Health Care Real Estate Advisor

Housing Strategies to Improve Employee Recruitment, Retention and Overall Health

Housing Strategies to Improve Employee Recruitment, Retention and Overall Health

As housing costs have continued to skyrocket nationwide, many middle-income hospital and health system team members have found it increasingly difficult to find high-quality and affordable housing options. The lack of available housing has exacerbated the staffing challenges for many hospitals and health systems. This strain has impacted employee recruitment, retention and the overall health and well-being of health care employees.

Hall Render attorney Danielle Bergner discusses various strategies that hospitals and health systems may consider to address housing challenges faced by their team members.

Podcast Participants

Danielle Bergner

Attorney, Hall Render

Moderator: Thanks so much for joining us today. We’ll get started in just about one minute. (silence) Thanks so much for joining us today. We’ll get started in about one minute. All right, well hello and welcome to today’s webinar. Thank you so much for joining us. My name is Julie Senesac and I’m the digital marketing manager here at Hall Render. And I’ll be here in the background answering any questions. Today we’re presenting housing strategies to improve employee recruitment, retention and overall health, presented by Hall Render attorney Danielle Bergner. Just a little housekeeping before we get started. If you have any questions during the presentation, please go ahead and type them into the Q&A box in your Zoom control panel. We will have some time towards the end for questions. Any questions we don’t have time to address today, we’ll make sure to follow up with you via email. Now I’m going to turn things over to our presenter, Danielle Bergner.

Danielle Bergner: Thank you, and thank you everyone for joining today. We have great interest in this topic as I’m gathering from the registrations for the program today, I hope we all find some great information. Let me advance my slide here. First, just a little bit about Hall Render, Hall Render Advisory Services, and myself. I have actually worked in the housing industry for about 17 years now. Most recently here with Hall Render, advising hospitals and health systems nationally on a range of real estate issues, including housing strategies and action plans. Hall Render, and Hall Render Advisory Services, we like to say we focus our services as an extension of your in-house team. We have lawyers and non lawyers who partner to coach and advise our clients through real estate challenges with pragmatic objective and conflict free advice that has earned us the trust of hospital and health system clients nationally.

Danielle Bergner: I’ll start with a brief program overview. We’re really focusing today on housing as it impacts the issue of employee recruitment, retention and overall wellbeing for hospitals and health systems. This is the second in our housing as healthcare series. And we are focusing today specifically on employee housing, because it has become such a critical tipping point issue for so many of our clients around the country. So first we’ll talk a little bit about, what is the problem? Well, how does this dovetail with other staffing challenges that healthcare is facing right now? We’ll talk a little bit about how this is a two-pronged problem, lack of affordable housing versus lack of available housing. Which are two distinct issues that we have to understand at the outset of developing any strategy. And then we’ll finish the program today with a summary of actual strategies that hospitals around the country are using and have been using for quite a period of time now in some cases.

Danielle Bergner: We will focus today on the concept of permanent housing options for employees. I emphasize permanent because there are other temporary housing strategies, some of which I’m sure many of you are familiar with. Things like renting rooms and hotels with surplus capacity, trailer type housing accommodations. Those are topics we will not be covering today. Today’s focus is really on the concept of permanent housing solutions for hospital and healthcare employees. So first, we are, as an industry in a crisis, in a letter written to Congress this month actually, the American Hospital Association states that the workforce challenges facing hospitals are a national emergency that demand immediate attention from all levels of government and workable solutions.

Danielle Bergner: They note that hospitals have seen a decrease of nearly 105,000 employees since February 2020, which has resulted in an increased reliance on contract labor from healthcare travel staffing firms, which of course as many of you know, are charging hospitals exorbitant rates for labor driving up overall expenses at every level. In other words, setting aside housing as a contributing factor, healthcare is in crisis as it pertains to providing adequate levels of critical staffing.

Danielle Bergner: So how does housing contribute to this problem? Here is just a collection of recent headlines. In preparing for this program I searched just the last five months and came up with several dozen headlines specific to the issue of housing contributing to staffing problems for hospital and health systems. Headlines like, housing for hospital workers called a crisis. Florida hospitals say potential staffers cannot find affordable housing. The housing crunch means Montana hospitals cannot find or keep workers. These headlines are just indicative of the geographic range of the problem. This is no longer a market specific issue, this is now a national issue. And increasingly we are seeing hospitals and health systems developing proactive strategies to address the housing shortages in their communities.

Danielle Bergner: So what do we have here? Well, I call it a perfect housing storm with two prongs, lack of available housing and lack of affordable housing. On the available side, the reality is available housing inventory has decreased nationally in most markets. In some cases we’re seeing peak inventory at less than 40% of what it was two years ago. In other words, demand for housing is far outpacing supply. This has been going on for a number of years and what we’re seeing now is the result of underbuilding for the better part of the last decade. The second prong of the perfect housing storm is lack of affordable housing. Housing is considered affordable if it costs less than 30% of a household’s income. So you can see how with constrained supply, escalating material costs, a prolonged period of low mortgage rates, record inflation and other pandemic fueled factors such as remote work and the increase of second homes have created a perfect storm for the current housing market. So we have constrained supply, we have demand that cannot be met, and we have costs that have been increasing dramatically in recent years.

Danielle Bergner: Here I say hospitals are innovating because the problem is unfortunately only getting worse. The graph here is showing the relationship of median home price to household income over the last 20 years. And what you can see here is median home price is far outpacing the increase or I should say, lack of increase in real median household income nationally. And as you can see from the chart, the divide is only growing wider, which means housing is getting less and less affordable for the average American.

Danielle Bergner: I inserted kind of a colorful quote here by Shawn Tester the CEO of Northeastern Vermont Regional Hospital. He says, on the topic specifically of providing housing for hospital employees, he says, “When you’re haying and the baler breaks and there’s a thunderstorm coming, you got to figure out how to fix the baler and get the hay up in the barn.” In other words, when he was asked, why is Northeastern Vermont Regional Hospital getting into the housing business? His response basically is, because we have to. We don’t have a choice anymore. We are unable to recruit and retain employees in our market if we don’t do this.

Danielle Bergner: So transitioning from kind of a general overview of what the problem is, which I know many of you are familiar with. I want to really dig in now and talk specifically about different strategies that hospitals and health systems are using around the country. As an over view, we’ll touch here on the concept of direct benefit programs, a master lease housing model, housing acquisition and development, community land trust partnerships, public housing authority partnerships, and regional housing initiatives. This is by no means an exhaustive list of how hospitals and health systems can or are engaging in solving housing issues in their communities. But I do think it’s representative of a range of strategies that hospitals and health systems may want to consider at the outset of thinking about how they may want come at housing. I do note here, there is no one size fit all approach. A successful housing strategy often involves layering a number of different approaches depending on what the issues are.

Danielle Bergner: So first let’s talk a little bit about direct benefit programs. Employer assisted housing programs have been around for a long time. They have been used in the healthcare and non-healthcare contexts for many years. Basically assistance in an employer housing program can be provided in a number of ways, typically through financial assistance, sometimes in the formal of a down payment grant or a loan and rental subsidies. Sometimes those are forgivable loans, sometimes they’re not. It does require internally at the hospital level, the development of formal policies that address eligibility, repayment and forgiveness terms. And education and credit counseling are also typical components of a direct benefit program focused on housing assistance. One example that I saw recently was in South Carolina where the Beaufort Memorial hospital is offering a $10,000 home buyer assistance program for its employees. Another interesting example that I want to point out, which is not financial assistance per se, but I thought it was a creative tool.

Danielle Bergner: St. Luke’s Health System in Boise recently launched an online portal right on their website that connects hospital employees with area landlords and invites landlords to connect their available units with hospital employees. So it’s a way for the hospital to connect its employees with housing, to connect landlords with hospital employees without necessarily offering a direct financial benefit. Although I do note St. Luke’s also has financial investment in housing strategies as well. And then just a footnote on this concept of direct benefit programs, I think it’s, one of the trends that we are seeing nationally is healthcare clients looking more globally at their suite of employee benefits to include not just housing support but non housing support work. Things like childcare, tuition assistance, mental health programs. So maybe sometimes if a hospital or a healthcare system is thinking about housing, I would also encourage them to think about these other potential options for benefit programs that would enhance the overall wellbeing of employees.

Danielle Bergner: So transitioning now from the direct benefit model, I want to talk a little bit about the master lease model. The basic mechanics of a master lease housing model are this, the hospital master leases homes and apartments, and then subleases them to hospital employees. Often with the assistance of a contracted residential property manager to ensure that all of the various residential regulations are being complied with and so forth. And also because, one of the things we’re keenly aware of is housing is not healthcare’s core business. And so the more that hospitals and health systems can get themselves out of the day to day of leasing and managing residential real estate the better, because it is very difficult to build an internal competency specific to residential rental practices. So here the hospital master leases homes and apartments, subleases them to hospital employees. And then the benefits of this type of model, master leasing housing allows a hospital to better control the inventory that’s available in the market over time.

Danielle Bergner: It ensures to the greatest extent they can that units are available for hospital employees when needed. A master leasing strategy can also be a fast way for hospitals to secure housing inventory. And that is assuming housing inventory is available, which in many markets today that is one of the challenges. I also note on the benefits side that a master lease model can also be very appealing to landlords because it offers a reliable revenue stream. And so what you have here basically is the hospital or the health system serving as a guarantor of sorts to a residential landlord. That is obviously a very valuable benefit to landlords as opposed to underwriting each individual residential lease based on the credit of an individual tenant. The challenges with a master lease model, and I say challenges, but I would say it’s probably better characterized as realities.

Danielle Bergner: The master lease rents can be higher than what hospitals can recoup through subleases, which does require financial subsidy when that’s the case. This is typically the case in very high rent markets. So I note an example down at the bottom, the Vail Health organization has actually master leased many units for the better part of two decades now. And they just recently renewed their master lease at that development and they’re actually expanding their master lease program. And if you think about it, that makes sense.

Danielle Bergner: Vail is a high rent district. It has been for a very long time. And so here, what you have is Vail Health basically subsidizing the rent through this master lease program where they master lease at the market rent, but then ultimately when needed they sublease at more affordable rents to keep the rents affordable for the people that live there. It is in a way, if you think of about it this way, it’s kind of a rent control program that’s achieved through a master lease model. The challenge of course is that in some markets and today, unfortunately, many markets there may be no inventory available to master lease.

Danielle Bergner: The next strategy I want to talk about is what I’ll just call generally housing acquisition and development. This is, I would say a more permanent solution in the sense that the focus of a program like this is really to create more high quality affordable housing units that will be available potentially to hospital and healthcare employees, but also potentially to the wider community depending on the program’s goals and objectives. So increasingly hospitals and health systems are purchasing land for future development for residential purposes. They’re purchasing existing housing units, rehabbing them and helping to finance the construction of new affordable housing units as a strategy to create and support again, permanent housing options. I cite a couple of examples here. One being Atrium Health in the Charlotte area of North Carolina. Atrium has been very active in recent years with a robust DNI and community investment strategy with a heavy focus on housing.

Danielle Bergner: This one example I point out is a partnership that Atrium did with a local nonprofit organization and a developer, which called for the creation of 341 affordable apartments with 20% of the units, quote unquote, set aside for hospital employees. What that means is Atrium basically made a financial contribution to this project and in exchange 20% of these 341 units will have a rental preference attached to them for hospital and health system employees. Another example I notice here is the Martha’s Vineyard Hospital, which recently purchased 26 acres of raw land for future housing development. I pulled this one out as an example because Martha’s Vineyard Hospital is a critical access hospital. Again, in a high rent district, and recently devoted, I think $3 million of their budget specifically to housing issues.

Danielle Bergner: And a lot of the hospital and health system leaders say, “Would we like to ideally put that $3 million to other uses? Yes. But if we don’t put the money to this use, we’re going to increasingly have difficulty recruiting and retaining staff, which means we will not be able to meet our core business objective.” And so I don’t want to say it’s reluctant. I think a lot of organizations are embracing it, but it is a little bit of a curve in terms of healthcare stepping into the housing space and recognizing that, the fact is the market and government have not kept up, they’re not keeping up and they’re probably not going to keep up going forward.

Danielle Bergner: And so I think healthcare is recognizing this is a problem that healthcare has to address for healthcare and we probably can’t lose much time doing it in most markets. I also want to note with housing acquisition and development that what you often have here is a development partner that really does all of the, most of the heavy lifting in terms of the financing and development of the project, the ownership and management. The hospital’s role tends to be more passive, typically financial support, possibly a land donation. And then also the employees set aside component, which is usually what I see hospitals and health systems getting in an arrangement like this.

Danielle Bergner: Another concept to touch on here is, and it’s kind of an outgrowth, I would say, of the acquisition and development model, is models that involve the use of what’s called a community land trust. A community land trust is a legal mechanism, often a nonprofit that ensures the long term affordability of housing. They do this through the recording of deed restrictions, which restrict the long term conveyance and pricing of the property, or in some cases, the community land trust actually retains ownership of the underlying land to accomplish it. The end purpose is the same, which is that the land that the house is on is basically permanently rent restricted or purchase price restricted, creating a long term, again, more permanent solution to an affordable housing problem in a community. I note here a couple of examples. On one end of the spectrum is the Maggie Walker Community Land Trust, which was funded in part by Bon Secours Mercy Health.

Danielle Bergner: This organization is very active. They buy, rehab and sell homes at a reduced price subject to permanent restrictions on resale value. I would characterize this as a community investment strategy. The Maggie Walker Community Land Trust organization is not focused specifically on hospital or healthcare employees, but the work that they do certainly benefits the employees of the health system working in the area. Another example, which is on a much smaller scale would be a hospital partnering with a community land trust on a smaller project, perhaps involving the donation of hospital owned land to the community land trust for development, subject to long term affordability restrictions and potentially a right of first opportunity for hospital employees. Which means that the hospital employees would have a first opportunity to buy those homes at the reduced purchase price before they could go to the open market for sale. This is a more hospital centered strategy, not as much of a, quote unquote, community investment strategy. But again, accomplishing the same thing, which is creating long term permanent affordable housing for hospital and healthcare employees.

Danielle Bergner: The next model I’d like to talk about is the public housing authority partnership model. I use this model because I like to remind people that public housing authorities are really powerful entities. They are governmental entities, often mission aligned with hospitals when it comes to advancing the affordable housing needs of a community. Public housing authorities also possess unique financial resources and often an abundance of knowledge that can be helpful in advancing in affordable housing development. One example I cite here is a recent project in Denver with Denver Health. Here, Denver Health partnered with the Denver Housing Authority to repurpose a surplus hospital administrative building for 110 units of housing. Financial sources for the project included the low income housing tax credit, which was facilitated largely through the public housing authority and a ground lease financing which was provided by the hospital system.

Danielle Bergner: I like this example because it layers a number of different strategies and achieves a number of different objectives. Denver Health here had a surplus building like many hospital systems do around the country. And fortunately this one was well suited to a residential conversion and instead of selling or donating the land outright, here Denver Health structured their land contribution as a ground lease financing. And so ultimately Denver Health will retain the land in perpetuity, but will essentially subject it to a long term ground lease to facilitate the development of these affordable housing units. I thought this was a really creative, a really thoughtful example of some of things that hospitals and health systems are doing around the country. And also a good example of how to leverage the tools that a public housing authority can bring to the table.

Danielle Bergner: And here my last strategy slide is focused on regional housing initiatives. One of the dynamics that we’ve become very in tune with around the country is there’s a very big difference between housing initiatives in urban areas and housing initiatives in rural areas, and rural meaning much less populated areas. And how you approach your housing strategy really depends on whether you are urban or rural. In less populated areas what we see is a successful strategy will often require a regional approach or even a statewide approach, depending on how rural the entire state is to incentivize development of new housing units. Here the challenges are a little different. In an urban area there’s no shortage of buildings. There’s no shortage of developers. There’s no shortage of capital. All of the parties who want to be involved in a housing development project are in place.

Danielle Bergner: In a rural area you don’t have those pieces necessarily in place. There may be no developers willing to come into the area because it’s not worth their time. There may be no contractors willing to mobilize a team to build anything in a rural area because it’s not to scale to make it profitable for them. And so in these types of circumstances, it’s a unique planning exercise because you often need to bring the resources and you often have to get the project to scale to get the right people interested in doing the project. So one really creative example that I’ve come across in recent months is with the Southeastern Colorado housing initiative. This initiative was led by a number of nonprofit economic development agencies in collaboration with the state and with some federal funding, some ARPA funds. And basically in this model, the regional agencies essentially led the RFQ process.

Danielle Bergner: They led the contracting process. They identified a developer. They identified communities, counties, local governments that were willing to participate. Here there was one hospital district participating where they donated land essentially to the economic development agency. The economic development agency contracts with the developer for the construction of the house. And then when the house is done, the hospital district purchases it back from the developer for an agreed upon market price. And so it isn’t the simplest structure, but I will say it was awfully creative. And it really impressed me in terms of how it brought all of these parties together to tackle a housing issue that for many, frankly for decades had kind of plagued the region and they didn’t know what to do. And now they have 63 houses going up over the next six months. And so the good work is getting done. It’s not always easy to do, but there are models out the there that can help hospitals do it.

Danielle Bergner: And then I’ll wrap up here to talk a little bit about how hospitals and health systems may want to approach a housing strategy. At the outset let me say, it can be overwhelming because it’s not part of a hospital’s core business. You’re working with parties and concepts, and ideas that are maybe not particularly familiar to those inside of your organizations. And so, one of the things I recommend when we start working with a hospital on a housing strategy, is I say, “Okay, don’t bite off too much at the outset. Let’s just take this in pieces.” And what we talk about is a phased approach to a housing strategy. Phase one being the establishment of a clear vision, goals and identifying assets for the endeavor. So we start by talking about, well, what are the hospital’s primary goals?

Danielle Bergner: What is the vision for this project? How are we going to make those things measurable? The next part of this phase one process is identifying land, building and financial resources that the hospital can bring to the table. Sometimes this is surplus land. Sometimes this is the acquisition of dilapidated homes around the hospital. Sometimes this is just straight financial assistance. Sometimes the hospital says, we don’t want to donate land. We don’t have land to donate. We don’t really want to rehab houses. What we’d like to do is write a check and we’d like someone else to do these things. And we can work with hospital systems to help them develop those strategies as well. And then the other really important part of the phase one work is identifying stakeholders and partner resources.

Danielle Bergner: It’s very difficult in housing to have a big impact if you are not bringing multiple stakeholders and partners to the table. The other concept I really spend a lot of time thinking about when I look at these projects for our clients is the concept of leverage. I would like our hospital client dollars to be leveraged on a housing project to the greatest extent possible so that the value of that hospital investment is multiplied because we have other stakeholders at the table. Other stakeholders might be governmental agencies, they might be housing agencies, they might be the philanthropic organizations. They might be developers who are bringing a private investment to the table.

Danielle Bergner: And so the goal when I look at these projects is not always, how is the hospital going to solve this problem? What I look at is, how is the hospital’s investment going to leverage the greatest possible impact by bringing other people and other dollars to the table? Phase two then looks like, what I call organizing the team and developing the plan. Engaging those stakeholders, getting their buy-in, and then developing the plan and the program, whether it’s a direct benefits plan and coordinating that with legal or an HR. Or it is a wide scale housing development project and it’s coordinating the development and financial partners. It’s really heavy on organizing the parties to make this happen. And then phase three is implementation. It’s the contracting, it’s the land acquisition, it’s the program implementation. And so I kind of take a little time to go through these phases with clients, because sometimes what I find is people get a little overwhelmed at the magnitude of taking on a housing project. And the reality is you can, reduce it to more bite size pieces if you’re thoughtful about it.

Danielle Bergner: And just a few practical takeaways before we open it up for questions. First, always understand the problem in your market. Just because affordability is a problem in the other county it doesn’t mean that’s the problem in your market. You have to understand, is our problem that we don’t have the inventory? Is our problem that it’s not affordable? Or is it a combination of both? And then recognizing that there is no one size fit all solution, multiple approaches are often needed for a successful overall strategy. And then third, consider a phased approach to make strategy development and program implementation more manageable for your teams. I invite everybody on the program today to stay connected with Hall Render healthcare real estate insights. We publish a podcast. We have a weekly real estate briefing that you can subscribe to and we often publish articles and blogs. In this slide are links to the various resources, which you will receive after the program today. And with that, I’d like to hand it off to Julie.

Moderator: Thanks Danielle. Did we want to take some time to go through any of the questions?

Danielle Bergner: Sure.

Moderator: Okay. We’ve got one here. Are the costs of subsidizing housing costs allowed to be included on cost reports for critical access hospitals?

Danielle Bergner: That’s a great question. The answer is sometimes. That is actually a question we explore with our clients in typically that phase two analysis, where we really start digging into program planning and implementation and how we might be able to structure it to achieve the best possible tax related outcomes. So that’s a great question and the short answer is yes, sometimes.

Moderator: Great. Here’s one asking about experience with tax-exempt bonding finance model, when funding housing projects. Any pros and cons you could share about this model?

