen at a great deal of are our forward commitments, which never really happened all that much before. There’s a couple other reasons for that. The IRS took away what we’re called advanced refundings on the tax exempt side. But a lot of deals have forward commitments either because they’re trying to synthetically do an advanced refunding or because they’re just anxious about interest rates moving quickly once they start moving. So, a couple thoughts there.

John Marshall: Good thoughts. Thank you. Goes without saying, there’s a continued consolidation amongst both hospital providers and physician groups. Whether it’s a macro consolidation of specialty groups that are PE fueled and creating super groups around the country, or whether it’s just the consolidation amongst hospitals. We don’t see that slowing down and I’d be surprised to hear if somebody does. That sort of consolidation fuels a higher occupancy use by the health system if it’s a health system related consolidation, which is also one of these things that we think could lend a hospital or a health system and take more direct control of its real estate, right? So, you got more of the hospital or health system utilizing its space directly, and you have historically low interest rates that can be done at a taxable level that keep a lot of use flexibility in place. The downside is that valuation are also at a historic high, right? So, there’s a whole bunch of people that are following the capital markets on this call probably, and the cap rate compression on core assets just continues to be pretty amazing.

John Marshall: And I think partially driven by the flood of new capital. Depending on what you’re reading or who you’re getting the information from, we see reports of, I put in here, new capital or nearly $10 billion of new capital announced in the market. It can be anywhere from five to 10 depending on how you’re categorizing that new capital. But it’s PE firms, it’s new REITs, it’s pension fund related money, all seeking to source a more secure investment in the healthcare real estate sector. So, consequently competition for core assets, especially core assets that are majority occupied or leased by a credit entity short supply. So, even though there’s probably some investors or owners that would be interested in selling some of their assets given the extremely high valuation, it’s really hard to replace that. It’s really hard to find the place to redeploy that capital base.

Jerimi Ullom: Yeah. And if you think about what’s going on in the retail and office markets as well, a lot of that money’s looking for a better home. So, we see this in healthcare, and I hear that the cap rates are even more compressed in multifamily. Folks are just looking for alternatives to retail and other segments.

John Marshall: Given some of these confluence of factors, if you’re a hospital and you’re looking to source a third party development solution, you should be seeing historically low rent factors. Sorry, REITs and developers that might be on the call, you’re aware of it as well as everybody else. But in some of the projects, we’ve had an opportunity to assist our clients on, it’s a great time if you want to hire a developer for an extremely low rent factor. Having said that, you also have an opportunity to look to other financial mechanisms that maybe haven’t been as heavily explored in years past. For example, credit tenant lease, CTL structures still have merit for certain types of financings or project delivery solutions. And as several of you on this Zoom call might be aware, we’ve been a favor of the nonprofit foundation, real estate structure as another option for seeking a third party leasing solution.

John Marshall: Andrew, you’re driving next one. And we’ll go over this real quick. If there’s really specific information people would like to explore on how this works, just call me or Jerimi. We’ve spent a lot of time talking through it. Jerimi way more than I have, because he’s got a few years in vetting the model. You essentially have a 501(c)(3) registered owner that’s a foundation. It’s structured as a founding. It’s a charitable entity that serves as the landlord, secures 100% debt financing for a project. Very flexible lease terms from 10, 12, 15 year operating hybrid leases, up to 20, 25, 30 year fully amortizing leases, flexible purchase options during the entirety of the lease term at the debt balance, not at a fair market value equation. So, generally speaking, way more accretive to an underlying tenant that might wish to take control of that asset sooner rather than waiting for the lease-

Jerimi Ullom: John, one thing I’ll jump in there for the health systems and kind of the providers on the call. We’ve seen a lot of the dynamic where the proposals come from the foundation or from the developer, what have you. I think the future trend is really for the health systems to kind of say, here’s what we want, right? Here’s the accounting treatment we want. Here’s the term of lease we want. Here’s the obligations we’re willing to accept. Tell me how you can make that work. Because one of the things we’ve seen is that there’s so much flexibility, particularly in this model that we get into a situation where folks have difficulty picking, right? It’s like the retail store, if they have less variety, sometimes they sell more because it just overwhelms people.