Danielle Bergner: Yes, no, that’s also a good question. We do have quite a bit of experience working with tax-exempt bond financing for housing, although that’s typically facilitated through a private sector developer not by a hospital. Not that it can’t be, but again, it really goes to the question of whether the hospital wants to be on the front line of developing, owning, operating the property, or does the hospital prefer to be more in the financing seat by donating land, donating money, donating resources. Pros and cons just generally with tax-exempt bond financing for housing, one you have to have scale. So tax-exempt bond financing is not feasible if you’re building 12 units. Tax-exempt bond financing is feasible if you’re building 200 units. And so bond financing, tax credit financing, these more sophisticated finance vehicles for housing really require projects to be to scale.

Moderator: Great. We’ve got one here. A question about the Atrium example. How does the hospital determine who gets housing? How do you decide who gets the subsidized home? What’s the criteria?

Danielle Bergner: Right. That’s a great question. So here in the Atrium model, which is very similar to a lot of models around the country, Atrium is not in an active role as it pertains to the evaluation of potential tenants. So Atrium basically has a program to refer their employees to these housing opportunities. But once they’ve been referred, the evaluation of that tenant is done by the property management firm that’s overseeing the management of that property. And that’s done to ensure that all of the, for example, fair housing laws and other regulatory requirements applicable to a project are being satisfied. The hospital itself in this case is not doing that itself. They’ve essentially … They refer their employees to the property management firm, the property management firm evaluates those tenants the way they would any other tenant. And then if they qualify, they get the unit and if they don’t, then they may not, even if they are an employee.

Moderator: Great.

Danielle Bergner: That’s a good question.

Moderator: Yeah. As a follow-up to that, someone asked, how do you begin to measure the success of something like this? Is it against like a traveler agency costs?

Danielle Bergner: Yeah. So that’s a really great question. It’s one that gets asked all the time. So in all honesty, I think it’s very difficult to measure it in hard dollars. How do you measure the cost of not attracting and retaining employees? How do you measure the cost of losing employees because they don’t have a place to live? These are hard of things to do. I will say though that one metric could be, with permanent housing that you don’t need as many travelers. So is that a metric that a hospital may want to track if it goes into a housing strategy? Yes.

Danielle Bergner: Are there studies that have been done, longitudinal studies that have been on the financial benefits of housing programs for hospitals? Not really. There’s a really good study that was published a number of years ago in partnership with Bon Secours Mercy actually, where they studied and developed a formula essentially for measuring what they coined the social return on investment, which measures not just financial, but the broader social impact of these programs for hospitals. And that is, I will say a theme that I hear frequently with hospitals that are doing this, that they view it not just as a tomorrow bottom line type of issue, they view it as a larger community investment issue.

Moderator: Great. We’ve got one here. Can you speak to the income tax implications for individual employees who receive hospital subsidized housing?

Danielle Bergner: Yes. That’s a great question. So the short answer is when anyone who receives housing for less than market value is receiving that it’s possible they will have a tax implication. The caveat being, if this is structured as an affordable housing development where the rents are subsidized in a way and the residents are restricted to certain income levels, it’s possible that that income would not have to be recognized. But that is something that has to be thought through as part of the program analysis.

Moderator: Great. That also kind of links to someone who asked, how does this work if the employee quits?

Danielle Bergner: So that goes back to, for example, the direct … So let’s talk about a couple different things there. The direct benefit program, let’s say there was a loan made for somebody to buy a house and that employee quits. That goes back to that issue of having to have programs and policies developed around, when is a loan forgivable? When does it have to be repaid? The short answer is hospitals can set those programs up any way they want to so long as they’re being administered fairly. And so the answer is, it depends on how a benefit program is set up for that. In the context of something like a person renting an apartment who got the apartment on a preferential basis because of their status as an employee, that would be more difficult. So would you be able to evict somebody who’s no longer an employee? I would say that’s very difficult in the rental concept. I think that that issue probably comes more into play when loans have been made by the hospital to the employee to subsidize housing needs.

Moderator: Great. One here. I would love to hear if you have any examples specifically or recommendations for small rural critical access hospitals, in addition to the Martha’s Vineyard examples, specifically those with limited financial resources for their housing work.

Danielle Bergner: Yeah. That’s a good question. So one I mentioned in the program is the Kiowa County Hospital District in Southeastern Colorado. This is a very small hospital, very limited financial resources. They had one piece of land that they could donate for this project, which ultimately made it go. It did involve an investment on their part, it’s not free. But there’s a good example of a very small critical access hospital that without this duplex being built they literally have nowhere for recruits to live.

Moderator: Yeah. Someone asked, how do employees feel about working and living together?

Danielle Bergner: Yeah. So there are things that have worked and things that have not worked in that respect. I think one of the issues that has to be thought through specific to this question is, what does this place feel like when it’s built? So does it feel like employees are living in a dorm? Because that’s a good example of where employees may not like the arrangement, it may not be successful. Or does it truly feel like they’re living independently in a nice apartment building where they are truly living separately? So there are, I would say there’s case studies of things that have worked, things that have not worked. And generally what has not worked are designs that look and feel more like a dorm type of setting as opposed to market rate apartments.

Moderator: That makes sense. We’ve got a few more here. I’ll just go through a couple more and if anyone wants to submit any questions in the Q&A panel, we’ll make sure to get back to you via email after the webinar. So we asked, how are healthcare organizations balancing the housing needs of their employees with those of their patients in terms of their investment of time and resources?

Danielle Bergner: Yeah. So this is why it’s challenging because housing is not healthcare’s core business and there is a balance, and some organizations are large enough that they can absorb a lot of housing capacity in their internal staffs, others are not. And that’s where I will say, that’s a role that we’ve been playing increasingly with some of our clients where we’re kind of filling that gap for them because the core business is healthcare and that is never going to change. Regardless, there is a certain level of staffing support that has to be committed to any housing endeavor. You can’t avoid that. But I do think that selecting and working with the right partners is what makes all the difference.

Moderator: Yeah. Last question here, before we wrap up. We’re wondering if you can touch on eligibility and selection criteria considerations for hospital employees offering housing subsidies, childcare, transportation assistance.

Danielle Bergner: So the answer to that question is, it’s all over the board. It really depends on what the hospital wants to accomplish with it. It depends on what the specific challenges of their employees are. We do have internally some examples of what clients are doing, but it really is, it would be hard for me to summarize one particular set of eligibility selection criteria because they really are all over the board. I will say one common thread tends to be need based. And so there has to be some component to the selection eligibility process that evaluates bonafide need.

Moderator: Great. Well, thank you so much Danielle. This has been really great. And thank you all for joining us today. Just so you know, we will be sending out an email with a link to a recording of today’s presentation, as well as a link to download the slides. If you’re interested in learning any more about any of the topics we’ve discussed today, feel free to reach out directly to Danielle, her email and phone number is on the screen. Or you can always find more information on our website hallrender.com. Thank you as always for joining us and we hope you have a great day.

Danielle Bergner: Thank you.

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Real Estate Year in Review – 2021

2021 Real Estate Year in Review

Join Hall Render attorneys and advisors to hear about the top trends in real estate from the past twelve months.

Podcast Participants

Andrew Dick

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Danielle Bergner

Attorney, Hall Render

John Marshall

Advisor, Hall Render Advisory Services

Jerimi Ullom

Attorney, Hall Render

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.

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An Interview with Tamia Kramer, AVP of Real Estate, Ardent Health Services

An Interview with Tamia Kramer, AVP of Real Estate, Ardent Health Services

In this interview, Andrew sits down with Tamia Kramer, to talk about her real estate career, building a centralized real estate function for Ardent Health Services and trends in the health care real estate industry.

Podcast Participants

Andrew Dick

Attorney, Hall Render

Tamia Kramer

AVP of Real Estate, Ardent Health Services

Andrew Dick: Hello and welcome to the Healthcare Real Estate Advisor Podcast. I’m Andrew Dick, an attorney with Hall Render, the largest healthcare-focused law firm in the country. Today we’ll be speaking with Tamia Kramer, the associate vice president of real estate at Ardent Health Services. Ardent is a national hospital and healthcare system that’s based in Nashville, Tennessee. We’re going to talk about Tamia’s background, Ardent Health Services and trends in the healthcare real estate industry. Tamia, thanks for joining me.

Tamia Kramer: Thanks for the invite, Andrew.

Andrew Dick: Tamia, before we talk about your role at Ardent, let’s talk about your background and tell us where you’re from and what you wanted to be when you pursued a professional career.

Tamia Kramer: So I’m from a little bit of everywhere. I was a military brat growing up, went to 14 different schools. I went to college in Texas. That’s actually where I lived for the 18 years before I moved to Nashville with Ardent. Went to college at Texas women’s university, and really knew that I was fueled at negotiation and analytical review of information and decided to pursue working within the real estate industry and start as a broker, but ended up taking my career down that path. And so I bring that level of experience to this role at Ardent.

Andrew Dick: Got it. And so when you worked in the commercial real estate industry, talk about your roles. I mean, it’s my understanding you were a commercial broker, you worked for a developer. Tell us a little bit about your experience.

Tamia Kramer: Yeah, so I started out working for an industrial real estate developer and kind of an administrative capacity and that really gave me a snapshot into the industry itself and the ins and outs. And let me begin to hone some of my negotiation and analytical skills. From there, I decided to double down on that career path and become a broker. Got my real estate license working for a local firm in Dallas. And the primary client that I had to start out with was a healthcare client. I actually worked on the corporate headquarters of the former Triad hospitals campus and managed all of their real estate transactions. And then as far as the developer piece of it goes, in addition to the brokerage side of things, I’ve also gotten some experience with build-to-suit type developments related to the expansion of some of those healthcare clients and specifically art and health as well.

Andrew Dick: Got it. And so at what point did you make the transition to Ardent, talk about that transition.

Tamia Kramer: Yeah, so I was working in-house for another healthcare company in 2017. Ardent reached out to me and was interested in centralizing some of their real estate functionality at the corporate office. At the time, the real estate functions were all on a case-by-case basis at the facility level. And so that led to either a lack of visibility or cohesiveness with our strategic plans. And there was a lot of benefit to giving that visibility to the leadership team at the corporate office. So I presented to the executive team, gave them a plan on how exactly we would go about centralizing the department. And at that point, they extended an offer to me. And I took that role in mid-2017.

Andrew Dick: And to me, it sounds like when you presented to the executive team, it was really to build out a real estate department, and so what does that mean? Talk about building out a centralized real estate department within a larger health system. That sounds like a heavy lift.

Tamia Kramer: Yes, very much so it was slow going at first, a little bumpy along the way. The first thing that you have to do in trying to stand up a real estate department that didn’t exist previously is getting your arms around what you currently have, and we had a lot of lease documents, but they weren’t in a centralized location, they were not all electronic. So a large part of what I did to start was just taking inventory of everything that we have and a baseline of where we’re at and then start the process of making sure that each of those agreements is compliant, it’s current, and try to add value wherever you can.

Tamia Kramer: Another function that we work to streamline and centralize is the billing and collection of all of our income leases. So what that means is sending out rent statements to any tenants that lease space from us and then collecting on those funds and reporting those down at the facility level. Previously, the hospitals each managed that locally and at the end of the day, if rent isn’t paid, that is a problem, not just from a business standpoint, but also a compliance standpoint. And so it has helped us to get in front of a lot of those issues, kind of create a standardized process of billing and collections and not letting anything get too far gone before it’s addressed.

Andrew Dick: Got it. And so you’ve been at Ardent for a number of years now and so what are some of the key takeaways? I mean, did you implement like a centralized technology database or how did it work when you started centralizing the real estate function?

Tamia Kramer: Yeah, we did. So we have a web-based platform that we use that holds all of our real estate leases. We are able to pull reports out of that system. We use that same system to build the income tenants, their rent, and any other amounts that are owed under the lease. We’ve created a site selection, an optimization system using various demographics and business intelligence data to help us determine where we want to be and why we want to be there. So that’s added a level of improvement to the locations that we decide to pursue. Rather than taking a wait-and-see approach and trial and error, we’re trying to get it right the first time where we can. So that has significantly helped. In addition, we’ve got a data room of various floor plans, schematics measurements that we have been able to collect over the last four years by engaging a firm, an architectural firm to help us remeasure all of our spaces to ensure that what we’re releasing is in fact accurate.

Andrew Dick: So Tamia, talk about, let’s transition and talk a little bit about strategy. So one of the big issues that healthcare providers face today in the real estate world is whether to own or lease their facilities. How do you approach those decisions and does Ardent have a certain perspective on whether to own or to lease?

Tamia Kramer: So it’s approached at the highest levels, we certainly want the local division leadership and the Ardent leadership to kind of be the driving force behind whether we decide to own or lease something. I will tell you that the historic approach is into lease property. Now that does not mean that we do not own property, we have a healthy amount of both, but we do have a preference to lease. And the reason for that preference is that it doesn’t tie up large capital sums of money in those hard assets that could otherwise be deployed into operational type functionality and also an expansion of our footprint and of our various healthcare activities and market.

Andrew Dick: And so let’s also talk about the impact of COVID, Tamia, so how is the impact of COVID changed the way you’re doing business on behalf of the health system?

Tamia Kramer: So we are always trying to be as smart as possible about the dollars that we spend, but COVID really made us focus even more on that and tried to leverage what we could in order to improve existing terms or close locations in favor of better locations. I’m sure a lot of other healthcare companies have gone through that same exercise. Now we’ve also, from a corporate office standpoint and an administrative space standpoint, we’ve been looking at how to better utilize the space that we have and ways that we can improve efficiencies.

Tamia Kramer: One thing that we have started looking at and we’ve implemented fairly recently is a hybrid type working environment where people are in the office 1, 2, 3 days a week, the rest of the week, they’re working remotely from home. That has enabled us through some creative exercises to potentially reduce our corporate office footprint by over 30%. We’re currently sitting in about 104,000 square feet and it looks as though we may be able to reduce that footprint down to about 75,000, still meet all of our needs, and actually improve efficiencies and collaboration across the board. And in that same approach is being used in each of our local markets as well to evaluate our use of administrative space and how much we in fact actually need.

Andrew Dick: Got it. So Tamia, when we talk about administrative office space, there are often strong feelings on behalf of the employees that use the space. Has there been any pushback from employees that like to have a traditional office, or how have your team members responded to this more hybrid approach?

Tamia Kramer: Before we implemented that, we actually distributed a survey to all of our staff and we asked them to weigh in on what they wanted the corporate office of the future to look like, what was important to them. And at that point, when we deployed the survey, we had already started working remotely for the most part because of COVID, because of all of the lockdowns and the restrictions and we didn’t have a cohesive hybrid working policy developed yet. And we weren’t sure if it was going to continue in the future. So to get a decent baseline of where exactly the future was going to be taking us, we deployed that survey and the survey came back with 73% of the staff wanted to work in some type of hybrid environment. That was pretty telling, only 11% of the respondents came back and said that they wanted to work in the office five days a week, which was, it was a little shocking to everybody that was reviewing the results.

Tamia Kramer: But that told us what we needed to know that with the changes that COVID brought around, we were better serving our employees by giving them a chance to work in the environment that they thrive in, whether that’s in an office without distractions from home or working from home if there aren’t any distractions at home. And so focusing on where someone thrives rather than just having somebody sit at a desk just to sit at a desk, it’s kind of, it’s been a culture change here at Ardent and I can tell you that from my perspective, I’m happier. I think I have a better work-life balance as a result and I think that that is probably the case with a lot of my colleagues. I will tell you that we are planning on doing a secondary survey just to test the waters again and make sure that what everybody thought they wanted, earlier in this year is actually working for them before we start making some long-term space reduction decisions.

Andrew Dick: Yeah, that’s interesting because it seems like each company has a little bit different response to those types of surveys, whereas, in the law firm world where I work, the attorneys always want an office and aren’t as flexible when it comes to giving up an office. But that’s interesting how Ardent approached it and how things are working out. So Tamia, let’s talk a little bit about trends in the industry. What are some of the bigger trends in the healthcare real estate industry that you’re noticing?

Tamia Kramer: So I am noticing more of an ambulatory strategy. That is where access points are at an increase and access points are the goal. People are looking for convenience, they’re looking for things close to their home. They don’t necessarily want to travel to an on-campus large acute care type facility and have to navigate all of the halls there just to get to a run-of-the-mill doctor’s appointment. And so we’re trying to increase those access points across most of our markets.

Tamia Kramer: I am seeing that that is an increasing trend. We’ve partnered with some Ardent care providers that are helping us meet that goal in several of our markets, specifically near Austin and Topeka, and several others. So I trend toward urgent care, I trend towards increased access points and also just making sure that any new developments that are created, they’re using the dollars as best they can. The construction cost is just through the roof right now, which is obviously increasing the cost of any real estate ownership and or leases associated with those developments. So just noticing a little bit more cost-consciousness across the industry as a whole.

Andrew Dick: And what about telehealth? Tamia seems like health systems have had a big increase in demand for telehealth services. Has that changed the way that you and your team operate?

Tamia Kramer: Absolutely. So I would say that we are starting to utilize portions in some of our clinics as a telehealth room, as a place where doctors can go in and have a dedicated area to conduct those telehealth visits. When in person visits aren’t possible, it’s definitely increased our volumes. Now we don’t, it doesn’t necessarily translate to more dollars but if we are able to get access to more patients, then that’s not a bad thing, even if we’re not necessarily seeing them in person, they’re getting the quality care that they need. And they’ll likely be come back to us for more care if they had a quality experience.

Andrew Dick: Yeah. I think that’s what I’m hearing from other providers as well. So talk about your young professionals who are getting started in the healthcare real estate business, what advice would you give to someone who’s new in the business that wants to learn as much as they can? What would you tell them?

Tamia Kramer: So I would say that healthcare real estate is a little bit of a different animal from typical commercial real estate. Mostly in that there are compliance parameters that you have to stay within in order to keep yourself out of trouble. And those don’t necessarily align with the typical, get the best deal for your client approach that you will typically see in commercial real estate. There have actually been some times that I have had to approach a landlord and ask them to increase my rent, because it was not fair market value any longer.

Tamia Kramer: And you typically won’t ever see anybody do that in commercial real estate. It’s get the best deal you can. The reason why we have to be careful with that in healthcare is you cannot give any type of incentive for any referral business. And if, for instance, we’re leasing space from a referral source and we are not paying them at least the fair market value for the rent, or more fair, more money, more than fair market value for the rent, then that could be construed as an incentive to refer. So it, I would say that go into it still with making the best financial deal possible at heart, but understanding that the most important thing to do is to actually stay within those compliance and regulatory bar rails.

Andrew Dick: Yeah, that’s right. I agree with you from, in the healthcare world, the regulatory environment is very different than in the traditional business world. So Tamia, this has been great. Where can the audience learn more about you and Ardent health services?

Tamia Kramer: So you can go on our website at ardenthealth.com. There are several links on that webpage that will navigate you through our health systems and our history where we started at, where we’re going. There’s also a link to careers and different news articles that are available that talk a little bit about what we do and our impact in the community. And I’m on LinkedIn so, I mean, I’m welcome to connect with anybody that wants to know a little bit more about what I do, a little bit about Ardent or just wants to talk about real estate.

Andrew Dick: Great. Well, thanks Tamia, this was a good conversation and thanks to our audience for listening on your Apple or Android device, please subscribe to the podcast and leave feedback for us. We also publish a newsletter called the healthcare real estate advisor to be added the list. Please email me at adick@hallrender.com.

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An Interview with Collin Hart, CEO, ERE Healthcare Real Estate Advisors

An Interview with Collin Hart, CEO, ERE Healthcare Real Estate Advisors

In this interview, Andrew Dick sits down with Collin Hart, to talk about his company and trends in the health care real estate industry.

Podcast Participants

Andrew Dick

Attorney, Hall Render

Collin Hart

CEO, ERE Healthcare Real Estate Advisors

Andrew Dick: Hello, and welcome to The Healthcare Real Estate Advisor Podcast. I’m Andrew Dick, an attorney with Hall Render, the largest healthcare-focused law firm in the country. Today we will be speaking with Collin Hart, the CEO and managing director of ERE Healthcare Real Estate Advisors. ERE is a healthcare real estate consulting and brokerage firm.

We’re going to talk about Collin’s background, the company he leads, and trends in the industry. Collin, thanks for joining me.

Collin Hart: Andrew, thanks so much for having me today.

Andrew Dick: You bet. Collin, before we talk about your role at ERE, let’s talk about your background. Tell us where you’re from, where you went to college, and what you aspired to be.

Collin Hart: Sure. I actually happened into the real estate business by chance, but I’ll kind of start at the beginning and give you a little bit of understanding of where I come from.

Collin Hart: So I originally grew up in the Carolinas, and I started my undergraduate degree at NC State University in Raleigh, North Carolina, and I was going for business. But sometime between my sophomore and junior year, I was looking for an internship, and I basically was late in the game. I didn’t have anything lined up for the summer. And I was kind of looking at my options and figured I, I wasn’t sure what I was going to do.