Jerimi Ullom: So, I would say health systems, you guys are in the driver’s seat to design these things both from an accounting standpoint, and a structure, and amortization and length of term. You’re in the position to really design this as much in the way you might design it if you were borrowing directly. So, I think that’ll be something we’ll see more and more of where the health system starts to take control of that and say, here is what we want. Go find the right product or right vehicle to deliver what treatment we’re looking for.

John Marshall: Yeah. Thanks Jerimi. A couple other quick things, just to note. In certain markets or jurisdictions, there’s an opportunity for property tax exemption. That’s not something that we would suggest anybody take as immediate gospel. There are all sorts of regulations around how that gets taken care of. And at the end of the day, assuming it’s a very long term strategic asset for a hospital, there is inherent long term accretive value that’s retained by that sponsoring credit tenant entity.

Jerimi Ullom: And that’s really the overriding factor here. I mean, a lot of folks latch onto property tax exemption, which can provide current savings. That’s wonderful. Where we can get it, we certainly will take it. But people have tended to not pay as much attention to the long term value and rather focus on what’s my rental rate in the next several years. And I understand that from an operating standpoint, but I think folks will start over time to really dig a little deeper and say, okay, the real value in this is, I’m going to pay for this facility once, right? I’m not going to lease it for another 40 years y the time I’m done. I’m going to lease it for an initial term of 15 and maybe get to 2025, and then I’m going to be able to take ownership of it.

Jerimi Ullom: So, I think that long term value will start to overwhelm some of other benefits as people recognize it more. And as I think in the market depending where interest rates go and depending where cap rates go, it might get harder to generate current year savings, even though there’s all of this value created over 20 years for the health system.

John Marshall: Right. Andrew, I think we’re done with that slide.

Jerimi Ullom: Andrew, we could do this in two slides, what took you like 15. So, see how Danielle does.

John Marshall: I do want to raise a question that was brought up by one of our participants and it’s a fair point on just the rising costs associated with construction and labor on delivering projects. There’s an inherent conflict on the risk associated with that and the spreads that developers essentially can achieve to manage those escalating costs. And so while I’m not suggesting that rent should be at historic lows, there is evidence that rent factors, the yield on cost have been at historic lows. Yet there’s also sensitivity to the fact that developers are put in a position where they have to manage supply chain and construction cost escalation risk that has been really challenging. So, there is a creative tension there that I think will probably need to be worked out amongst the tenant and the entities delivering the space.

Danielle Bergner: Thank you, John. Hello everyone. I’m Danielle Bergner, I’m an attorney in Hall Renders real estate group. I’m going to finish out the program today by talking a little bit about another big macro trend We’ve been watching closely in recent years, and that is the entry of healthcare into housing ventures. So, I always start by addressing what is usually a fairly obvious question, which is why are we talking about housing? And the reason is that housing instability is increasingly becoming a growing concern for healthcare. I have an excerpt here, a headline from a recent Georgia Health News article that says, “Housing is a health issue, a big one.” And that’s very true. And whether healthcare, likes it or not, the reality is the lack of safe, decent, affordable housing for populations in need of it are presenting on the doorstep of healthcare every day.

Danielle Bergner: So, what is the role of hospitals in housing? Nationally, healthcare organizations are realizing that traditional medicine and healthcare alone isn’t enough. And so healthcare organizations are entering social interventions and housing being a big one. I think that one of the reasons healthcare systems are gravitating to housing as a social intervention strategy is, it is a particularly accessible and flexible, and I would say tangible way for healthcare systems to make a difference in the communities that they serve. Housing is also a really interesting opportunity for healthcare systems to target specific populations and to achieve different outcomes depending on the needs of a particular community. So, for example, you may adopt one strategy to address homeless populations, a different strategy to address a shortage of housing for senior populations, or as we’re seeing with a number of our clients nationally, financial contributions to support workforce needs for hospital employees in need of affordable housing.