Collin Hart: So I ended up going to a family reunion and I ran into a cousin of mine. And I mentioned to him that I was looking for an internship and he said, “Well, that’s perfect. We’re looking for an intern. We run a real estate business in south Florida. We own a bunch of shopping centers, and we’d love to have you down.”

Collin Hart: So I didn’t have any other options, and I thought this might be a good one. So I decided to move down to Palm Beach Gardens for the month of July. And basically, I was working at his company. It’s a family office. And so during the day I was learning all about property acquisitions, management, leasing, working with tenants, and then in the evenings he was mentoring me.

Collin Hart: And so at the end of that internship, I moved back up to NC State and I’m reflecting on that experience. And I decided that I learned more in that month working with my cousin and be mentored by him than I learned in my first two years of university. And so with that, I decided, hey, I really want to have a career in real estate. And I moved down to Florida to continue school, but also continue working with him.

Collin Hart: And so that’s how I got started. And eventually I moved into an acquisitions role for that company. And so, as I mentioned originally, they were owning shopping centers all over the state of Florida. But we started branching out and looking for other asset types to acquire. And so we got into the single-tenant real estate space. And so, in case you’re not familiar, that’s fast food restaurants, drug stores, gas stations, basically single-tenant net lease properties that you can really own anywhere. And basically, your job as a landlord is to collect rent. Okay?

Collin Hart: And so that allowed us to really open up our box. And so I got into the role of acquisitions, buying these properties all over. So we acquired about a hundred million dollars of real estate all over the country in about 30 different states. And so fast forward, and I got to the point where I realized I was never going to own any of those assets.

Collin Hart: And so I thought, maybe I ought to forge my own path. And so from that point I left the company, and I went to New York and I worked for a private REIT in acquisitions in New York. And so just in the year that I worked in acquisitions, we bought $300 million of real estate all over the country.

Collin Hart: So I’m coming from this private, we’re investing our own money, into working with an entity that’s investing on behalf of others and really needs to get money out the door. So I got a lot of great experience there, but ultimately decided that I was not set up for cold weather. And so I relocated to Southern California.

Collin Hart: And so at that point I had kind of left the principal side of the business, I no longer worked for that REIT. But at the REIT, we acquiring three different types of properties. We were acquiring single-tenant industrial assets, single-tenant retail assets, and then single-tenant medical assets. And that was really my first foray into the medical real estate world.

Collin Hart: And so what I noticed is that the REIT, we were getting the best deals on all the medical real estate. And I think the reason was because there was poor representation, or no representation, on behalf of the owners of those medical properties. And a lot of times we were buying properties from doctors.

Collin Hart: So that was pretty much the advent of the start of our company, ERE Healthcare Real Estate. Where we said, hey, instead of being on the buy-side, I can move to the sell-side, to the advisory side, and fill a gap in the market, helping these folks who really are getting taken advantage of to now represent their best interests, and get the best possible outcome for them on a real estate sale.

Andrew Dick: Got it. So I know you worked for an investment bank as well. At what point did you say, hey, I need to start my own company, I need to forge my own path? And what really prompted that, Collin?

Collin Hart: Sure. Yeah, so thanks for filling in that gap there.

Collin Hart: Yeah, between the private REIT that I worked for and the founding of ERE, I briefly worked for an investment bank. And so, obviously an investment bank focuses on advising business owners on how to monetize their businesses. And so we were in the real estate side of that. And so I was working on a small team, and basically we would help with the real estate when a practice, or hospital, or healthcare organization was being sold.

Collin Hart: And I just didn’t feel like the real estate was the number one focus. Because again, we were just a piece of the investment bank’s business. And so oftentimes the outcomes would be subpar on the real estate because we were trying to get the best possible outcome on the enterprise.

Collin Hart: And so when I saw that conflict of interest, or not the best total or aggregate outcome, I said, hey, let’s focus just on the real estate side of things. And that was really the founding of ERE.

Andrew Dick: Got it. And did you start the business on your own, or did you come over with a partner?

Collin Hart: I started with a partner. Fortunately, I met some really great people working at the bank. And so as part of that, a couple of us left at different, times and ultimately ended up coming together and founding ERE together.

Andrew Dick: Got it. So talk about your typical client. Is it the physician, independent physician? Talk a little bit about the client base.

Collin Hart: Sure. So I would say that we’ve worked with all different types of healthcare organizations. It could be institutional real estate investors, it could be a health system, or it could be the independent physician groups. I would say the majority of our business is in working with those independent physician groups, generally because real estate is maybe the third or fourth tier of their expertise, right?

Collin Hart: Number one, their physicians and providers. Number two, their members of their community, members of their family. Number three, there may be business people and investors. And then number four, perhaps real estate is the focus. So those are the folks who we can work with, where we can add value to their situation. And so that’s where a lot of our business comes from. We’ll certainly advise the health systems and the others, but at the end of the day, we’re able to deliver the most value with the folks who perhaps have the least experience in real estate.

Andrew Dick: Got it. And Collin, talk about where you’re at in the country and markets that you’re serving. Or maybe it’s just nationally.

Collin Hart: Sure, yeah. So we have offices in Southern California and in Texas. And so while we have just those two offices, we’re really focused all over the country. And the reason for that is because it’s not like there’s hundreds of physician-owned medical buildings in any one market. Generally we’re working with the specialty physicians in any one market.

Collin Hart: So that might be gastroenterologists, orthopods, urologists, dermatologists, nephrologists, any of these specialty folks, often who are in a position where they own their practice and then they also own their real estate.

Collin Hart: So we literally travel across the country. I mean, we’re working on transactions now all the way from, let’s say south Florida to Alaska, believe it or not. So this is our first deal in Alaska and we’re really excited to help those folks.

Andrew Dick: That’s great. So talk about the type of services you’re providing. A lot of times we think of brokers who are trying to convince physicians to sell their real estate, or participate in a sale lease back or an UPREIT transaction. What is your role when you’re working with clients, and what is the objective?

Collin Hart: Yeah, that’s a great question and I appreciate that. So I will tell you that we’ve probably told just as many people, that they should not sell their real estate, as those who we’ve told, you really should sell your real estate. And so we really take an advisory approach. While we are a brokerage and we do make money when we sell real estate on behalf of our clients, at the end of the day, we take a long-term perspective on our transactions with our clients.

Collin Hart: And so we generally are not pushing them for a sale. Generally, they reach out to us, or we’ve been in touch with them for many years, and we advise them on certain points in the life cycle of their business that, hey, it might make sense for them to explore a real estate transaction.

Collin Hart: So the services that we offer, to kind of get back to your question, while our primary business is selling real estate, oftentimes on behalf of physicians, there’s a lot more to it, right?

Collin Hart: So you’re an attorney, and I’m assuming you understand the correlation between the strength of the lease and the value of the real estate. Right?

Andrew Dick: Mm-hm (affirmative).

Collin Hart: Right. So that’s where we try to differentiate ourselves as advisors. While we sell real estate, we’re really experts in leases as well. And so we get involved oftentimes in the lease negotiation process. Totally, we can bring aggressive offers, we run a competitive marketing process to generate multiple offers on our client’s real estate when they’re ready to sell it. But there’s a lot of buildup to that, oftentimes over the course of a couple of years.

Collin Hart: And so one of our biggest business segments right now is, we’re working with independent physician groups who are exploring a sale of their practice, let’s say to private equity or some aggregator. And so when they’re going through a transaction like that, if they own their practice and they own their real estate, and they’re selling off their practice but retaining that real estate, there’s going to need to be a new lease executed or negotiated between the new owner of the practice and the original physician to retain the real estate.

Collin Hart: And so we see so often that the physicians are so focused on the practice deal, that they don’t pay attention to the real estate and they negotiate subpar terms. So what we’ve tried to do is create a lot of education surrounding that, and the value of your real estate, and the importance of the lease terms. And so we often come in when a practice is going through a PE deal to help them negotiate that lease. So that whether they decide sell the real estate or not, they have the option.

Andrew Dick: Got it. So talk about some of the areas of expertise. I know you and I have talked about different private equity deals right now, the private equity firms are really aggressive going after certain specialties. And I know that you and your team have developed an area of expertise with ophthalmologist. And talk a little bit about that, Collin.

Collin Hart: Sure. I kind of fell into the world of ophthalmology just by chance, kind of like the same way I got into real estate. And so what ended up happening is, we were working with a couple of ophthalmology practices several years ago, and they were really satisfied with the outcome.

Collin Hart: And so we started getting involved with the different ophthalmology professional organizations, like the trade organizations that really catered to the physicians, the providers.

Collin Hart: And so in going to a couple of those conferences, I noticed that everybody’s talking about private equity and practice operations, but really nobody was talking about real estate. And I didn’t understand that. And so in, corresponding a lot with these different professional organizations, we’re able to create a consultant membership or role for ourselves where we can add value, not only to those individual physician groups that are part of the organization, but also contribute to the knowledge base.

Collin Hart: And ultimately, that’s what we’re about. So for us it’s just about delivering value from a longterm perspective, not only to specific clients but to that industry or specialty.

Andrew Dick: Got it. And so when you’re working with physicians, what are some of the concerns that they raise your. You’re right that in a traditional sale of their practice they’re focused on the economics of the sale of the practice, and the real estate doesn’t always get a lot of attention.

Collin Hart: Right.

Andrew Dick: What type of things are you helping them with? Negotiate the lease term, negotiate the lease rate, the form of the lease, things like that?
Collin Hart: Sure. It’s all of those things plus many more. And so let’s just take the private equity piece out of the equation to start out, right? Let’s just say it’s a traditional sale and leaseback transaction that we’re working on with an independent physician group, just to kind of simplify the discussion.

Collin Hart: And so everybody talks about, hey, we want to get the most money, right? I’ve never heard anybody say I want less money. And so that’s always how the conversations begin, but ultimately it comes down to, what terms are you willing to agree to in order to get to a price like that?

Collin Hart: And so what we’re kind of working against is a lot of brokers, unfortunately, I won’t say advisors, but a lot of brokers in the market kind of lead those discussions, or try to bait some of their perspective clients with the most aggressive pricing possible.

Collin Hart: And so maybe there’s really low cap rates that are available, but hey, is the practice, or are the partners willing to sign up for all the obligations that are necessary to get to something like that?

Collin Hart: So our education process is related to pricing, and certainly we can bring aggressive pricing as part of our marketing process. But it’s helping our practices understand what the implications of a lease are. What are the market terms of a lease? What is the length of lease that helps them optimize the value of the real estate? What is the rental rate that not only is sustainable for their practice, but also is in line with fair market value?

Collin Hart: And so there’s a lot of nuance to that as I’m sure you know, as council, right? And there’s no right answer. But ultimately our goal is to try and balance the short-term objectives of the sale of the real estate, and kind of getting the most proceeds, with the long-term objectives of the practice, which are ultimately sustainability, right?

Collin Hart: We’re not here to put any of our client practices out of business, it’s more about helping them balance those objectives.

Andrew Dick: Got it. So Collin talk about, you’ve been doing this for a while. Talk about how the industry has evolved. I mean, it seems to me that private equity, at least as of late, has been really driving a lot of deal activity. I was just looking at the BOMA MOB agenda for November, private equities prominently displayed. In terms of, that’s a discussion topic.

Collin Hart: Sure.

Andrew Dick: Is that one of the driving forces of the activity, as of the last couple of years? Or what else are you seeing in the industry? I mean, it seems to me that private equity is having a very big impact on the healthcare real estate industry.

Collin Hart: So here’s why I think it’s having a big impact, and there’s changes in real estate, but there’s also changes in the operational side of the business. And the practices, right? Like the delivery of healthcare.

Collin Hart: So on the real estate side, first of all, you’re seeing so much more interest in healthcare real estate because it fared so well during the recession and through the pandemic, right? Rent collections were high and tenants remain in business. And if you look at the investment landscape in the real estate world today, well, retail’s not that appealing of a place to invest, just given everything’s moving online.

Collin Hart: And then let’s say multifamily, which has traditionally been a really attractive investment class, is a little bit less certain because, hey, for the time being, you can’t kick your tenants out if they don’t pay rent. So that leaves a lot of investors looking at, what are the options? And because of the successful track record of healthcare real estate, they say, hey, maybe we should explore this. Right?

Collin Hart: So that’s, I think, why there’s a lot of additional interest and big volume of transactions in our space. Now, on the provider side, and the practice and operations side, I’m not a physician. As I know, you’re not either. And so I can only begin to understand the challenges that they’re having.

Collin Hart: But I think 20, 30, 40 years ago, practicing medicine provided a lot of freedom for the providers. It allowed a lot of creativity, and delivery of care, and running their own business. But what we’re seeing in healthcare, as is the case in many other industries, is there’s a lot of aggregation. And so it makes it challenging for independent practices to continue operating profitably, successfully, with limited risk.

Collin Hart: And so, particularly because there’s so much pressure on costs from all the third party payers and Medicare, I think it makes it even more challenging for independent practices to be sustainable.

Collin Hart: And so what we’re seeing, especially in a post-COVID world is, hey, if I could be part of a bigger organization as an independent provider, whether it be a health system or I’m under the umbrella of some private equity-backed management services organization that gives me negotiating power at a big company, but allows me to operate within the confines of my practice on my own, that might be an appealing idea. And so I think that’s, what’s driving a lot of the trend towards consolidation in the practice side of things.

Collin Hart: And as a result of that, I think that affects healthcare real estate too. Because think about it like this. Andrew, if you own your practice, you probably bought or built your real estate as a way to control the destiny of your practice, right? It’s an investment, but it’s also, the investment part is like secondary. Number one, you just wanted to own your home, let’s say. Right?

Collin Hart: So if you’re selling your practice, and you no longer control the tenancy in your building, it totally changes the dynamic of the real estate investment. And so from that perspective, we’re seeing a lot of folks say, well, the reason I bought or built my real estate was to control the practice, but I don’t control the practice anymore. So why do I own this real estate? And so that’s, at least for us, driving a lot of deal flow.

Andrew Dick: So Collin, one question I thought of is, when we see independent physicians join a larger group or join a roll up under a private equity model, sometimes I’ve seen these independent docs are very entrepreneurial. And sometimes they say, look, I want to give this a shot for a couple of years, but at some point I may want to go back to being an independent, or maybe reserve the right to do that.

Andrew Dick: Does that come up often in discussions with physicians? Meaning, hey, I may want to terminate the lease with the new provider entity, and then go back, have the right to go back to what I was doing. I’ve seen that come up a couple of times, Collin. As some of the independence are so, sometimes they want all the benefits of joining in on a larger group, but sometimes they get frustrated by the bureaucracy.

Collin Hart: Sure, so I agree with you. And I think we’ll see a wave of that in the next five to 10 years. Here’s why. In our client relationships, the folks who are really driving the practice sales and the real estate sales are the previous generation of providers. Those are the entrepreneurial guys that you’re referencing that built up their practice because they wanted to control everything.

Collin Hart: The reason that they’re selling is because they need an exit strategy. They need some way to get the sweat equity out that they built up through those decades of practicing. And so they look to the younger providers who are coming out of school, and we’re seeing a different financial and work profile associated with those folks. They have less money, they expect more, but they also have more debt. And so as a result of that, those incoming providers probably aren’t the best candidate to buy the practice from the senior physicians. And so the senior physicians don’t really have an exit strategy. So private equity or a health system would provide that.

Collin Hart: Now, fast forward five years, the senior physicians who sold are out, and the junior guys are still around. And I think eventually you’ll see this, we want to get away from working for somebody, and we want to go back to independent practice. And so I think eventually that’ll happen. But along with that comes hard work, risk, and entrepreneurship, right?

Collin Hart: And a lot of the generalizations that we’re hearing from our clients who, again, are usually the senior guys are, hey, we don’t see the same mentality in our incoming providers that we had when we started in practice. So it remains to be seen, right? I mean, my crystal ball’s about as hazy as yours.

Andrew Dick: Yeah. I tend to agree with you though, that I predict there will be a wave over the next three, four, five years of some of these docs who have joined in a larger practice, become employed and say, you know what? I kind of want to go back out on my own, or join a smaller group.

Collin Hart: Right.

Andrew Dick: Where I have a little bit more autonomy. So yeah. I agree with you.

Andrew Dick: Collin, switching gears a little bit, where do you see the opportunities in the healthcare real estate industry?

Collin Hart: Sure.

Andrew Dick: A lot of activity, right, over the past two years. It just seems more and more investors coming into the space, where are the opportunities?

Collin Hart: Yeah, I agree with you. I think historically there’s been so much focus on hospital credit, health system credit, corporate credit, right? Whether it be a hospital, or whether it be a national operator like a DaVita or Fresenius, or some of the bigger urgent care chains that are popping up.

Collin Hart: I think that corporate credit has always been something that feels safe, that you can hang your hat on as a real estate investor. But I think the real opportunity lies in understanding some of the smaller credit-worthy tenants, and really getting a better understanding of the operations, and what makes them dominant in particular areas. And that they own the market there for a reason. And they’re independent for a reason.

Collin Hart: And I think that makes for a very compelling investment thesis. And it’s not new, I mean, I’m not coining something and saying, hey, everybody should go focus on this. There are certainly plenty of participants who are focused on that. But I think that’s where a lot of the bigger opportunity is, especially in terms of risk and reward, right? Because if you look at some of those traditionally desirable corporate credit deals, the cap rates or yields on those are really low.

Collin Hart: So if you’re looking for a little bit better risk-reward profile, if you properly underwrite some of these smaller credits, I think there’s some value arbitrage to be had there.

Andrew Dick: Yeah, I agree with you. Collin, what about surgery centers? I don’t know how often you run into physicians that have ownership in a surgery center. There’s been an awful lot of activity in surgery centers over the last year or two.

Collin Hart: Sure.

Andrew Dick: Seems to be that they’re gaining more traction, but there’s also been a lot of new development of surgery centers in certain markets. And what’s your thoughts on that opportunities in that industry?

Collin Hart: Sure. So again, I’m not a provider, so I can’t give you the nitty-gritty in terms of the pros and cons of surgery centers. Here’s what I’ll share with you. Obviously there’s a push to outpatient care. And I think the reasoning for that is for pressure on costs and outpatient care is less expensive to deliver, and therefore the payers want that. That’s number one.

Collin Hart: Number two, I think you’re seeing better outcomes and lower infection rates in an outpatient environment. So not only is it better for cost, it’s better for outcomes, right? So that’s, I think that’s great, and those are things that are achieved in an ASC setting.

Collin Hart: Now from a real estate investment perspective, I would say 75% of the transactions that we work on have some ASC or surgery center component, right? So it’s a big part of what we do.

Collin Hart: And I think there’s always going to be demand for that, especially when we were talking about surveying your different investment opportunities across the real estate spectrum. You can buy retail goods online, certainly everyone’s always going to need a place to live so there’s always an investment thesis for multifamily.

Collin Hart: But the same applies to surgery centers. Which is, hey, you can’t buy procedures on the internet, right? So if someone needs LASIK, or they need to have their cataracts removed, or they need a colonoscopy, or you need a new knee, I mean, we can’t do that via telehealth, right? And so I think that’s the compelling investment thesis behind AFCs is, you need somewhere to do the procedure. So I think that in the long run, that’s where it’s at, as opposed to inpatient care.

Collin Hart: But I think maybe you were alluding to, you’re seeing lots of ASC development, and is that a sustainable model? Is that your question?

Andrew Dick: Yeah, Collin, that’s right. We know that there’s tremendous demand for those facilities, not just on the real estate side, but on the [OPCO 00:27:21] side. And anytime you see big players like Optum jumping into that space and buying up hundreds of surgery centers, you have to take notice.

Andrew Dick: And so I’ve just, I’ve seen a tremendous amount of development activity when we’re looking at trends in the industry. And I just think it’s interesting to watch. I mean, surgery centers have always been out there, but just seems like there’s an awful lot of momentum right now.

Collin Hart: Right.

Andrew Dick: In terms of investors looking for those assets, but also operating providers looking to gain access to new patient populations.

Collin Hart: Yeah, I agree with you. And just to continue on that a little bit, I think part of the consolidation play, be it in practices or in the surgery component, like in an ASC environment, part of the value proposition for folks buying into the enterprise is, hey, if we own more of these operations, we have more negotiating power with the payers. So I think that’s also driving a push into an interest in that space as well.

Andrew Dick: Makes sense. Collin, let’s switch gears.

Collin Hart: Sure.
Andrew Dick: A couple more questions before we wrap up. Last time we spoke, we talked about veterinary clinics. I find those very interesting because they’re also becoming hot right now, from an investor perspective. We’re seeing private equity move into that space as well. What are your thoughts?

Collin Hart: So it’s pretty top-of-mind for us. We just completed a transaction where we sold six veterinary hospitals. And so that was our first engagement in the space, but we learned a lot about it. I think there are a lot of parallels between human health care and veterinary care, but actually you said, hey, private equity is moving into it. Actually, private equity in veterinary care is probably a decade ahead of where it is in human healthcare.

Collin Hart: And so I think if you really study and look at the vet care consolidation, that’s what the future holds for human healthcare as well. And so I think the reason for that earlier consolidation is because there’s obviously less regulation related to the care of animals versus humans, number one.