Danielle Bergner: So, I’m showing a graph here that really is intended just to highlight over the last 10 or so years, what’s happened in the housing markets nationally. And the short story is that most of the new construction nationally in the last 10 years, has been in higher rent market rate housing. And so what’s happened is we’ve seen a decline in construction and opening of affordable rents. So, rents under $1,000 a month plus or minus, depending on the market have declined substantially over the last 10 years while construction of higher rent units has actually increased. And so what we see nationally as a trend is a growing gap between the need for affordable units and the availability of affordable units. I would also note that the markets are watching very closely what the COVID 19 pandemic does to this need for affordable housing. Experts generally agree that the pandemic is going to exacerbate housing related strains in most communities nationally.

Danielle Bergner: So, what we’ve been monitoring closely in particular in this last year is an increased ground swell of dialogue and action amongst hospitals and healthcare systems to address housing. At the Health 2021 Conference this year, a number a panel discussion with a number of executives from Cleveland Clinic, UMass and Boston Medical Center talked extensively about why their systems are investing in housing, why they are adopting it as a core social intervention strategy, community benefit strategy, and what they are expecting to see in terms of returns, not just financial, but also social in the communities that they serve.

Danielle Bergner: And I didn’t want to cover just a handful of trends that we’re seeing in terms of strategies that are being adopted by healthcare systems nationally. I call this closing the gap. What is healthcare doing exactly to start closing the gap between the need and the supply for affordable housing? I would say one high level trend that we see nationally is hospital anchored mixed use campus style projects where the hospital or the hospital clinic serves as the anchor for a mixed use development kind of surrounding the hospital campus, or even throughout the campus to a certain extent. One good example of this is Cleveland Clinic has a project underway located adjacent to one of its clinics, where they will have not just housing, but grocery stores to serve what had been historically food deserts, laundry facilities, community centers. So, in other words, the hospital is really using the hospital’s presence in the community to create a community around the hospital to support the needs of the people that they’re serving.

Danielle Bergner: Another high level trend that we’ve been monitoring is the growth of public private partnerships in the area of housing. Another example of this would be Denver Health this year partnered with the Denver Housing Authority to repurpose a surplus hospital administration building for 110 units of affordable housing near the Denver Health Campus. This project leveraged low income housing tax credits. It leveraged the public housing authorities access to project based vouchers, and was partially financed through a ground lease financing from Denver Health. So, Denver Health did not convey fee title to the Denver Housing Authority in this case. Denver Health financed the housing authorities acquisition through a long term ground lease structure that basically served to preserve the real estate very long term for Denver Health, but to facilitate for at least the next probably for more decades, an affordable housing project.

Danielle Bergner: I liked this project too, because it was a creative reuse of a surplus, what was underutilized administrative building for Denver Health. And we know nationally that this is a challenge for health systems, what to do with these surplus buildings. I will say that conversion to housing does not work particularly well for traditional medical hospital facilities, but it can work really well with surplus administrative buildings, just because of the physical characteristics of those types of buildings generally.

John Marshall: Hey, Danielle, you raised an interesting point there real quick, that the potential administrative conversion, and one of the things I’d be interested to hear from the group, maybe it can be just through a chat is how many hospitals or clients that our hospitals are looking at a major reduction of space in their administrative footprint. And my guess is it’s significant based upon a lot of other health systems we’ve talked to in the past year. But that might be something that’s part of a macro trend, Andrew, that we want to pay attention to going forward as to whether or not that administrative reduction actually happens, and then what to do with those buildings and that footprint, right?

Danielle Bergner: That’s right. And I would say it’s a great opportunity for affordable housing because to the extent that health systems can assist in the buy down of the cost of the land through something like land donation or ground lease structures, that can go a long way to closing the gap in a typical affordable housing capital stack. So, that’s why I like this Denver Health project, because it really puts all those pieces together and is a good example of how people can partner in that respect. I do want to address a question that came in in the chat. The question is, do you see these housing projects focusing more on public needs or more on employees of the health system or both? The answer is both. And it really depends on the market. So, in some markets, employee housing is a more acute concern for the health system.