Collin Hart: But are were some major operators out there in the vet care space. And the trends that we’re seeing in vet care are pretty similar to healthcare in that the consolidation is driven by pricing power, driven by demand for succession planning from those senior founding docs.

Collin Hart: But what’s unique about that care is, in human healthcare we have this third-party payer system. But in veterinary care, do you have a pet or an animal?

Andrew Dick: We did for many years, and I think I know where you’re going.

Collin Hart: Okay.

Andrew Dick: Out-of-pocket private pay.

Collin Hart: Out-of-pocket, yes. So in human healthcare it’s like your insurance company, you pay your deductible, your insurance company foots the bill for the rest. And we don’t necessarily see what happens behind the scenes there as a patient. But for veterinary care, if your dog is sick, you take your dog and you pay for it, cash, that day. And that’s not to say there aren’t some insurance policies for pets, but generally you’re reimbursed directly by the insurance company after you pay the bill.

Collin Hart: And so that’s a pretty interesting value proposition for an owner of a vet practice, because you’re not beholden to these big payers who are putting pressure on your pricing. So I think vet care is a desirable investment segment from that perspective. And obviously, I mean, I know you don’t have a pet now, but the growth in pet ownership has never been greater, especially through COVID.

Collin Hart: And so more people are having pets, and maybe waiting ’til later in life to have a child, right? So they treat their pets like a member of their family, and as such they’re willing to spend money on their health care. So I think it’s a super interesting space, and a lot of parallels to human health care and the real estate surrounding that.

Andrew Dick: Well, I find it interesting as well. Thanks for the insight.

Collin Hart: Sure.

Andrew Dick: Last question. What advice would you give to a young professional getting into the healthcare real estate business?

Collin Hart: I think that’s a great question. And I’ve thought about it a lot, especially as we grow our team. And I think I would take it back to an earlier part of our conversation, where we have a really long-term perspective, and we’re not pushy in terms of transactions, right?

Collin Hart: My business lives and dies by transactions, but we’re not focused on that. We’re focused on delivering value to our clients. And so I think that if you’re new coming into the business, and you can focus on delivering value, whatever capacity or role you have in the business, I think you’ll be successful. It’s all about that long-term perspective, that persistence, and that delivery of value.

Andrew Dick: Got it. Collin, where can our audience learn more about you and your company?

Collin Hart: Sure. So our website is pretty simple, it’s just six letters. It’s ereadv.com. And you can find everything about our team, and our company, and all our contact information on our website.

Andrew Dick: Great. Collin, thanks for joining us today. A great discussion. Thanks to our audience as well, for listening on your Apple or Android device. Please subscribe to our podcast and leave feedback for us.

Andrew Dick: We also publish a newsletter called The Health Care Real Estate Advisor. To be added to the list, please email me at adick@hallrender.com

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An Interview with Brannen Edge III, President and CEO, Flagship Healthcare Properties

An Interview with Brannen Edge III, President and CEO, Flagship Healthcare

In this interview, Andrew Dick sits down with Brannen Edge III, to talk about the evolution of Flagship Healthcare Properties and trends in the health care real estate industry.

Podcast Participants

Andrew Dick

Attorney, Hall Render

Brannen Edge III

President, CEO, Flagship Healthcare Properties

Andrew Dick: Hello and welcome to the Healthcare Real Estate Advisor podcast. I’m Andrew Dick, an attorney at Hall Render, the largest healthcare focus law firm in the country. Today, we will be speaking with traded Edge III, the president and chief executive officer of Flagship Healthcare Properties, LLC. Flagship is a privately held real estate company that owns, manages and develops healthcare facilities. We’re going to talk about Brannen’s background, the evolution of the company and trends in the industry. Brannen, thanks for joining me today.

Brannen Edge: Andrew, thanks for inviting me and pleasure to be with you.

Andrew Dick: Terrific. Well Brannen, before we talk about your role as the chief executive officer at Flagship, let’s talk about your background, tell us where you’re from, where you went to college and what you wanted to be.

Brannen Edge: Sure. So, before moving to North Carolina, I was born and raised in Richmond, Virginia. Lived there, my whole childhood went to James Madison University for undergrad, up in Harrisonburg, Virginia, and after graduation initially started out in banking. So, I describe myself as a recovering banker. I had gone to Charlotte for a conference, middle of my time at JMU, the first time I visited Charlotte, and was so impressed with the city. It was a clean city, a growing city, a business-friendly city. So, as I approached graduation, really all of my efforts were focused on how do I find a job in Charlotte? Which is a little unusual, Richmond has a way of bringing its natives back to Richmond, but I wanted to do something a little different and frankly, I really didn’t care what industry it was.

Brannen Edge: I wanted to find some training program that would teach me how to do some something. I found that in BB&T and joined their training program right out of school. It was actually located in Winston Salem, which is about 80 miles from Charlotte. I thought, “All right, that’s close enough. I can do a pit stop in Winston Salem and then find my way to Charlotte,” which is what I did. It was a great pit stop because I met my now wife in Winston and had a great experience with the bank.

Brannen Edge: But after about six years of working with the bank, where I learned a bunch about credit, and operating companies, and service companies, and manufacturing companies and real estate companies, I realized that I didn’t want to be a banker for the rest of my days. A number of my clients that were in the real estate side appeared to be having a lot more fun than I was having in the banking world. So I used that opportunity to go back to business school and spent two years in Chapel Hill, also known as Blue Heaven. Then during that time, is when I found the founder of Flagship and joined forces with Charles Campbell in 2006. So, that’s what I made the shift from the banking world to the healthcare, real estate world.

Andrew Dick: So, talk about that opportunity and how you met Charles and how did you all decide to come together and start your business?

Brannen Edge: Sure, sure. So this business school’s, I guess like many universities and graduate programs are focused on getting you a job, that is from day one. So there I was in the fall of 2005 and newly married, newly resigned from my full-time employment and very much in debt with student loans. I knew where I had come from in terms of being with a public company, a big company in the form of the bank, and an old company, the bank had been around for 150 years. I wanted to do something the exact opposite. I wanted to find a young company that was growing, that entrepreneurial, that was in the real estate and private equity space. So, literally searching online for opportunities, I came across a press release from the early Flagship, Flagship 1.0, which had just launched earlier that year in 2005.

Brannen Edge: So, I reached out cold call to Charles and said, “You don’t know me, and you don’t know that you need to have an intern next summer, but I’m willing to do whatever it is.” So I did, I worked as an intern that summer, between first and second year of business school, and I think I was employee number five or six or something like that at the time. Then continued working with Charles my second year and then joined full-time after graduation. So, that’s how it got started. We were initially, a very small company working with family offices and high net worth individual investors to find real estate opportunities. And in pretty short order, focused exclusively on healthcare, which is how the firm and I got our start in the healthcare business.

Andrew Dick: So Brannen, when we’ve spoken before, you talked about the company evolving and what I’ll call the merger of Brackett and Flagship, talk a little bit about that and how the business really started to grow.

Brannen Edge: Sure. So you’re exactly right, Andrew, that that was the seminal moment for our company, which occurred in 2010. Up until that point, the legacy Flagship was really an investment firm in the real estate world. And in 2008, 2009, we purchased a building from the Brackett company, which was another firm focused on the healthcare, real estate space, also located in Charlotte, whose roots dated back to the mid 1980s. We bought a medical office building for our investors from the Brackett company, but Flagship at the time didn’t have property management skills. It didn’t have leasing and brokerage skills. We didn’t have those resources internally and we were really, really impressed with the platform and the people that the Brackett company employed. So, on the heels of the great financial crisis, we approached the Brackett company and said, “Look, we can probably be a better firm if we’re together, as opposed to separate.” They saw things the same way.

Brannen Edge: So we brought those two companies together initially as a joint venture. Then as I described, the slowest, longest merger and small business history, we integrated those two companies over the next four or five years. At that time I was really … I was not the CEO of the Brackett company, I was not the CEO of legacy Flagship. So, I was tapped as really the neutral party to integrate those two companies together. So, moved from my prior role to become president of what at the time was Brackett Flagship Properties. Then subsequently, we changed the name to Flagship Healthcare Properties. But that moment in 2010 really laid the groundwork for where we are today, which was the decision to be a vertically integrated, full service, healthcare real estate firm. That we made that decision, that how we were going to compete in the industry, how we were going to be able to serve our clients, whether they were tenants, healthcare providers, or investors, was going to be by providing the services that we do today.

Brannen Edge: So property management, maintenance and engineering, asset management, ground up development, acquisitions, investments, full service accounting, all of those services we have under one roof now, so that we are in our buildings every day, building relationships with our tenants and the healthcare providers that we serve. We didn’t want to be in a situation where investors were calling us and saying, “Well, how’s my investment performing?” We’d have to say, “Well, let me go check with the people that are taking care of your building and we’ll get right back to you.” We are the people taking care of your buildings.

Brannen Edge: And so that today is the single biggest differentiator, I think that Flagship has, versus some of the other folks in the industry. We allocate capital and it’s a critical role for us, but it’s only one facet of what we do.

Andrew Dick: So, that was a terrific summary. So Brannen, talk about the company today. So, fast forward today, talk about the size of the company in terms of employees, where your properties are located, where you’re doing business, give us a snapshot of what everything looks like today.

Brannen Edge: Sure, sure. So, the company as we’ve grown over the past 11 years and morphed into that full service provider, our mission, our whole purpose for being, is to provide extraordinary stewardship and outcomes for all we gratefully serve in healthcare real estate. So, that’s a mouthful, but what does that mean? So, we’ve really got three primary constituents and all of them are extremely important and none of them can get the short end of the stick. So, we view our investors, our tenants, and our employees as being critical to success and if we let one of those groups down, or put one of those groups well ahead of the others, there’s going to be problems. So, we work really hard to try to make our company a culture that attracts and retains really good people and we’ve got, I think the best in the business. We’ve got 86 employees now, and those are again, across the spectrum of asset management and property management and leasing and brokerage, and on the investment side, and the ground up development side, and the accounting side.

Brannen Edge: That’s what allows us to deliver excellent service to our tenants. And if we do that, we do that job and we can help meet their needs, they’re more likely to turn to us for their real estate needs. If we can deliver on the tenant side, that allows us to generate attractive returns to our investors and the investors provide the capital that lets us continue to grow and attract and retain employees. So, that virtuous circle is what keeps us going.

Brannen Edge: We are focused geographically on the Southeast and Southern Mid-Atlantic. So we own properties across 10 states right now, and that’s where we deploy our capital, our investors’ capital, is in that Southeast footprint. But when I look at the areas where we have services, we manage a building in Nebraska, not exactly in the Southeast, but that’s where one of our clients went and they asked us if we would help them with buildings that are outside of our footprint. Of course, we will follow our clients just about anywhere, but our focus is on growing our business and brand and services in the Southeast and Southern Mid-Atlantic.

Brannen Edge: The other thing you asked about was the types of properties that we’ve got. We are laser focused on the clinical outpatient healthcare sector. And so what does that mean? Well, one way to describe the properties that we seek to work on, or build, or lease, or manage and maintain, are those buildings where a patient enters the building to receive care from a healthcare provider and they leave without spending the night. So, we are not invested in senior housing facilities, or inpatient rehab hospitals, or skilled nursing, or acute care hospitals. Not that there’s anything wrong with those businesses, but they’re very different from what we are good at and know. So, I like to say, we love having senior housing as neighbor, we just aren’t looking to have them as tenants. We share the same patient population and same demographics, but we’re focused on the outpatient sector. So, that’s predominantly medical office buildings and ambulatory surgery centers.

Andrew Dick: Got it. So, let’s transition a little bit Brannen, and talk about Flagship’s REIT, because I think that is one service line that you offer that’s a little bit different than some of your competitors. There are lots of publicly traded REITs, a lot of investment funds that focus on healthcare assets, but Flagship has its own private REIT. Let’s talk a little bit about that and the evolution of that business, which is pretty interesting, based on what we’ve talked about before.

Brannen Edge: Yeah, yeah. Thank you, Andrew. I’ll describe our process, or journey of getting to the private REIT structure in Flagship Healthcare Trust. It was a journey and we’ve had some iterations along the way. Before 2010, we were doing all of our investments one off. We would do silo investments, we would have capital from a family or a group of high net worth individual investors, and we’d go and purchase or develop an asset, and we managed each of those investments separately. They were all separately capitalized and it worked. It worked well and investors were happy and the projects were profitable and turned out well, but we didn’t have any sort of synergy doing that. I like to say we weren’t managing a portfolio of say, 30 buildings, we were managing one building 30 different times.

Brannen Edge: So, everything had separate accounts, and separate reserves, and separate leasing teams, and separate agreements. So, we weren’t being efficient as a manager and our investors weren’t really getting the diversification because an investor might be in building number one, but not in buildings two through 30. So there really wasn’t that diversification.

Brannen Edge: So, the next iteration for us happened in 2012, when we launched our first closed-end fund. We raised money from accredited investors and from institutional investors. We did our first fund and we did a second … it was a venture with USAA Real Estate Company, but it operated much like a closed-end fund and started raising our third fund. At that time, we took a step back and this was 2016, 2017 and said, “What are we doing?”

Brannen Edge: Our investors were asking us … It was coming time to look at selling our first fund, liquidating that, and our investors almost in unison said, “Please don’t do that. We like the buildings that we’re invested in. We don’t want you to create a tax issue or a reinvestment issue by selling these funds.” We said, “Well, geez, we don’t really want to sell them either. We’re we’re in the business to be long-term owners in real estate and if our business model is to attract and retain the best and brightest in the healthcare real estate industry, how does that align with selling a big portfolio of properties every few years?”

Brannen Edge: Meanwhile, our tenants, the healthcare providers and healthcare systems, they really care about long-term ownership. They don’t want the owners of their property to be short-term holders. They want to know that you’ve got empathy for what they’re doing, that you are going to be taking care of these assets as if you’re going to own them forever. It didn’t really line up with a shorter term investment fund type structure.

Brannen Edge: So we engaged advisors to help us figure out how could we be structured that would create better alignment between our investors, and our tenants, and our employees, and the private REIT structure is what rose to the top. And admittedly, when we were talking about the private REIT structure, we didn’t understand what that meant and familiar with public traded REITs and there’s some excellent ones out there, but we didn’t really want to be public. But we’d heard about public non-traded REITs and those had not a great reputation at the time. It’s gotten better since then but we said, “I don’t know that we want to go down private REIT path.” It was explained to us that said, “Look, the structure as a private REIT is a tax structure.” REITs avoid double taxation, as long as you’re distributing 90% of your taxable income to investors. It looks and feels just like an open-ended fund, but it preserves a great deal of optionality.

Brannen Edge: Meanwhile, being private, we think avoids a lot of the correlation with the public markets. So, we get asked a lot by investors or prospective investors, “Why should I buy a private REIT as opposed to a public REIT?” My response is always, it’s not an either/or. There are some excellent public REITs out there and many that we are fortunate to work for on the management leasing side.

Brannen Edge: What we think we bring to the table is because we are private, we’re not correlated with the public markets. So, for investors who want to have an allocation to healthcare real estate, we think we provide that and maybe provide a better representation of the value of our healthcare real estate assets, as opposed to whatever’s happening from day to day in the stock market. So, it is almost like putting on a tailored suit or a tailored sport coat. When we got to the launch of Flagship Healthcare Trust four years ago, it felt like we were putting on a sport coat that had been tailored, it just fit, and our investors feel the same way. So, we’ve continued to grow and new capital, but just as importantly, attract additional capital from our existing investors who continue to believe in what we’re doing.

Andrew Dick: It’s a great story and I can appreciate why you selected the private REIT structure, right, it’s not subject to the whims of the market. That makes a lot of sense. So, talk about the REIT, number of properties, how much equity you currently have, things like that, that you’re able to share?

Brannen Edge: Sure, sure. Absolutely. So, we are structured as a Reg D private placement. All that means is that our investor base are considered accredited investors. We have about 350 shareholders. A number of those shareholders have been with us for many, many years, even predating the REIT’s launch. When we converted our legacy closed-end funds, all of those investors and the legacy closed-end funds had the option to either cash out of those funds and take their money and go elsewhere, or contribute their interests into launching the REIT. We had 94% of our investors by capital say, “This is exactly the structure that I want.” So when they joined us in the launch of the REIT, back in late 2017, we were about $55 million of equity. Since then, we’ve grown to where we are today, which is right at $250 million of equity, and about $600 million of gross property value. That’s about two million square feet in the REIT across 73 properties, and in 10 states in the Southeast and Southern Mid-Atlantic.

Brannen Edge: That’s in addition to about an equal number of properties and approximately three million square feet of properties that we manage for third party owners. And those are institutional investors, those are public REITs, and those are private individuals, or healthcare practices that want to own their own real estate but don’t want to have the headaches of property management or leasing. So we gladly do those services for others, as well as for our own account.

Andrew Dick: Terrific. I’m assuming that the REIT follows your investment philosophy, that it’s primarily MOBs, outpatient healthcare facilities, ASCs?
Brannen Edge: As exactly right, it’s ASCs and MOBs, are the predominant assets. We have a blend of multi-tenant buildings and single tenant buildings, a number of practices who make the decision in this current environment to lock in attractive pricing on their buildings, but they don’t have any desire to move. We’re doing a number of sale lease pack transactions with practices, both groups that are independent, as well as groups that are affiliated with healthcare systems. An interesting unexpected benefit of our REIT structure is that the vast majority of those sale lease back transactions, the selling groups, if they’re groups of physicians or investors, are electing to UPREIT a portion of their sale into Flagship. So, essentially a seller of a medical office building who chooses to work with Flagship, they can receive cash when they sell us a building, or they can receive operating partnership units in our REIT, and essentially it’s tax deferred in most instances, and it provides diversification for those sellers.

Brannen Edge: So, an investor who owned 100% of one building can UPREIT and all of a sudden, they’ve got that same value spread across a much more diversified portfolio of more than 70 assets. Meanwhile, they’re locking in their current valuation on their building and able to decide on their timeline, when to recognize that taxable gain on their own terms. So, it’s been something that we didn’t expect would be as popular as it has been, but it’s been a major source of our growth as we continue to grow our footprint. But it is all clinical healthcare outpatient. So, ASCs and MOBs are our primary investment targets.

Andrew Dick: Got it. So, let’s transition for a minute and talk about the healthcare real estate industry in general, over the past five, six, seven, eight, years, the asset class has really come into its own and becoming more and more attractive investors of all types. Talk about cap rate compression, trends in the industry. It seems like there’s an awful lot of demand for these assets right now. How does a company like Flagship through its REIT, compete for assets in a market that just seems very hot right now?

Brannen Edge: You’re exactly right. It is overwhelming the amount of capital that is chasing the healthcare real estate industry right now. It’s coming from traditional real estate investors who hadn’t previously been exposed to the healthcare sector. It’s coming from international investors, both individual and sovereign wealth funds. Everybody it seems, wants to get into healthcare real estate. So, the secret is out. Now, when we started in this business, plus or minus 20 years ago, healthcare real estate was really not its own asset class. It was lumped into other asset classes. Was it part of the office market, or was it part of the retail market, or do they just lump it as other? Now, it’s a clearly defined asset class and it’s clearly defined for good reason.

Brannen Edge: Through the great financial crisis, our portfolio and that of most healthcare real estate performed really, really well. And of course, values were impacted across all sectors in the great financial crisis, but we really didn’t see tenants that were handing over their keys and shutting their doors. It was a very resilient asset class. We’ve had bankers that would come and visit with us back during the Great Recession and saying, “Look, the credit folks say I can’t lend to anything unless it’s government backed or it’s healthcare-related or student housing. So what do you have for me?” When you fast forward the movie through the pandemic that we’re going through now with COVID, the portfolio did extremely well. Our tenants were extremely resilient and I describe the industry as it’s now more akin to a consumer staple than it is to something that is voluntary.

Brannen Edge: Americans want and demand and deserve healthcare and a pandemic’s not going to get in the way of receiving care. So, it was really impressive to see how these healthcare providers adapted to the global pandemic, whether it was changing the way they were having patients wait for care or alternating how they were seeing patients. But what didn’t happen was stopping seeing patients. Telemedicine had a big boon and folks wondered, “Is this going to replace the need for medical office buildings?” The answer was a resounding no. It became an additional avenue for providing care to patients but it was an additional outlet, it wasn’t a replacement.

Brannen Edge: So we saw a surge in telemedicine, but not one that overtook or replaced inpatient face-to-face visits. It’s interesting, we are really agnostic at Flagship of whether we’re buying on campus buildings or off campus buildings. We’re seeing really a proliferation of off campus buildings as healthcare providers recognize the three Cs in healthcare, of care, convenience, and cost. It is much more convenient and able to be delivered at a much lower cost when you have outpatient settings. So, I think last year, there were 60 plus million surgeries that were done in the US and over 60% of them were done in an outpatient surgery center environment.

Brannen Edge: So, 20 years ago you would be going to the hospital campus and having your knee procedure, or your wrist procedure done inpatient and on the campus, today, it’s generally not happening that way. Medicare and Medicaid are increasingly approving, and even requiring some of these procedures to be done in an outpatient setting, which is really good for both the providers and for the patient. So, that’s going to continue to grow and that’s why we’re laser focused on that outpatient setting.

Andrew Dick: Yep and I would add, through the pandemic, we saw that patients were hesitant to go to a hospital campus for fear of picking up the virus or contracting the virus. So, those outpatient facilities that are off campus seem even more attractive during difficult periods like we’re living through now.

Brannen Edge: You’re exactly right. That hospital acquired infection has all always been present but in the age of COVID in the pandemic, it got much greater scrutiny. So, I don’t think there’s any going back from this shift.

Andrew Dick: So Brannen, we’re near the end of our interview. Let’s talk a little bit about advice for young professionals. We’ve got a lot of folks who listen, that are starting out in the healthcare real estate profession. What advice would you have, someone who’s getting started in the business?

Brannen Edge: Gosh, that’s a great question. I guess I would say, try to figure out what you like and work toward achieving that. Oh, by the way, that’s a lifelong learning. So what you like to do at 21 and are working towards then, may be different than when you’re 31 or 41 or 51. So, continue to try to figure out what it is that makes you tick and gets you excited to go to work in the morning, I’d say, do every job to the best of your ability, even if it’s not exactly where you want to be and maybe especially if it’s not where you want to be. If you can focus on knocking the ball out of the park, opportunities will find you. So, do everything that you can to the best of your ability. Ask questions, that’s something that … that natural curiosity, I think, is a benefit for everybody.

Brannen Edge: It’s okay to not have the answers and shouldn’t be afraid to ask for help or ask questions to learn more. And finally, don’t be afraid to fail. A little bit better to fail quickly if you can, but you are going to make mistakes and it’s fun to find an environment where you can be supported when you make those mistakes and learn from those mistakes and move on. But healthcare real estate industry has got great tailwinds. We’ve got demographics that are providing a huge lift to the industry. So, for young folks that are looking at careers in various sectors, I think this has got a great next few decades in front of us.

Andrew Dick: Well, that’s good advice. So as we wrap up, where can our audience learn more about you and Flagship Healthcare properties?

Brannen Edge: Sure, please, we’d welcome visitors to our website at flagshiphp.com, or our sister website for the REIT at flagshipreit.com. We’ve got an active social media presence, so follow us on Instagram and Facebook. If you have questions or we can provide any support, feel free to reach out to us. Call us, email us, text us.

Andrew Dick: Terrific. Thanks, Brannen. Thanks to our audience for listening on your Apple or Android device. Please subscribe to the podcast and leave feedback. We also publish a newsletter called The Healthcare Real Estate Advisor. To be added to the list. Please email me at adick@hallrender.com.

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Health Care Real Estate Growth Strategies in Mergers and Acquisitions or Joint Ventures

Health Care Real Estate Growth Strategies in Mergers and Acquisitions or Joint Ventures

Hall Render Advisory Services’ advisor John Marshall talks with Victor McConnell of VMG Health, Matt Robbins of Kaufman Hall and Clayton Mitchell of Thomas Jefferson University Hospitals. Their discussion highlights several real estate factors that implicate the overall JV or M&A transaction: Fair Market Value (“FMV”); facility compliance (regulatory and use); property taxes; facility ownership options; asset disposition or acquisition; new facility development; licensure; and other issues.

Podcast Participants

John Marshall

Hall Render Advisory Services

Clayton Mitchell

Thomas Jefferson University Hospitals

Victor McConnell

VMG Health

Matt Robbins

Kaufman Hall

– Coming Soon –

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Hospital Property Tax Exemptions – The New Jersey Statute and Beyond – An Interview with Neil Eicher of NJHA

Hospital Property Tax Exemptions – The New Jersey Statute and Beyond – An Interview with Neil Eicher of NJHA

In this interview, Joel Swider sits down with Neil Eicher, Vice President of Government Affairs with the New Jersey Hospital Association, to discuss a recent bill that was signed into law in New Jersey related to property tax exemptions for nonprofit hospitals. The law brings resolution after almost 6 years of uncertainty in the wake of the NJ Tax Court decision in the Morristown Medical Center case which jeopardized hospital property tax exemptions in New Jersey. The interview covers the New Jersey statute as well as strategies for protecting property tax exemptions in other states through legislative efforts.

Podcast Participants

Joel Swider

Attorney, Hall Render

Neil Eicher

Vice President of Government Affairs, New Jersey Hospital Association

Joel Swider: Hello, and welcome to the Health Care Real Estate Advisor podcast. I’m Joel Swider an attorney with Hall Render, the largest healthcare-focused law firm in the country. Our guest today is Neil Eicher, who is vice president of government affairs with the New Jersey Hospital Association. We’re going to be discussing legislation that was recently signed into law to restore property tax exemptions for nonprofit hospitals in New Jersey, but which also requires nonprofit hospitals to pay certain community service contribution payments, which we’ll get into in more detail. Neil, welcome back to the podcast.

Neil Eicher: Thank you, Joel. Thank you for having me and you guys do great work on this issue, so I appreciate being a part of it.

Joel Swider: Well, thanks Neil. So before we can understand and appreciate the text of the bill itself, that was recently signed into law, I think it would be helpful to explore some brief background of hospital tax exemptions in New Jersey. I think that there’s really a broader applicability here in other States where we’ve seen the gradual chipping away of property tax exemptions for nonprofit hospitals. And so I think the process is in some ways, just as important as the result, particularly for those who are looking at this case and who’ve been watching it as we have from other States looking to see what that’s going to look like in New Jersey in the future and how it might be translated or mistranslated in other States and other contexts. So, Neil, could you give us a little bit of a lay of the land? What did the landscape look like pre Morristown, which was the case that really sort of brought this issue to a head in 2015?

Neil Eicher: Yeah, sure thing. So the Morristown Memorial hospital tax court decision was a pivotal moment for the industry. As you said in summer of 2015, it’s sort of unexpected rolling from one tax court judge in New Jersey, challenging Morristown property tax exemption. Now, they had been in litigation for almost 10 years with a town that included, multiple mayors moving in and moving out, even a change in administration at the hospital level. So it did kind of predate when the decision was actually made. But the judge in that ruling, as I said, stated that Morristown should be paying property taxes. It wasn’t precedential, but it was certainly influential. And then it resulted in NJHA as the advocacy wing to start pushing for a legislative solution because the judge did actually make that statement.

Neil Eicher: And his court decision was that although they should be paying property taxes, the legislature needs to step in. And it’s interesting because our statute on tax exemption, property tax exemption goes back. I want to say 70 or 80 years. And in that exemption, there was no carve out for for-profit medical providers within a nonprofit hospital. So while we disagreed with the rolling for a variety of reasons, the fact that the judge said we need to step in and get a legislative solution is what changed the landscape for us.

Joel Swider: Okay. So what did happen after the Morristown Medical Center case? What has happened sort of bring us up to this current bill that was passed last month and signed what’s been happening in the intervening years. I know you guys have been working at this for a long time.

Neil Eicher: Yeah. So after the decision was rendered, we knew we had six months or so until the end of our legislative session to pass a bill. And again, this is in 2015. So we did pass a piece of legislation, very similar to what has been signed into law six years later. But unfortunately it was vetoed by the governor at the time and what we were afraid of and what actually happened was with the beginning of the tax year in 2016, we saw a flurry of litigation. In some cases, it’s the town putting the hospital on the tax rolls. And it’s the hospital that initiated the litigation. Sometimes it was the reverse, we had to deal with omitted assessments, which is just a clever way of kind of looking back at retroactive tax years up to two years prior to put entities back on the tax roll.

Neil Eicher: And then I think when we’re all said and done, we probably had 40 to 42 of our 59 nonprofit hospitals engaged in litigation. Now I should note that some of them settled, they had agreements with their towns. Ironically enough, many of those agreements were similar to the community contribution fees in this law, but they had expiration dates. Other hospitals were just involved in litigation and then some other hospitals didn’t see any lawsuits at all.

Joel Swider: So then leading up to, you mentioned there’ve been other attempts over the years, leading up to the current bill that was finally passed and signed. Even that once it was introduced in January, 2020, took over 13 months until it was finally signed. Was there more give and take at this time around as well?

Neil Eicher: Yes, absolutely. It was a very arduous legislative process. We’re happy with the result so we can kind of look back at it and figure out what worked and what didn’t, what started, having the speaker of our general assembly as the prime sponsor and only sponsors, five or six bills in a session that was a positive signal and also getting our Senate, President and Governor on board early, at least conceptually was important. What happened in practicality is as the bill started to move, we started to hear, or the legislators started to hear from very influential mayors who had problems with what this bill might mean for them, at least according to what their tax assessor told them, what they could get out of the hospital, if there was full property taxation on the facility.

Neil Eicher: So we did a lot of behind the scenes work with local mayors, local hospitals tried to resolve very territorial type of issues, but it actually worked as a benefit because what we were seeing was the creation of an adversarial relationship between the towns and the hospitals that didn’t exist prior to this Taxport decision. And having this discussion kind of helps move that smooth that over. So some of the amendments in the law dealt with, for example, walking in or grandfathering in current agreements that are in place between a town in a hospital, that would be the floor. If the legislation, or I guess the law will say, if it has to be greater, the hospitals is obligated to pay more. But that took care of a couple of towns. We made some changes to the offsite for-profit medical providers made it very crystal clear that the medical provider had to be exclusively working with the hospital for a hospital purpose.

Neil Eicher: That was an issue from some legislators previously thinking that non-profit hospitals would all of a sudden purchase a bunch of for-profit medical provider buildings, take them from tax paying entities to non tax paying entities. That was not the way we read it. And it’s obviously was not our intention, but we needed to make necessary changes. And then the last thing I’ll say, Joel, is you might may have noticed if you follow this at all, we went from $2 and 50 cents per bed, per day, contribution to the town, to $3 per bed per day contribution. That was because the governor’s office wanting to get a little bit of a higher rate from hospitals to towns. So that obviously we had to discuss that for a while, but we ultimately agreed to it. And there are other small changes, but those were the main ones.

Joel Swider: Well, Neil, let’s dive into the meat of the law a little bit, this nonprofit hospital property tax bill, or a 1135, as it’s been called, going through session, let’s start with what type of property or property owner is subject to the new law?

Neil Eicher: We first specifically to a nonprofit hospital. I’m sorry, nonprofit general acute care hospital. That’s important in case you’re a specialty hospital, rehab hospital. And according to your State’s definition of licensure for a general acute care hospital, that’s important, but for our purposes, for New Jersey’s purposes, a nonprofit general acute care hospital. So it’s that building in any other building that’s utilized by the nonprofit hospital solely for hospital purposes. As I mentioned previously, if it’s a for-profit medical provider, it has to be exclusive to that hospital who does this apply to and in all practicality, it’s your ER groups that maybe you contract with, maybe you have an anesthesiology group or wing cardiology, all the wrap services, pathology, those that may have for within your hospital, maybe it’s an attached wing of your hospital, but this is an important point of clarification because this had stalled the bill as well.

Neil Eicher: If you have, let’s say a for-profit medical provider group that is renting space or attached to the hospital or attached to the hospital and renting space, and they provide some assistance to patients from the hospital. So if it’s a cardiology group and let’s say they do 40% of services for the hospital, but they have 60% of patients come as walk-ins, they would not allow that part of that wing, that building would not receive a property tax exemption. They would still be required to pay property taxes. The normal arrangement is through the lease agreement with the hospital.

Neil Eicher: So we made it very clear. It has to be pretty much, well, it has to be a hundred percent of what that group does is for the hospital purpose. It also, if you have a McDonald’s, if you have a Starbucks within your hospital, that will remain taxed. Usually again, it’s done between the lease agreement with the facility that will not change. The cafeteria, however, would fall under the property tax exemption.

Joel Swider: Okay. So if you have an exemption, you qualify, you’re a general acute care hospital, you qualify for exemption, but there’s also this element of a community service contribution. What does that mean? And what does that look like?

Neil Eicher: So because of the statute that we were dealing with about the inability for Eddy for-profit activity to occur in a nonprofit entity to get property tax exemption, we recognize that with for-profit activity occurring in these hospitals, that we needed to modernize the law. It could be those groups that I mentioned previously, or it could be a specialist that has privileges in a hospital, whatever it may be, at least in New Jersey, there are for-profit entities working in a nonprofit entity and it puts our statute in jeopardy. So recognizing that things have changed, what we agreed to was that in exchange for, I guess, the codification or update to our property tax exemption, we would pay a fee to the town because we are also getting bigger. We are utilizing more municipal services. So as a recognition and actually just from the get-go trying to be a good player with the towns and not just try to railroad through something, we thought we would try to find that fair balance and at $2.50 at the time, the contribution will be $2 and 50 cents per bed per day, to each town.

Neil Eicher: I will note that you are, as a hospital, able to deduct any agreements that you already have. We call them voluntary agreements. Most people know them as pilots. We stayed away from the word pilot because there’s a strict definition in New Jersey statute that may have brought on issues after this became law. So we just call them voluntary agreements, voluntary arrangements. So if your obligation of now it’s up to $3 per bed per day, is $500,000 to your town. You have an agreement for $300,000 each year, maybe to pay for a public nurse in the school system, redo a park, whatever it might be, or just general money. You’re able to deduct that 300,000 from that 500,000, therefore you would owe $200,000 a year.

Neil Eicher: It would never go reverse. If your agreement is more than the requirement here, you can’t obviously deduct that. But that was again, a good faith effort by us. We just wanted to turn the spigot off of all these lawsuits, put something in there that was a fair that the towns would get something. And then we wouldn’t be spending money on legal fees. So that, that was the purpose of the community contribution that we thought it was important to be a good partner with our towns.

Joel Swider: That makes sense. And Neil, I mean, this applies to a lot of hospitals. I know you, you gave a couple of specific examples in some sort of variations of the general acute care hospital, but I mean, that’s a majority of New Jersey’s acute care hospitals will probably fall into the ambit of this statute. Is that right?

Neil Eicher: Yeah. Correct. We have 59 non-profit hospitals and 71 acute care hospitals.

Joel Swider: Okay. So are there any carve-outs from the ambit of the statute or other clarification’s that we should be aware of in terms of how this shook out?

Neil Eicher: I mean, I think it’s important to understand kind of your for-profit medical providers, the buildings associated with your nonprofit hospital, how it’s structured under your license. I think that’s very important. So I did talk about that, but I will say we did get abdication carve out. We have a specially cardiac hospital in New Jersey that doesn’t bill patients. They have a special OIG opinion from the federal government to have this exemption, not to, for example, go after Medicare patients for balanced billing. So we did insert a section in there that exempted them and that actually made it into final law.

Neil Eicher: So let’s say, other than that, no other real carve-outs, no hoodwinking that we were trying to do, we try to be as transparent as possible, where we needed the clarification, like I said on off-site for-profit medical providers and whether we’re going to buy them up and switch to property tax status, we made it very, very crystal clear that that wasn’t the intention. But it was very important to us on the for-profit medical provider to get that exemption for the emergency department. For example, if you have a for-profit medical group, if you have the third floor of your hospital has a cardiology group, that needs to be exempted. So other than that it’s pretty straightforward with, again, nonprofit general acute care hospitals.

Joel Swider: So Neil, as I read this statute and I’ve read now a number of them from other States, I find it to be pretty comprehensive in terms of, it’s pretty clear about its scope. It’s pretty clear about how it applies and how it works. There are two things that caught my eye though, as potential wrinkles, I guess you could say in terms of how this is going to be implemented, one of them is that there’s language requiring the New Jersey healthcare facilities, financing authority, and the director of the division of local government services to adopt regulations, to effectuate the bill, where do you see that going? And it sounds like it has to be done within four months following enactment and which may or may not end up taking place, but any thoughts on the regulatory aspect of this?

Neil Eicher: Sure thing. And I think it’s good for listeners to consider that in their own state. A lot of times when we have legislation going into the water, there is a requirement for the promulgation of regulations, but it’s very clear, from previous experience, that a statute is a statute. So you still have to implement it, still the letter of the law, even if the regulations don’t come. So you’re correct. There needs to be regulations within four months. I doubt that our department will meet that deadline. It’s been very difficult previously. And then of course we’re still trying to get out of COVID and a lot of other things that are affecting the work of the department. So I personally do not expect them to meet that four month deadline. However, what was important to us and maybe another consideration for your list just to make the language as specific as you can.

Neil Eicher: And even some of these provisions need further clarification. After six years, we tried our best to make it as clear as possible, but we still need some guidance on a few things from the various departments, but we did make a conscious effort to make it as specific as possible. So that once the bill was signed into law, we knew what to expect. Our members certainly knew what to expect following this for years and most of the towns as well. So I do think they’ll get to regulations eventually, but right now, we’re just kind of moving forward with our interpretation of the law until we get that guidance.

Joel Swider: So near the other wrinkle, if you will, that identified as I was reading it was, there’s a non-profit hospital community service contribution study commission, which has set up, which has as its goal, sort of looking at the financial impact, analyzing, analyzing the financial impact on effected hospitals and municipalities among other things. And I guess, again, as an observer from another State and who represents clients in additional States, I think it’s really interesting. I will really be curious to see how the study commission reports shake out and what is found, but could you give me a little bit more color to why that was in there and what the goal of it is?

Neil Eicher: Yeah. Yeah. You and me both, I’m interested to see what they come up with. We thought again, because a lot of this language was actually taken from our original bill that went forward in 2015. And the purpose of this bill, originally, I guess it still is, was to provide a stop gap, to put a pause on a lot of the legal suits because no one has really examined the role of healthcare entities, hospitals in particular, and how it relates to property taxes, New Jersey, by the way, has the highest property tax rate in the nation because we, variety of reasons. So property taxes are very, you know, interesting phrase here. So we needed, you know, some experts kind of sit down and take a view of the changing landscape of healthcare changing landscape of towns and property taxes.

Neil Eicher: So, that was the purpose. At the time the $2.50 now $3 contribution was meant as a stop gap. We knew that we needed to start paying something two minutes to Powell these, and by the way, it’s pretty much, it’s about 20 to $21 million a year annually, collectively in New Jersey. But we want this commission to review everything. And if they say, you know what, $3 is too low, we’re going to have to swallow that and accepted. Luckily, we have some good representation. One of the amendments that the governor’s office asked for some additional person from the governor’s office to sit on ex officio. So I do think this will be helpful and understanding kind of as we move forward. However, one thing I neglected to mention about the community contribution fee is that each year it goes up with an inflator of 2%.

Neil Eicher: So at minimum, it goes up 2% moving forward. So again, for the hospitals that are listening, this might sound like a good deal for the towns, even though they lobbied against it, but this bill and this law is essentially the floor of what hospitals must pay. Things will always continue to go up. So we needed to make sure the study commission was there, but at the same time, it is balanced. So it’s not swayed one way or the other, but Joel, kind of to your question about regulations, when that’s going to come, I know there are strict deadlines for this, but it’s possible that this doesn’t meet in a timeframe that the put in the bill.

Joel Swider: So Neil, let’s turn to the subject of sort of the effect or the fallout, if you will, both positive and potentially negative of the legislation. I think in some ways beauty’s in the eye of the beholder, but Kathy Bennett, who’s the president and CEO of the New Jersey Hospital Association, seemed overall positive about the new law in the news reports that I read. She said it was the right solution. And I do think that, I mean, just my personal opinion is that NJJ has done a great job of taking into account the various perspectives here and coming up with a solution that is equitable, but also puts New Jersey hospitals in your membership, in a better position than they were for the past five, six years and maybe more. Do other healthcare leaders in community organizations feel the same way about the bill or what sort of the anticipated effect?

Neil Eicher: Sure. So we were very as an association and by the way, where we represent all the hospitals in New Jersey, I know that’s somewhat unique in many States, so it’s-

Joel Swider: So it was sort of everybody

Neil Eicher: Everybody. Yeah. So we have a for-profit non-profit that adds up to 71 hospital members. We have 250 to 275 post-acute specially care type of maybe not core members, but affiliated members, business members, et cetera. So we count over 400 members in our membership, but of course our core membership is mostly general acute care hospitals for-profit and nonprofit, but we also have some behavioral health facilities and other post acutes that are core members. But to your point, everyone, all the non, all the acute care hospitals supported this, membership completely supported this. It was difficult at times going from $2.50 to $3 to make sure everyone’s comfortable with that. I should note I won’t name, but there was one health system that had four hospitals in New Jersey that had no pending litigation that wasn’t very happy with it. They were fine with MGHA pursuing and they were absolutely great partners in it, but they just made it clear that they didn’t support it.

Neil Eicher: It would mean over a million dollars to them each year that they would have to pay. There are other categories of members who may not have had lawsuits, but also knew that they could be next and we’re supportive. I think it was also supported by maybe not very publicly, but nursing home health associations, others that were nonprofits, but thought that maybe they could be next. Educational institutions also were supportive. We got the council, the center for nonprofit hospitals or sorry, center for nonprofits in New Jersey to be supportive because of kind of the snowballing effect that could happen watching what would happen to our hospital. So we did have some kind of ancillary support and really the only, the only opposition was the advocacy group that represented the towns, it kind of depends on your perspective.