Danielle Bergner: These would be higher rent markets where employees of the health system, moderate income employees of the health system are finding it difficult to secure affordable housing near or at least relatively near their place of employment. That issue is not as acute in markets that are not particularly high rent markets. In lower rent markets, so think upper Midwest to a certain extent over into Pennsylvania, some parts of the East Coast, the true additional rust belt type markets. Here the issue is not as much high rent as it is low income. And so depending on the market, the focus of the intervention might be a little bit different for the health systems. And this is what makes housing such an interesting strategy for health systems is because depending on what the actual needs of the community may be, the health system can tailor a housing intervention, a housing investment to meet exactly the needs of the community or the population that they’re trying to impact.

Danielle Bergner: That’s a great question. Thanks. Another trend, and this question that I just answered touches on it is hospital employee workforce housing. I cite an example here of Atrium Health partnership that included workforce housing for Atrium employees. This particular project included over 340 units of housing with 20% of those units being set aside for Atrium Health employees. Here in this particular market, the issue is a real spike in rents. And so a lot of Atrium employees are finding themselves in need of affordable housing. I would say another significant trend that we are actively monitoring is how hospitals and health systems are partnering with community development financial institutions, or CDFIs to establish funds for housing.

Danielle Bergner: So, some hospitals and health systems have taken what I would call a more passive investment approach in housing, where instead of making direct investment in a particular project or with a specific investor or developer, the health system is actually pooling its funds with a CDFI, which then essentially uses the funds, administers the funds and funnels the money into affordable housing initiatives in the community. I cite an example here, Bon Secours has partnered with Enterprise Community Development for years on housing funds in and around the Bon Secours campus. They’ve together developed over 800 units of affordable housing that serve the community that Bon Secours serves as well.

Danielle Bergner: And that wraps up my housing intervention. There’s one question that came in, Andrew, that I’ll answer here. The question is, has the issue of nonprofit healthcare organization investing in housing for community employees raised concerns around organization’s tax exempt status or the use of tax exempt debt? So, that’s a good question. That is one of the legal and business questions that we always evaluate when we’re looking at these projects with our clients. The short answer is there are ways to structure hospital investment in these project so as to not run a follow of these concerns. But yes, that is absolutely an issue that we look at with every one of these projects.

Jerimi Ullom: And the last part of that question, use of tax exempt debt. I think workforce housing, it’s not rent restricted, it’s not reserved to folks that make a certain level of very median income. My off the top of my head answer is that that’s probably not going to qualify for tax exempt debt. If it’s dedicated the workforce for the organization’s purpose, then maybe it’s charitable, but I think that would be the analysis. That just means maybe you don’t do this with tax compliance, right?

Danielle Bergner: Correct. Correct. And I would say that we didn’t spend a lot of time on it here because this is more of a high level trend discussion, but this is why I still advocate for the low income housing tax credit as still being one of the most efficient ways to finance affordable housing. You can finance affordable housing without the low income housing tax credit, but when you do that, you just have a much larger gap to fill in your capital stack. So, this is the benefit of finding a trusted partner of a hospital or health system finding a trusted tax credit development partner, like a housing authority. Housing authorities are great partners for these projects for hospitals and health systems, because they’re governmental, they tend to have the same alignment of community interests. But there are a lot of other really great low income housing tax credit developers nationally, including a number of nonprofit developers that really have a charitable mission of expanding affordable housing opportunities nationally. So, those are also good partners for hospitals and health systems.

Andrew Dick: Terrific. Thanks, Danielle, and thanks everyone for joining. Okay. Well, thanks again for joining. We do plan to post this discussion on our podcast channel in about a week. And some of you have asked if we would share the slide deck, I will check with my co-presenters and if you’re interested, I will send it to you. Just send me a note here on Zoom or send me an email. I’d also like to say that we just launched a new platform where we will be sending out our monthly healthcare real estate news letter and our weekly update on trends in the industry. If you’d like to be added to that list, let me know and I will add you. Thanks again for participating.