Neil Eicher: They were making a case to their mayors, that hospitals needed to be taxed, a hundred percent of the market rate. We believe that we shouldn’t have need to pay anything, but at least we came up with a compromise, the pay something, again, over $20 million a year, the other side just fought it and wanted a full payment. So I think in general, just some of, I think in general, a lot of the healthcare leaders understood this was important to get this codification, even those who are advocacy groups for patients, et cetera, knew that we were spending money on legal fees. And as a nonprofit, you have to report to your board, you have certain community benefit requirements. So they knew we could put that money back into care. So I’m glad we got this done. And I think we had the right amount of support.

Joel Swider: So Neil, maybe to close here, I’m curious as well, you mentioned the towns and the advocacy against this effort, which sort of surprises me in some ways since the statute previously allowed for exemption. And it really wasn’t until Morristown, that was even in question, but what is the anticipated effect on legislation, excuse me, on litigation that was ongoing at the time that this was signed or maybe really everything that’s kind of come out since Morristown, what will happen with that litigation and what do you see there happening?

Neil Eicher: That’s a very good question. And I’m happy to be able to explain this a little bit. And again, every state’s different, but I think there might be some crossover on this statement, but with the legislation being signed into law, it codifies our property tax exemption. It refines the statute for the exemption. As I mentioned before, requires the community contribution fee. However, everyone wants to meet. Everyone must remember the separation of powers between the executive branch and the judicial branch.

Neil Eicher: So yes, the statute will go into effect, but it cannot throw out the lawsuits and the litigation that’s currently taking place between towns and hospitals. That’s the legal interpretation from our council. However, in all practical sense, since we only have three or four tax court judges, and our counsel has been the ones representing those, the hospitals, she has told us that every judge has been looking at the progress of the legislation and art, and they are going to point to the legislation as kind of the solution.

Neil Eicher: So for those of you, or you may maybe council or are looking at from a legal sense, it’s important to understand that just because you pass a law, doesn’t necessarily mean it overturns a tax court decision, but it will be very influential and making their decisions. So if you’re thinking about going our route and trying to make a lemonade out of lemons and just kind of dealing with a bad situation that was put in front of us, I would encourage you as you go through the legislative process to also think about how you can make sure the judicial branch is aware of what you’re trying to do before moving forward.

Joel Swider: Well, thanks so much for your time and expertise, Neil, and congratulations on getting this bill finally negotiated and signed into law. Where can our listeners go to learn more about the law or about your work at NJHA?

Neil Eicher: Sure. No. And, and thank you for having me. njha.com. Please visit us. We have a lot of different things that are available for non-members a non password protected that you can visit. My email is an eicher@njha.com always feel free to send me a note. Again, it’s eicher@njha.com. I’m happy to talk about this. This was six years in the making happiness done, still more to do, but yeah, I’d be happy to talk to anyone who wants to learn more about this.

Joel Swider: Great. Well, thanks again, Neil, and thanks to our listeners for joining us today. If you liked this podcast, then please subscribe and leave feedback for us using your Apple or Android device. And if you’re interested in more content on healthcare real estate, we also publish a newsletter called the Health Care Real Estate Advisor. If you’d like to be added to the list, please email me at jswider@hallrender.com.

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An interview with Kevin Jones, Managing Director and Real Estate Practice Leader, ZRG Partners

An interview with Kevin Jones, Managing Director and Real Estate Practice Leader, ZRG Partners

In this interview, Andrew Dick sits down with Kevin Jones, Managing Director and Real Estate Practice Leader with ZRG Partners to talk about professional development and executive recruiting in the healthcare real estate industry. 

Podcast Participants

Andrew Dick

Hall Render

Kevin Jones

ZRG Partners

Andrew Dick: Hello, and welcome to the Healthcare Real Estate Advisor Podcast. I’m Andrew Dick, an attorney with Hall Render, the largest healthcare focused law firm in the country. Today, we will be speaking with Kevin Jones, a managing director and real estate practice leader with ZRG Partners. Kevin helps real estate and healthcare companies with executive searches. We’re going to talk about Kevin’s background, the healthcare real estate industry and what he looks for when recruiting for executive positions within the real estate industry. Kevin, thanks for joining me.

Kevin Jones: Thank you, Andrew. Always a pleasure.

Andrew Dick: Kevin, before we talk about your role at ZRG Partners, let’s talk about your background. Tell us where you’re from, where you went to school and what you aspired to be.

Kevin Jones: Sure. Well, the first part of my career, if you will, is largely uninspiring. I went to Indiana University in Pennsylvania, which spent the rest of my life explaining that’s actually in Pennsylvania and not Indiana. However, I actually joined a recruitment firm right out of school, so I had no industry sector experience. And if I think about my career and my background, it really boils down to three to four significant decisions and changes that I made. The first one is leaving the firm that I started with after nine years to join as one of the partners at Crown Advisors. And crown was only a few months old at that point.

Kevin Jones: And I have a 13 year run to really effectively build that firm, helped build that firm from the ground up. Although at the time, the plan was just to stay there for the next 20 years, I couldn’t see it. The firm, it topped out. And my timing there was that I wanted to do a lot more in the firm, became a lifestyle business, which is great. But it was just focused on the partnership and the lifestyle that the business created. That was the second big risk that I took, is I left just to start the Jones Group. And that’s when I doubled down on my commitment to healthcare real estate.

Kevin Jones: For the next eight years, I focused on becoming a subject matter expert in the healthcare real estate sector, became embedded in the business in that community. That’s where I really understood the value of becoming a specialist. As an insider, you could build meaningful relationships versus just somebody that, who calls into the sector, if you will. So, that was a great run on my own. And I established relationships that I believe will be with me the rest of my career. About three and a half years ago, I was actually approached by a search firm to build a global real estate executive search practice at ZRG.

Kevin Jones: And so frankly, that’s been a heavy lift. But the nice part about ZRG is we have a robust healthcare executive search practice across the board. So I bolted into the healthcare group when I started. And our roots and healthcare as a search firm, we actually have a partner that’s a medical doctor. We focus on clinical academic medical centers and of course health systems, as well as PE backed healthcare firms. So within that group, I was able to use that as leverage to build the global real estate practice. And now, though the real estate practice is anchored in the US, we have outposts in Brazil, London and Dubai and it gives us a legitimate global reach.

Kevin Jones: I still do largely healthcare real estate, but as a practice, we’re doing probably 60, 50 or 60% in commercial real estate. And then I do the balance in healthcare real estate.

Andrew Dick: So Kevin, how did you at some point, and it sounds like many years ago, you identified healthcare real estate as a niche that you wanted to pursue. How did you end up working on searches in the healthcare real estate industry? That’s a pretty narrow niche.

Kevin Jones: Yeah. Yeah. It goes back a while. I was actually at the first BOMA Healthcare Conference in San Francisco. There might’ve been 45 people there. You’d have to, Laurie Damon would have to fact check me on that, but it was very small. And like a lot of people in this sector, Andrew, I had a personal experience that just drew me to healthcare and hospital real estate. So it became an interest. Once I discovered it, it became an interest. And like you build a practice anywhere, you get some companies that are growing and you work really hard to satisfy them and as they grow, your practice grows. And I had done that with a couple of pioneering firms in the sector, where I’d worked closely with their founder.

Kevin Jones: And as they grew market to market, they just tapped me on the shoulder and I helped them open. They went from a local brand to a national brand and I did all those searches. So through that process, that’s how I just became embedded in the business when it was much smaller than it is today. It was an easier effort because when people start to recognize you specialize in their startup sector, if you will, they recognize you. So it was easy to make my way around the block with all the players and as the sector grew, my practice grew. It was really more serendipity than, I did something spot on to make it grow.

Andrew Dick: Sure. So Kevin, give us an idea of the type of assignments you’ve had over the years in the industry. Would this be C-Suite executives or give us some examples?

Kevin Jones: Sure. Yeah. And focusing on the sector, I would say I do C-Suite, as well as the people reporting into the C-Suite. That’s really my strikes zone. And I’ve done some board advisory work, as well. I would say a typical search, it involves… I had done a search for a senior managing director for a group that does healthcare real estate consulting. And the leader of that group, somewhat of a legendary person in the sector frankly, was retiring. So, they engaged us to find that replacement and that’s always tricky to find somebody that’s been embedded and worked with the team for decades to bring a new leader in. And we did just that. It was a very successful search. It took us probably eight months, which was three months too long, frankly.

Kevin Jones: But when you work at that level, you’ve got to work around non-competes, you’ve got to work around other competitive covenants to try to get the timing right. Nobody wants to go against that. But that’s a typical search. And what I see when people come to me often, they’re looking for more than a plug and play person. They want somebody that has deep experience in the sector, but also they have that ability to be the face of the franchise. Somebody that knows how to sell and lead and execute. I see that a lot and I get that a lot. So that’s probably the type of role that I see, because they’re just so hard to find. You really need to know those people first, just to get their attention to consider something because they’re generally well paid, well taken care of because they bring such, three components of value to the organization.

Andrew Dick: Let’s talk about that, Kevin. We have quite a few young professionals who have been in the business maybe a couple of years, the healthcare real estate business. Or young professionals who are looking at getting into the healthcare real estate business. Let’s talk about the skills that you look for and your clients look for when trying to identify talent. You hit on a couple things, the ability to sell, interact well with others, et cetera. Talk more about that. What advice would you give to someone who’s really trying to make a name for themselves in the industry?

Kevin Jones: Sure. And that’s a great question. I actually have kids in that same period in their lives. This is something I’ve thought about. I think it’s, the thing is, it’s not new, right? It’s a generational to generational piece of advice. But I think the first thing is for most people, they need to redefine what sales is to them. Everybody carries around this baggage of what sales is and what it isn’t and the immediate cliches and imagery that comes with it. That’s obviously so old fashioned. I challenge people to, that they really need to just look at that. Do some self discovery and understand really, what’s your hang up on that word and what that means. They need to redefine it because every business is driven by sales and top line revenue.

Kevin Jones: There’s no way around that. And the more you can impact that, the more value you bring to an organization. I think most people, some of the conversations I’ve had with people, they just will tell me, “Well, I won’t sell.” And I think, “All right. Well then, good luck and stay where you are and nestle in, because that takes away a lot of your growth opportunities.” So that’s a little bit of personal work. You really need to evaluate what it is, what your hangups are around it. You need to read on the subject, very contemporary material on what it is, because that really is going to be a game changer. And once you’re able to embrace that and put your talents to use around it, that’s going to change your value to the market. And that changes everything.

Andrew Dick: That’s a great point, Kevin. We have on the team I lead, we have a number of young professionals and we talk a lot about building a personal brand and getting your name out in the industry. And in other words, even as lawyers, we have to sell. We sell a little differently maybe than other industries and we’re subject to ethical rules that prohibit us from doing certain things. But I think you’re spot on, Kevin. I think that in certain circles, when you talk about sales and those types of skills, it can turn people off. But in my experience, individuals who master the art of developing relationships and building a personal brand, tend to rise to the top. And I think that’s what you’re saying.

Kevin Jones: You’re exactly right. That’s what you see across the board. You bring up something else too, is networking is a large part of that. And networking, frankly, networking was real work for me. I mean, I obviously love what I do and it’s a cool business, frankly. But when I would go to a conference, networking would be so challenging. And I probably still haven’t been to a conference in a while, but I still get nervous and feel like I’m intruding. You’ve got to get over all those hangups and networking is an amazing skillset. It’s just that, and it’s like a skillset. You have to practice. You have to do some of the corny role playing. You have to really get outside of your comfort zone and become effective.

Kevin Jones: And that takes, more than anything, the things that I hear now is self-awareness, social and professional awareness, C-Suite and board presence. Those are really important elements and that’s communication skills. That’s style. That’s how you carry yourself, to a T. So you need to keep that in mind. If you want to be in the C-Suite, you really need that self-awareness and social awareness. And if it doesn’t come naturally, even if it does come naturally, it’s something that you need to work on and practice so you’re prepared. I’ve always, I’m going to butcher it, but I’ve always kind of hung on the Abe Lincoln quote. Prepare yourself, for one day, your chance will come. It’s one of those things where you need to be prepared. You need to practice beforehand. And when you find yourself in that situation, you’re ready.

Kevin Jones: Networking’s a big part of that and it’s going to be again. You’ve been in this space for a while too, Andrew. We went from one conference a year to maybe two a month. It is a business in and of itself, or it will be, and that’s fine. That’s a great opportunity to meet people, to sell yourself, to create that personal brand. The opportunities exist and the more you embrace that, the more you get comfortable with it and dive into it versus shy away and just try to back away from conversation… When people talk about coming out of their comfort zone, that’s a perfect example. It really is. And then, that’s when you’d need to develop a self-awareness and have a ready list of conversation points or topics or trends that you’re seeing.

Kevin Jones: Asking questions is always the way to engage conversation. Ask important questions. In those situations, you can start personal, but you really want to be able to learn how to leverage that into business. What do you want to ask about your legal needs, about your recruitment needs and your growth strategies? That’s when you have those conversations. Everybody’s at ease and disarmed, and it really is just a conversation. We both know everybody loves to talk about that. Nobody doesn’t want to talk about their growth plans or their growth strategy or their troubling situations professionally. So, develop a strong list of questions to ask, and that makes it a lot easier.

Andrew Dick: Great advice, Kevin. Let’s dig just a little deeper for the folks who are starting out in the industry. Talk about in your experience. I mean, you hit on a couple things about some individuals are maybe introverted or are uncomfortable networking and putting themselves out there a little bit. What tips do you have in terms of, do those individuals, should they seek out mentors who can help them or coaches? We live in a world where there’s an awful lot of coaching going on, which I find really interesting. What tips would you give? Do you see executives or young professionals seeking out mentorships with more senior level professionals to help them through that journey?

Kevin Jones: Yeah. Obviously, mentoring works, but it often doesn’t work. It’s not like you can be assigned or go up and approach somebody and say, “Be my mentor.” Right? And you might pick the wrong person. You really might. My advice, my approach to that is, and it’s think of it more of not like the old way of I’ve got one mentor and I do whatever that person tells me and I follow them around. But maybe target three people, three types of mentors and define what they are. Somebody that’s just amazing in sales and networking. Somebody that technically has a lot of depth, and somebody that you respect from an integrity standpoint, that seems to have the, I’m not going to use the word balance because I’m not a fan of that approach. It’s somebody that has balanced a career and a family or healthy relationships outside of work, is a better way to put it.

Kevin Jones: You don’t just walk up to the person and ask, but again, you develop your list of questions. And when you are around people like that, whether it’s a cocktail party or a conference, you have your line of questions. So, how did you get into what? Just like we’re engaged in here, right? Where are you from? What do you do? What do you do outside of work? Those are easy questions to answer, and then you feel yourself out. You’re going to resonate with somebody or not, and then you just latch on. And a mentor, that’s not a lifetime relationship, right? Somebody might just, it might be a five-year gig if you will, of where you need that help, and then you maintain those relationships. And they’re meaningful relationships, that you don’t have to just find one person that you follow around for 30 years. That’s an old fashioned way, in my opinion. And I think you can get a lot of value from different perspectives.

Andrew Dick: Good advice. Before we talk about some trends in the healthcare real estate industry, let me just ask one more general question, Kevin. When you’re undertaking a search, I know ZRG has a number of different tools to help find the right person. Maybe talk about how that search process works when you narrow the list of candidates and what metrics are you looking at? I think you’ve hit on some of them, sales and ability to work well with others. But how does that work when you narrow the field?

Kevin Jones: That’s a good question. Well, and look, that’s the reason I joined ZRG. I’ve always been in smaller boutique, real estate focused companies, whether my own or at Crown and when I started. And ZRG is very different. We’re actually the fastest growing search firm, maybe two out of the last three years. Through the pandemic, we’ve added maybe 10 plus managing directors where everybody else was shrinking. So it’s a very contrarian minded search firm and our approach and our thinking is to be the biggest search firm outside of the top five. We’re not looking to then become public or the size of a Korn Ferry or Heidrick because when we compete against those firms, we’re more nimble. We’re more flexible. Our culture is genuinely collaborative and that makes us better as a firm, as we approach these searches.

Kevin Jones: And like any sector, people grow tired of the old guard, of the way they’ve always done things and they want to do something different. And search is no different. And I agree, I’m glad you noticed our tools because they really are unique. It’s more than just a prop that we can set up. The assessments we do, and really, it’s the skills and attributes grid that our CEOs developed and we’ve refined over years. But it weights key skills and attributes, and we’re able to then create data points along the lines for each candidate. So you can rank them, frankly. Let’s say you create a batting order, but we’re very clear that doesn’t make your decision for you. It just gives you data points. You’re still having to hire the person.

Kevin Jones: This creates a very interesting dialogue because some people might score people differently or differently from us. You’re able to pick out what those points are. I think the strongest aspect of using our dashboard of tools, it keeps everybody on the same page where everybody’s interviewing, say on the seven same skills and attributes and what we’ve determined to be keys. In real estate, I find the interviewing technique is click and close. Once somebody clicks with somebody, they try to close them on either side of the table. And this process, it really forces the team because you’ve got to answer back to your team in terms of, this is how I ranked this person on all of these attributes. You can’t just then drift off into sports or family or politics, whatever you might be off topic. It forces everybody on the team to interview from the same criteria.

Kevin Jones: So everybody’s evaluating that candidate. I always think the value of a search firm is we continue evaluation. We’re doing a search right now for a chief revenue officer. There’s a lot of likeability around, say the two lead candidates, but from our process, we’re still in market talking to people. We’re also continuing to evaluate these candidates. We’re not just assuming, this is the person that we’re going to go through and hire. We’re continuing to critique and evaluate and share that with our client. That’s valuable because that’s where mistakes in hiring are made. You have that good first interview, and then you just glide to the finish line versus the continuing conversation, digging deeper. You’ve got this.

Kevin Jones: And I’ll go through frankly, through a process and I’ll re-rank my skills and attributes. The deeper you get to know somebody in the process, they might go from a four to four and a half or four to three, because as you dig and you talk to that person, I might talk to somebody 15 times through the course of a search candidate. You’re continuing to revisit and ask questions and that really helps in our clients just getting that right person in the seat. Does that answer your question?

Andrew Dick: It does. Just one follow up, Kevin. You talked about one search that took approximately eight months. When you’re hiring, I mean that was a special search, you’re replacing a leader of a group. On average, how long does the process take when you’re going, hiring maybe a C-Suite executive? Is it five months, six months? Or how long can someone expect to take, to go through a process?

Kevin Jones: It’s a three month process to identify and get commitment, and then you’ve got to work through the final piece of resignation. But yeah, within three to four months, the heavy lifting will be done and you’ve got one candidate that you’re finalizing. You should have somebody warming up in the bullpen as well, just in case.

Andrew Dick: Okay. And one more follow up, Kevin, because I enjoy this discussion. I find when I talk with professionals in the real estate industry, sometimes I feel like there are folks who are focused on the salary offered by a position. But in my opinion, that seems shortsighted. What are you seeing in terms of individuals looking for growth and opportunity? What’s your advice to a young person? It seems to me that they shouldn’t be focused just on salary or the location of the opportunity, but really, is there an opportunity to grow, to learn, to be mentored? What advice would you give there when an individual’s kind of considering a couple of different opportunities? What do you think is important?

Kevin Jones: Sure. Again, a very good question. It goes back to the advice you’d give. The other piece I would give to somebody that’s looking at a career is, re-examine what work means to you. So many people get hung up on work-life balance and whether they’ll be home and what their commute will look like. I really look at it is don’t even use the word work. You’re just spending your time. You can build a foundation, a professional foundation and a personal foundation to grow and merge those two. There’s a bridge between that. It’s not one or the other. So, I do. And work’s one of those things where we have these concepts that we’ve never questioned. They just kind of come up through our upbringing and we never reevaluate these things that we learned from a young age. Sales and work are two things that I think are worth reexamining throughout your life.

Kevin Jones: But the question is, to go back to your question, Andrew, I would say this, is you’re exactly right. People get hung up on salary and they get hung up on title and things like that. When you’re at that pivot point, and I’d mentioned mine. There were three to four really that were pivotal in my career. I think you need to recognize when those periods are in terms of, this is a pivot move and this is an opportunity. And then don’t ask yourself, what will I make in the next 12 months? But you need to sit and who am I going to be in the next three to five years? How can I grow? Who can I transform into being with this experience? And we see that with our private equity clients all the time, of when you join a growing private equity operating company and take that through a cycle, you’re a different person.

Kevin Jones: You’ve got a merit badge after that because of your experience there. So think about who you can become in this role versus what you’re going to make in 12 months. I think if you step back and take that process, that’s going to be very clear and that helps your answer. Now, comp always comes into play. It’s why we do it, certainly. But if the comp is close and one just has something more exciting to it, then you should certainly take that risk. It’s not a risk-free professional life that we live in, and you need to make smart risks and you need to make sure that the return isn’t so much in 12 months. I’ve made several moves where I actually had to take a step back. What I’ve learned through that process has been, the return is extraordinary. That’s what I would switch around and reconsider when people are looking at that.

Andrew Dick: Good advice. Thanks, Kevin. Let’s switch gears. Let’s talk about the healthcare real estate industry. The industry has grown tremendously. As you mentioned, you were at, I think the first BOMA MOB Conference, a small conference pre-COVID. It’s turned into what I would consider to be a mega conference, thousands of people. And then I think through COVID, we’ve seen even more growth in demand for healthcare real estate assets. Give us your perspective on the industry today.

Kevin Jones: Yeah. Well, it’s certainly different. There’s a couple things. If you recall, Andrew, I remember when the Affordable Care Act was a game changer the first time it came through. And the industry stood still waiting for some sign to act, a green light or red light to have certainty to go forward. And now, healthcare needs to be as nimble and decisive as any other sector. The old school bureaucracy, this is how we’ve always done things. It doesn’t translate into 2021. And we’re seeing a lot of that, frankly. We are seeing that old guard, that old way of thinking, it doesn’t translate and it’s not going to transform into future success, even if its worked in the past.

Kevin Jones: And frankly, I feel it’s an exciting time to be in healthcare if you’re prepared to be part of the change. If you’re clinging to what is, and that’s obviously always scary, regardless of what you’re doing. I’m seeing it. If you look at trends, I would be remiss not to say the words, proptech or data science. Those elements are becoming embedded in every sector, the technology efficiencies and data science. So I’m not minimizing that, but I don’t think that’s an insightful trend right now. That’s an obvious trend. I’m working with some firms that are leveraging machine learning and AI in terms of investment strategy and thesis, in terms of underwriting. It’s really a remarkable, if not scary, the depth that machine learning is coming into real estate from a decision making standpoint.

Kevin Jones: So I think that’s really interesting, where it just takes a more global picture, demographics, returns, all the things you want to put into the pot of stew. And it’s coming out with really smart and insightful answers. That’s really where I’m seeing in terms of technology, the proptech, the data, that’s really important. But there’s more to come and there’s even more forward thinking when it comes to applying technology within commercial real estate. In residential, for that matter.

Andrew Dick: I would agree. I think that there is. I’ve seen an awful lot of growth in site selection technology that’s really interesting. We’ve seen an awful lot of growth in telehealth and retail healthcare. And when you see a lot of private equity firms, as you mentioned, getting into this business, the healthcare business and the healthcare real estate business, I think we’re going to see more and more change. They’re typically very aggressive in trying to implement new models, so it’s exciting.

Kevin Jones: It’s exciting and it is different. The evolution is important. It goes back to my business in executive search. I mean, certainly that’s my day job, but with the changes and the speed of change right now, as a practice, my services have evolved into further introductory services. Whether it’s capital markets, joint ventures, project and pipeline introductions, mergers, team carve-outs. So, people are coming to me less with, “Hey, I need to hire this individual,” though that’s still the business. But more, “This is my larger problem of what I’m trying to solve. How can you help me solve that larger problem?” And it isn’t necessarily… A great example is this. We’re seeing more chief revenue officer searches right now. I think you could quickly just say, “Oh, that’s a head of sales,” but it really isn’t.

Kevin Jones: As you know, so many people that are trying to grow, they’ll hire a VP of business development and stick them in a region and say, “Grow the region.” Market facing people. The chief revenue officer role is transformative because this is a person that comes in that’s part of the C-Suite, and they’re really creating that repeatable systematic revenue process. If you have the right person, they’re not only looking at driving growth in revenue, but they’re creating systems and procedures to work with the sales team. And really, they should be strong assessors of talent to recognize this is the model. This is the model of person that we need to plug into this role, not just a VP of business development to go knock on doors.

Kevin Jones: And then the other component is identifying your client base. And how do you build more revenue from that in a very creative way? And then, how is that sustainable? How do we create revenue when the development market dips? How do we still keep cashflow and revenue expanding? That’s a strategy role, but the skill set really is in sales and marketing. But more so than just being a savvy client facing sales pro, the person brings a next level strategy to the business that frankly, the CEO, COO and CFO, they generally don’t have that background, that technical background. They also are not devoting the time to do that because they’ve got other full-time jobs.

Kevin Jones: So that’s been another trend that we’re seeing of people bringing in that transformative CRO. And that goes to the point, really part of the thing that we’re discussing here is the business is changing quickly. It’s exciting if you’re out in front of it. The problem I’ve seen is so many firms think they’re out in front of it. They feel like, yeah, we’ve got this. We’ve been through this before. But it’s a different, this, it’s a different scenario than it has been historically.

Andrew Dick: So Kevin, I have one more question as we wrap up. We’ve seen a lot of articles in the real estate industry about work from home and what that’s going to mean post COVID. What’s your take? Are we going to see organizations ask their teams to come back to the office? What will that look like? Any predictions?

Kevin Jones: That’s a big one. And this is just my opinion. I’m not an expert in that world. That involves sociology, psychology. The people that think everybody’s, everything’s going to go back to work from the office, largely have large office portfolios. So they can’t afford to even think anything different. I do see people coming back, but in a very different manner and a more effective manner, not just for Face Time. I have got clients and I know firms are looking to bring everybody back full time. I think that goes the way of the tie, right? Once you stop wearing a tie, it’s hard to put one back on. I think we’ve got a great experience on how to do this, but the real factor is having the right person.

Kevin Jones: If you’ve got the right person, they could work from anywhere and be productive. And if you have the wrong person, they can be in the office every day and still not quite get it and get it done. I don’t see office going away. If you look at your office, I think our own personal experiences play to it. I’m in a role where I can effectively work from home, but I’m very excited to get back on the road and work face to face. I still go into my office twice a week right now because I crave that interaction and you can’t create, or even have a culture if everybody’s working from home. I think everybody’s grown tired of the video conferences.

Kevin Jones: They’re very effective and they’ll play a greater role going forward. But I think we all know as a society that Face Time, personal interaction, it’s not healthy to do away with that in any, whether it’s professional or personal. You need to build that into your business plan, frankly, and make sure it’s effective.

Andrew Dick: Well, Kevin, I’ve enjoyed this conversation and I’ve enjoyed getting to know you over the past 12 months or so. Where can our audience learn more about you and ZRG Partners?

Kevin Jones: Sure. Easy to find, ZRGPartners.com is our website. My email’s KJones@ZRGPartners.com. So those are two very easy ways to find me. I’m all over LinkedIn as well, so I’m easy to get to.

Andrew Dick: Well, thanks again, Kevin. Thanks to our audience for listening to the podcast on your Apple or Android device. Please subscribe to the podcast and leave feedback for us. We also publish a newsletter called The Healthcare Real Estate Advisor. To be added to the list, please email me at adick@hallrender.com.

 

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Strategy Considerations for Health Care Real Estate

Strategy Considerations for Health Care Real Estate

Hall Render attorney Rene Larkin talks with Kelly Adams of SCL Health, Cindy Black of Indiana University Health, Matt Crawford of Bon Secours Mercy Health and Heidi Hohendorf of Spectrum Health. Changing trends, legal updates and population forces are steady factors health systems use to inform their real estate strategy, but evaluating the long-term impact of a pandemic on how and where health care will be delivered ensures significant implications on real estate strategy in the health care industry.

Podcast Participants

Rene Larkin

Hall Render

Kelly Adams

SCL Health

Cindy Black

IU Health

Matt Crawford

Bon Secours Mercy Health

Heidi Hohendorf

Spectrum Health

Rene Larkin: My name is Rene Larkin. I’m a shareholder in our Denver office of Hall Render, and I do real estate transactions, general transactions, and work is kind of a general counsel for some of our small critical access hospitals in the mountain West. I’m going to turn it over to our panelists to let them introduce themselves. So we’ll start with Matt Crawford.

Matt Crawford: Thanks Rene. My name is Matt Crawford. I’m the vice president of real estate and ambulatory facilities for Bon Secours Mercy Health, a Catholic non-profit healthcare system located in Cincinnati, Ohio. I oversee our transactional activity in our real estate portfolio, as well as our ambulatory facility management platform and the administration of our portfolio at large. Glad to be here.

Kelly Adams: Hi, my name is Kelly Adams. I’m in-house counsel for SCL health headquartered here in Broomfield, Colorado. We have hospitals throughout Colorado and Montana. I provide legal support for strategic growth transactions in real estate matters and our joint ventures. My counsel on acquisitions, dispositions development work, and also negotiate leases as in timeshares. Also partner with our real estate management team CVRE to help improve systems that manage our real estate portfolio. I’ve been with the system for just over a year and prior to that, I was in private practice with the Denver office of Ackerman. Thanks for having me.

Cindy Black: Thanks Rene. My name is Cindy Black. I’m the director of real estate at IU health. We’re headquartered in Indianapolis, Indiana, and we have hospitals and we deliver care across the State of Indiana. I work with a team that manages all of the transactions, the asset management and the lease administration partner with internal providers who help us deliver construction services throughout the system. And just happy to be here and talk to you about what we’re doing.

Heidi Hohendorf: Hey Rene. My name is Heidi Hohendorf. I’m sooner legal counsel for Spectrum Health. Spectrum Health is a nonprofit integrated healthcare system serving Western Michigan. We have a presence as far North as Trevor city, Michigan, all the way down to the Michigan Indiana State border. With our corporate headquarters in grand Rapids, Michigan our real estate portfolio consists of approximately 12 million square feet. We’ve got about 10.5 million that we own. And 1.5 million lease that consists of 14 hospitals, including a dedicated children’s hospital, 11 urgent care centers, various different physician offices, and seven integrated care campuses. My role includes providing… I’m involved with reviewing negotiating drafting contracts throughout the system with a primary focus on providing legal support for our real estate team.

Rene Larkin: Great, thank you again for being here. So as we saw who registered, I think we have a wide variety and diverse attendees participating in the webinar today and signing in. So I think it’d be helpful and instructive if each of you would just kind of talk through your real estate department, how it works, how it interfaces with strategy, business development and finance. So as people are kind of hearing your responses they just might be able to take some application and move it forward with their institution. So we’ll start again just with Matt and kind of go in the same order.

Matt Crawford: Sure. As I mentioned, I’m the area of our department that deals with real estate and ambulatory facilities, sort of think of it as your shorter traditional corporate services platform, your transactions, your brokerage, your property management, maintenance, et cetera. And then the overall administration paying the rent, collecting the rent, dealing with expirations and options, et cetera. I’m oriented as part of a broader group, real estate development and construction. And we have in-house development capabilities, we have a design and construction arm and within my group we’re heavily outsourced. We have corporate partnership with Cushman and Wakefield where we outsource a lot of the blocking and tackling and the fundamental stuff we do in service of the organization. We report through finance and broadly interact with obviously our medical group, our hospital leaders, our group leaders, our market leaders, just a host of folks that perpetuate the activity of a system the size of ours. So fully integrated within the organization. But then again, heavily outsourced as it relates to the services we provide to our constituents both internal and external.

Rene Larkin: Great, thank you Kelly.

Kelly Adams: So our internal real estate team consists of VP over real estate, and then we’ve got a planning construction team, and then like Matt, we outsource a lot of facilities management, lease administration services, brokerage services, things like that to CVRE who’s our management company. They also provide some strategic input in terms of the context of new development and some of our existing assets. And then our leaders in various markets and our business development team work really closely together in tandem with this real estate team on projects and initiatives. I’d say generally speaking real estate is a little bit of an output of a strategy at my organization. There are times we sort of develop an operational strategy in terms of what markets we want to be in. And then the real estate team has really pulled in to identify potential properties or areas for development. And because we sort of have a leaner structure at my organization, I’m sometimes pulled into sort of the more front end strategy for the system as well.

Rene Larkin: That’s great. Thanks, Kelly. Tell us about IU Health Cindy.

Cindy Black: Yeah, so IU health has a really robust platform. We have a pretty well actualized real estate department. Our real estate department has a number of verticals. So we have our transaction management where we do all the leasing acquisitions and dispositions. We have another team that manages the lease administration. We have an asset management group that’s growing as we speak and bringing on more and more capabilities. We also in-house have a design and construction group who actually sits outside of real estate, but we partner with them on most of our transactions, wherever we’re missing capabilities. We bring in third party vendors. So again, all of the sort of support services that Matt and Kelly talked about. We’re bringing in brokers and developers and contractors space planners, architects, engineers, wherever we need them that kind of support so that we can deliver a complete capabilities to our team, as far as how we work with our strategy folks and our finance folks.

Cindy Black: The strategies delivered both at a system level, regional level, and a local level it kind of depends on the type and the magnitude of the project. So if it’s a new billion dollar hospital that you’re contemplating that’s definitely going to sit at the system level. But we have smaller less large strategies that will be delivered on more of a regional local level, although we are integrated throughout the system. And as Kelly mentioned strategy really is the guiding light who with what it is we want to be doing, right. They make a decision with all the stakeholders that are involved. We provide input information so that they’re making, they have some real estate leaning information to make those decisions, but they make the decision and then kick that back to us.

Cindy Black: And they may tell us what they want and what in perhaps what geographic area or sub-market we tell them what corner there are opportunities on and what the cost of that’s going to be and how that could be structured, whether an own or a lease type of a model. And then with that information, they’ll go back and together we’ll make the decisions. Finances is feathered throughout all of those discussions. So they’re always at the table. It’s just a real dynamic kind of push and pull through as we deliver.

Rene Larkin: Great. Thank you. Tell us about Spectrum Health, Heidi.

Heidi Hohendorf: Yeah, so our structure is very similar to what Cindy just described. We also have an in-house real estate department. That’s comprised of five contract specialists, including two real estate service leads. We have an accountant dedicated to our real estate functions. They’re overseen by a senior director of real estate strategy and planning, and also a VP of real estate and facilities. So this team is very involved in the real estate strategy and planning. They’re often at the table in those discussions, providing input and actually, driving decision-making to and work very closely with our in-house plant operations and facilities teams. We also have an in-house construction team that includes on staff architects, design specialists. So those teams all work very closely together. We do also outsource construction. We engage with contractors for construction projects and whatnot, but we do have a robust in-house team.

Heidi Hohendorf: All of the senior leadership and our real estate department reports directly to the… Well up through the chain reports directly to our chief financial officer. So he’s very involved in decision-making processes related to real estate strategy as well. So that’s how we interact with facilities or with finance, but there’re processes in place where the operational stakeholders are brought in on relevant projects related to the service line. So I’m not involved in the day-to-day behind the scenes strategy, but the real estate team is very angry and in that process with our finance and our strategy teams.

Rene Larkin: Great. Thanks. Well, and so just let me kind of give a roadmap to our attendees of where we want to go today and use this time. We’re just going to kind of talk through trends, reimbursement. I mean, I think it’s been an exciting year in kind of health care in general. One way to put it and just talk through obviously the pandemic is going to come up, but also, normal kind of implications of regulatory reimbursement other industry trends that we’re seeing and how that’s impacting becoming the output for healthcare real estate strategy. And so feel free. There is a Q&A box at the bottom of your screen, feel free to post questions throughout if we can fit it in, we’ll pop it in timely. Otherwise, we’ll try to leave some time at the end for any questions that we didn’t get to but don’t hesitate.

Rene Larkin: We want to interact with you all as attendees and make this kind of as dynamic as possible. So just in that Q&A box feel free to throw any questions that you might have and we’ll do our best to answer them. So I think the first topic want to hit is… I mentioned obviously we’re seeing regulatory changes, reimbursement changes and those are typical without a pandemic. I think one thing we’ve seen this year too, is telehealth. There’s been a great, I think the pandemic was a catalyst for really pushing telehealth use both on the provider and the patient side. So I think that’s one component, but if you guys just want to talk through what you’re seeing in those areas, those trends and how that’s informing your strategy for real estate.

Kelly Adams: I think Rene as you mentioned, that pandemic has really accelerated out of necessity. Some of the telehealth initiatives that were already in place or that we were working towards as a system and right now we’re operating in a much more relaxed regulatory environment that might be tightened post pandemic. But I think telemedicine for us is going to continue to supplement our brick and mortar operations and is certainly a good tool for early consults and follow up visits. I think ultimately it may actually expand our medical office space because we’re able to reach more rural residents in our Colorado and Montana markets and provide consults that would lead eventually to in-person visits.

Kelly Adams: And then I think the other impact that we’re seeing is on construction. So I think there’s some considerations in terms of how our new spaces are designed and constructed to reconfigure facilities to provide technology enabled spaces and remote health monitoring services. And so it’s impacted space planning as well. But I think overall, I see telehealth really as a compliment to our traditional models of delivering care and not so much a replacement.

Cindy Black: I can kind of reiterate what Kelly said. I mean, there’s obviously regulations have a huge impact in our industry and they’re constantly changing. They impact where we locate and they impact how we deliver and how we design our space. And so everyone in the industry has been asking, how is telehealth going to impact your footprint? And early on in the pandemic, leaders that I was talking to felt that gosh, the advent of all of these relaxed regulations and increased use of telehealth would have the effect of reducing our footprint, but actually as we were starting to work through how care is delivered, some of the realities of that are kind of changing our attitude. And while it’s not fully informed yet, what we’re finding is that physician that is sitting in the office, that’s delivering telehealth care needs a PA or another assistant to set up that call and they both have to sit someplace.

Cindy Black: And if that physician is also delivering care in a clinical exam room to patients in the flesh, but part of his scheduled time is virtual care, then he’s got to have two places to be in that same office. So what those workflows look like and how that impacts the design of our space is really something that we’re trying to flush out. I think everybody on this call understands we’re all living in legacy space that was designed for workflows as they used to be. And so we’re just trying to get our hands around what those workflows are going to become and how that will impact.

Heidi Hohendorf: Yeah. To echo what both Kelly and Cindy said so far, we haven’t seen telehealth as having a major impact on any sort of reduction and it’s spate for clinical space that we need. Telehealth is important as a convenience for the patient. And we have been, and will continue to focus on quality of care and patient convenience. And the way that we’ve done that in the real estate world is still far as we have I mentioned earlier seven integrated care campuses. And for us that those are kind of a one-stop shop where the patients can come. They’re located throughout the service areas that we serve. So they offer a range of coordinated health care services from diagnostic to primary care to specialty care. So a patient comes in they are close to their home. They’re not having to travel an hour away to go to the hospital.

Heidi Hohendorf: They have convenient parking, they can come in and get a lab drawn, get an x-ray, go down the hall and see their primary care doctor. So with telehealth being convenient for patients, that’s kind of what we’re focusing on for real estate perspective is just making healthcare simple and affordable and convenient for the patient. So those are some means that we’ve been doing it. Again, I don’t see telehealth reducing the footprint but we can reconfiguring like Cindy and Kelly said to bring in technology to expand that and expand our convenience to the patients.

Rene Larkin: Yeah, I think that’s great. And really insightful. I think the man on the street would probably, if they were asked would assume the opposite. So another thing, and Heidi, you hit on this and maybe Cindy, if you want to talk about this because you and I had talked about it as we see this regulatory and reimbursement push towards really value-based care, I think you’re going to continue to see possibly the incentives to create more of kind of that integrated care. Cindy, can you just talk a little bit about some of the real estate implications you’re thinking through your team, they’re thinking through as that might become more of a reality.

Cindy Black: So value-based care and population health management they’re all kind of buzzwords that are flying around in the healthcare system. Obviously the goal is how do we improve the health of our patients and reduce the cost of care at the same time. And real estate kind of is a layer over that helps us accomplish that. And as I spoke previously, we’re all living in legacy space and legacy space has a workflow that’s designed around the way we used to deliver care. So now, if we’re looking for a model that Heidi was talking about, we were of an integrated model where we’re bringing all of the different provider types into one place. And for the convenience of the patient, we’re trying to drive them through all of the different service providers that they need and treat the whole patient. Then that looks at a different workflow and that’s going to require a redesign. And so I think this is work that was started pre pandemic, and I think it’ll continue post pandemic. But real estate is definitely at the forefront and helping to figure out how we can make that happen.

Rene Larkin: Thanks, Cindy. And a question just came in and I think one of them is really relevant. Here is those of you that kind of talked on how telehealth might be changing your spaces. Have you seen specifically kind of HIPAA compliance spaces? Is that a concern? And has that taken into consideration for kind of remodeling to ensure that the provider can be providing telehealth services without certainly a violation of HIPAA, maybe something we wouldn’t be considering in a day to day, because they’re seeing a patient in a closed room. Are we taking that same consideration to the telehealth implications for real estate?

Cindy Black: I think HIPAA compliance is always at the forefront of all of our minds when we design our space. We all have specialists and guidance in our organizations that are helping us make sure that we have security and safety in place in whatever form or fashion needed. So I can’t think of a specific example how the telehealth delivery would change that. I don’t know if one of my other panel members can think of something that-

Rene Larkin: I mean I’m thinking no longer… Maybe we’re not providing telehealth in the break room and knew we never were, but right as the pandemic happened, maybe that’s where you were providing it because we just haven’t thought for spaces, but it’s like truly that needs to happen in a private space. Even if the patient’s not there, the provider Neil’s still needs to be giving that in a private space. And I think you touched on that, Cindy I don’t know if anyone else has any other thoughts, but that’s kind of where my I jumped to.

Kelly Adams: And I mean, I think that supports I think Heidi’s comment as well regarding… We’re still using exam rooms to provide the tele-health services. So it’s not separate space. That’s just incorporating it into our kind of existing designs.

Rene Larkin: Right. But just because the patient’s not there doesn’t mean we need less space to deliver that care in a way. No, super insightful. So I think you know, let’s turn to the pandemic, what are the effects? I think there’s two kinds of different ways that we’ve talked about this, that we see it affecting. There’re the effects of the pandemic on non-patient facing space. Our admin space, our space where we don’t necessarily need people to be in a central location. What are the effects that your system kind of seeing because of that?

Matt Crawford: Yeah, it’s big, a little bit to the non-patient facing and even our administrative footprint. I certainly can’t say has it has experienced as much scrutiny as it has over the last year or so. And what I think the learnings are just, ever-changing ongoing. You find out something new about how it’s working or not working for groups, individuals, departments, almost every day, sometimes by the hour. I don’t think just because we’re in healthcare, we’re really any different than other or any other office occupying business. We’ve got administrative space that doesn’t include any clinical function and we’re analyzing how we can be more efficient in that space. It doesn’t mean you can get out of some lease locations that are become less necessary shirt consolidate into what we may have a longer term commitment to occupy.

Matt Crawford: Absolutely. But I think it extends into how we use our existing space and what we need to keep. I think for us what we found is that for a lot of people, this has been okay. It hasn’t been as shocking or as disruptive or as uncomfortable relative to being productive at work. I think there’s a lot of people might’ve anticipated. And I think the question for again, not just us many, many, many other office using companies is what level of this should continue to achieve either cost savings, flexibility, or perhaps more importantly. These days associate retention, just because we are a Catholic non-profit healthcare organization doesn’t mean we don’t want to think like organizations that have to recruit talent, just like we did. When forwarding a work environment or an option to work in a way that’s not everyday onsite in an office makes sense.

Matt Crawford: Then that’s something I think we want to be able to pivot towards. So how we use the space, what we keep and what we don’t, what level of work can be done just as productively from a low room, like the one I’m sitting in right now. I think our questions that are definitely out there and that continue to be answered with new information every day was certainly probably not an end in sight, at least in the next 12, 18 months.

Heidi Hohendorf: I can speak to how it’s affected our administrative space too. And we were actually Spectrum Health was taking a look at how we were going to reimagine use of administrative space before COVID hit. We had been involved in conducting a study where sensors were installed in some of our spaces to see how often the administrative space was utilized and found that in some instances, people were using their space less than 50% of the time. Whether that would be they were offsite and attending meetings and whatnot. And we still do intend to build a new center for innovation and transformation where we’re playing to co-located various different administrative departments. Now COVID has definitely impacted how we’re rethinking, how that’s going to be designed before COVID. So these statistics just came out last week.

Heidi Hohendorf: Our workforce showed that in February 2020, we had less than 1% of our workforce working virtually. So that amounts to about 200 employees as of February 2021, it was 20%, which was 7,000 plus. So we don’t see remote work going away. In fact surveys showed us that 97% of our employees want it to have the option to work remotely, at least part of the time have some flexibility. So COVID has definitely been an accelerant and to use a term that our senior director of facilities planning and strategy says he calls it a positive disruptor. So it’s causing us to think about getting out of the conventional use of space, where one employee had one office and focus more on shared space hoteling space spaces that give people the flexibility. Like I said maybe I don’t need an office in a building dedicated to myself full-Time.

Heidi Hohendorf: Maybe I’ll work from home two days a week and I’ll share it with one of my colleagues. So we’re looking at how we’re going to reimagine, redesign our administrative space. And it’s definitely going to result in a reduction, especially when we have this new building built, because of, as I mentioned, we’re going to be co locating various different departments, and that’s going to free up some space and some cost savings that and if we own that, the space that’s being vacated, then we can repurpose it for other clinical purposes. But I think the work from home really more than anything is showing how administrative space is going to be impacted going forward.

Kelly Adams: Yeah. I think like Matt and Heidi described STL health too, is sort of exploring different ways to consolidate our office space and reconfigure the space to move away from individual offices or cubes and move towards kind of collaborative workspaces. And our response I think, is not primarily being driven by cost. I think that’s certainly a secondary benefit. But we like others have kind of surveyed our associates and recognize that it’s really important for employee satisfaction and retention and recruitment that we allow for that, that flexibility. And so our space planning is really just being responsive to that. And another thing we’re sort of factoring in is, so we are co-located with a technology company on a campus and depending on what their strategy is in terms of return to work that impacts, some of the shared amenities on campus, like cafeteria and gym and things like that.

Kelly Adams: So that’s certainly being taken into consideration as well when we’re planning. I think Rene, you mentioned too, just like other trends from a patient facing perspective. And I think I’ll just add a little bit in terms of what I’ve seen in the market. We are in the process of building a new campus for one of our existing hospitals. And I think as a result of the pandemic and the economic impact developers I think are eager to work with us because we’re financially very strong and we’ve seen, definitely proposals with some very competitive cap rates which has been good to see and is working to our advantage. And then I’d say the other area we’re sort of looking at is retail space. And I think there’s an opportunity there where landlords are eager to get us in as tenants, and we’ve been able to negotiate some pretty strong terms for leases there.

Matt Crawford: Kelly, I would edit what you just said relative to the creativity of landlords across the board. Whether it’s honing in on healthcare as an industry that’s has to survive, or whether it’s just thinking of ways to repurpose space that’s recently become vacant. We’ve certainly been, I would say the beneficiary of some tremendously creative ideas owners in our various markets who are obviously trying to attract a tenant to a property. But frankly, properties that we hadn’t traditionally thought about. As Cindy may have alluded, when we get down to that zip code or that corner what maybe we considered before, because it hasn’t been available or haven’t considered before, because there was tremendous competition for the space. I think there’s certainly a trend towards those properties being put in front of us in a more significant way. And us being forced to evaluate those a little differently than we have in the past.

Rene Larkin: Yeah you’re seeing just nationally kind of this reuse of space that the pandemic probably accelerated like a shopping mall right. I mean, we’re seeing healthcare tenants take advantage of that and move in and repurpose that for maybe integrated care model or what have you. But just with fresh new eyes, looking at that for maybe something you wouldn’t have considered in the past and landlords willing to work with you from the TI prospective or what it may be to make sure that that meets your needs. Cindy.

Cindy Black: I could just jump in there. We’re looking for… We’re trying to be opportunist. Opportunistic and so pre pandemic, everybody was trying to move towards more of a retail model in the delivery of care, get closer to the patient. And retail was very attractive, but anybody working in the real estate industry knows that your retail is pretty high priced. Those corners of prime. And so it’s difficult for some of our operations to support that kind of cost. But as retail starts to see, how it starts to feel some pressure we become more attractive as target tenants.

Cindy Black: And so we’ve we are our long hold tenants. We go into space, we don’t leave and we pay the rent on time and landlords really appreciate that. So if a landlord is under some pressure that might create some opportunity and I’ve seen some really unique applications where they could shopping centers have been turned into corporate headquarters, administrative space. And then again, there are those typical outlaw opportunities or inline retail, where I’d love to put primary care there, but it’s just a really high cost, but maybe there’s a some softness in some particular areas that we could take advantage of at this time.

Rene Larkin: Yeah. And Cindy I know we’re stepping back a little bit, but I thought you had just an interesting experience with kind of the work from home and how the surveying of people kind of changed as the pandemic went on depending on age group too. Do you mind talking a little bit about that?

Cindy Black: Oh, sure. Yeah. Heidi was talking about serving and everybody in the market healthcare typically relies on high-skilled employees. And so we are all in the business of trying to retain those employees because it’s hard, it’s costly to have that turnover going on. So we’ve been serving and we’ve delivered several surveys. And at the beginning of the pandemic my staff, I can speak anecdotally. They were ready to go back, waiting to go back and we have several generations represented on our team. And over the course of time, as our capabilities of working remote have shifted and changed, and people have really come to appreciate the work-life balance that has come along with this. Some of the unexpected discoveries we’ve gotten to know each other better.

Cindy Black: In fact, we as panelists talked about that earlier that I now know who has a cat and who has a dog and what their names are because onscreen. And I hear them in the background and we know each other’s children’s names and that’s been really refreshing. And so and we are also those of us who have any kind of a commute we’re realizing we can have two to three hours added back in our day. Now some of us choose to put that into our work and we never get out of our seats and the others choose to have a little more work-life balance. But my team specifically has now really grown and decided that this isn’t a bad model, but we’re seeing really is a demand by our employees for a hybrid model.

Cindy Black: And what does that look like? That’s the head-scratcher and how do you manage that? So people sharing space in a safe environment, pre pandemic, we were going to more, we were densifying our space. And so we were taking out the walls and pushing people closer together in fewer private offices. And that was wonderful, but we’re not sure how that works in this new environment now. And how many days a week and how do we manage who comes in and out and how do we reserve that space? And so there are a lot of challenges with planning for that hybrid approach, but that does seem to be the preferred model, at least what we’re seeing evolve.

Rene Larkin: And just the question from one of the participants that I think tags onto the end of this, and you guys all touched on it, but do any you at this point have a return to work strategy or that’s still in flux?

Cindy Black: Yeah, I’ll finish and then I’ll throw it to some of my partners here to see what they’re doing. I think it depends and it changes. So earlier in the pandemic, everybody said we were going back at the end of 2020, and then it was June of 2020. And now it’s maybe December, I’m sorry. Now it’s June of 2021. And now it’s maybe December of 2021. And so I guess my answer is we don’t know when we’re going back and we don’t know how we’re going back. I’m speaking for generally for my system, understanding that our healthcare providers they have never gone home. That we are continuing to work and we’re all working. It’s just this remote for workforce. We don’t know when we’re going back and how.

Heidi Hohendorf: Yeah, that’s the same for us too. Like Cindy said, it’s continuously changing. Plans are being put into place, but it’s all science driven based on what is going to be happening with the vaccine. What sort of the herd immunity and what we’re seeing come out of the vaccine and how it’s going to impact people. We kept having guidelines and the targets have shifted. The last I heard was earliest return would be January of 2022 for those of us that are working at that kind of work at home, we’re still having to work from home. And then when people do come back, flexibility will be implemented, and it’s going to be a role based to who has the ability to do this work at home without having to be onsite.

Heidi Hohendorf: So there’s just lots of variables and I think there’ll be pilots put into place. So what does the return to work look like? What’s the space going to look like from a safety perspective. And so I think different groups will kind of come back at like a phased in basis.

Kelly Adams: I would just echo Cindy and Heidi’s comments from our perspective from STL health perspective. Really the plans have continued to evolve over time and just continue to be responsive to new research that’s out there. And then the data that we’re collecting internally as to people’s preferences. I think generally speaking a hybrid model is probably what we’re moving towards, like others have mentioned. But I think it just continues to be something that we’re working on and trying to implement.

Rene Larkin: One question that we’ll ask before we move on from this topic, we’ve all talked about kind of all admin being sent home, the administrative offices. They specifically asked, did that include kind of the administrative associate, so kind of your assistant type, have your systems been able to mobilize them such to work at home or were they returned back to work?

Matt Crawford: I would offer yes and with great success with. I think my one time I was going to say earlier when Cindy was talking about and I said this earlier to this group. It’s almost a shame that it took a pandemic for us to come face to face with our shared humanity. I think that we’ve realized that while we may do it begrudgingly in largely it can be done. And it’s been from the top down certainly in our organization as everyone has alluded to. It’s to what degree will that persist in sort of around the story. And it seems like more than less.

Rene Larkin: Thanks. Well, let’s move on into… I’m going to switch you guys up a little bit, but I think you guys are ready. Kind of just driven by some of the questions I’m seeing in the Q&A box. Let’s talk kind of the pros and cons of leased space versus owned space and especially in light of a pandemic and how that might kind of kind of change the way you look at things moving forward.

Matt Crawford: I have to take a swing at that a little bit as it relates to [inaudible 00:38:52] and the activity across our portfolio. I think in years past the mantra was if you need the flexibility and you’re generally off campus broadly leasing makes sense here too for have we had to take advantage of that flexibility sometimes, but not very often. I think there’s a lot more of these days. We’re analyzing certain locations and saying, nice short remaining lease term. It gives us an opportunity to do something to help ourselves. And I just think that’s really writ large these days, especially as it relates to our newly acquired lease locations. It’s all of those flexibility benefits that come with leasing a space are evermore important. On the ownership side again, it’s really the same analysis.

Matt Crawford: And I think these days, if we’re going to be there long enough, will it make financial sense? Well, once you figure that out, you’re analyzing your capital options, internal, external, et cetera, and trying to figure out whether it makes most sense to deal with something internally and try to control that piece of real estate or whether it makes sense to bring in a partner. And you’ve got an environment now where Kelly, I think you said earlier cap rates are changing rapidly. Demand is increasing substantially and properties are trading at a velocity that it’s startling almost to see that it happening during a pandemic against [inaudible 00:40:20]. And then it’s that type of activity you thought would largely slow down. I don’t know if it’s healthcare specific, but it is most assuredly picked up.

Matt Crawford: And to the extent we can participate in that opportunity to own our own real estate that we populate, you know, we do, I think a lot of organizations do. And again, as it relates to the leasing, just finally taking advantage of that rainy day flexibility that you always wanted but very rarely pulled the string on. And I think that demand for flexibility when you’re negotiating new leases, that demand… I saw a question actually that I might take a swing at answering. We’re seeing a lot of landlords more and more willing to extend the period of time during which we’re obligated to spend [inaudible 00:41:03]. And that’s really nice frankly. Thanks to all you landlords out there.

Matt Crawford: Thank you very much. It’s it gives us the flexibility because the TIA allows doesn’t always go all the way for us. We have to put some of our own capital next to it gives us a chance to wait to spend some of our own money. And if we have to give a little more term in order to gain that flexibility, that’s a hugely beneficial thing for us. Again, going back to what I said earlier, flexibility, the leasing scenario expanding a little bit relative to our own portfolio, I think has as benefit on both sides. And I think as it might’ve said has been accelerated by the pandemic environment.

Heidi Hohendorf: Yeah, I know with our system, we, we definitely have been seeing advantages and owning as of late and for several reasons, one being able to control costs and operating expenses. If we’re leasing five different buildings, we got five different landlords. They’re using five different cleaning companies. They all have their own, different protocols that they put in place. Whereas if we own the building, we can use our own internal environmental services to save just some, efficiencies they’re familiar with our spaces. And with regard to reduction in costs, as far as flexibility goes, I think it goes both ways. There’s definitely flexibility in leasing, but there’s flexibility and owning too. We’re not tied by restrictions that the landlord might have in place.

Heidi Hohendorf: We can use the space within, regulatory confines, how we want to use it without having to get permission from the landlord. We there’s certainty and knowing that what the lease term comes up, we might have to negotiate with the landlord. They we might be at a disadvantage, they might charge higher rent, whereas when we own it we have the certainty that we will have that space available to us. And like I said, it goes both ways. There’s pros and cons for both we’ve been seeing pros in lease or in owning outweighing the cons.

Cindy Black: Yeah. I would add to that from an operational perspective. There are definitely some pros to owning during a pandemic as well, just in terms of having more control over the building and other tenants and really just from an infection control perspective as well. So helpful in terms of enforcing, social distancing mask wearing you know, air flow, HVAC issues, things like that. And, and even cleaning and disinfection processes. And so when the pandemic hit in the spring for the buildings that we own where we have third party tenants, we instituted pretty strict supplemental building rules and regulations around kind of best practices which helped create standards that ultimately, protected our patients that were coming to visit us at those locations. So I guess the flip side to that is that this required deploying a lot of resources on our end.

Cindy Black: Whereas, if we were leasing, the landlords would kind of bare. There are some of those burdens. So another kind of challenge I think has been for us as landlords has been dealing with various issues that have come up with rent, deferral and rent abatement requests for our tenants. And so we’ve had to manage that and we’re in the business of healthcare and not real estate. And so certainly that has, that has shown to provide some challenges for us. And it’s more complicated from a regulatory perspective as well.

Kelly Adams: Yeah. I could just add tag on to that. Some of the things that we found ourselves trying to manage during the pandemic is, hey gosh, we need to stand up a daycare immediately for our employees so that we can deliver date deliver care to our patients. We need to get an infusion going so that we can start delivering some of these different treatments that are now available. We need drive-through testing and we don’t own the building, but hey landlord, do you mind if we start putting tents up and start routing patients through, and we’re bringing them from all over the city, and by the way, we need to change our hour of operations. And we want to control who can come in and not come in this building and under what circumstances they can come in. So you don’t mind if we put controls in, on your building.

Kelly Adams: So these were all interesting conversations that we had, especially when we might be the majority tenant, but we’re not a hundred percent tenant in those buildings. So those were some of the challenges we began to face. I would say that whenever we’re trying to figure out how we’re going to deploy our cash, we have to do have a trade-off question. Do we drive our money first, we assess our financial health. And then are we going to put that money in for business? Or are you going to hire more doctors or providers? Are we going to buy, you know, more x-ray machines and MRIs. So once we get past that hurdle and we have managed our core business, then if there’s still money available, I would say some in response to some of the other comments I’ve heard, I guess we’re developing a framework on when we want to own and when we want to lease and right.

Kelly Adams: And I think a lot of systems kind of had loose framework anyway. And so now we’re just tightening that up. So if it’s on our hospital campus, if it’s attached for a hospital, gosh, our preference would probably be to own. If it’s in an emerging market we’re not sure and we want to retain flexibility. That might be a place where we want to stay flexible in lease. And then there are different product types. Do you want to own your surgery centers, it’s a high cost delivery of care, but it is dealing with landlords who’d maybe don’t manage those buildings to the standards that you would like. It creates that push and pull. And so we are developing that framework so we can better deploy our capital.

Rene Larkin: On that capital question. That question came in and I do think it’s interesting. We didn’t hit it on it feel free to pass, but presumably we might see a lower cost of corporate capital. To your point, Cindy, there might not be a big of a pool of money such that we can then use that for real estate. Is that impacting or hasn’t yet even come into the consideration of maybe a reverse monetization strategy instead of buying back your buildings are you going to now considering going back, has that even entered the realm yet?

Cindy Black: I think the pendulum is always swinging, right. We went through a period of time when everybody monetized. And so we’re now all living through the great reality of working with our re partners. And what challenges those bring. So I do think you’re starting to see some conversations bubble up. I don’t know if that’ll bear fruit. I don’t know if any of my partners on the call have thoughts on that.

Matt Crawford: I think what it’s done relative to analyzing the lease versus own decision and analyzing individual deals is amplified the financial transaction aspect of it. Real estate is a location. It’s a quality of building, it’s a presentation to the community and your patients, but moreover, it’s a deal it’s dollars and cents. You’ve got to understand the very small, changes and things like cap rate that can have tremendous impact on value. And, when the internal cost of capital fluctuates by a half a point that makes a material difference in the way you’re analyzing your given transaction, where there’s that’s always been the case. That’s not new news being ever more important today when those half a point ticks can be daily, weekly, certainly monthly. And so I think the emphasis on considering these real estate deals as financial transactions, far more, really detailed level, far more than really ever before, as at least be prevalent for the workload.

Rene Larkin: Okay. Thanks. That’s helpful. Well, I think we have about five to 10 minutes left, and there’s quite a few questions that are kind of just random if you guys are okay with it, I’ll kind of take through those. And to the extent any of you feel comfortable responding, feel free. I think we answered that one. One of the questions I think that came up when we were talking about reutilizing space in light of the pandemic is how are you guys addressing the need for more technology as it relates to wifi coverage, et cetera? How is that impacting… I don’t think we hit on technology. So maybe if you guys can hit on that expanded use, and if that’s impacting the way you guys are looking at your existing and reutilizing the space.

Matt Crawford: Well, nobody else is jumping ahead. I’m not even sure what I’m going to say, but, what came immediately to mind is something so silly as printing. So many people working from home printing and whether or not you’ve got adequate wifi access whether you can maintain an unfettered video connection for hours and hours on end. I guess what I would say is just challenges nobody ever really thought we think about before and how real estate interacts. We interact with our HR department a lot as it relates to again, that associate experience. I can commend my colleagues certainly in our organization for really paying attention to that, thinking through those things. Whereas you look at a real estate person’s square feet, TEI, the difficult stuff we deal with, having to figure out whether or not the people who work around those administrative locations really can do so effectively from home.

Matt Crawford: Now, how do we accommodate a group that needs to come in and print out a high volume? How do we accommodate a group that has a scanning function that shouldn’t be done in their home office? What are the IT considerations connecting your home printer to your company laptop, things like that. I can’t profess to indicate that we’ve got a solution or that we’ve even begun to answer these questions, but they’re just new challenges that we’re trying to figure out. I would argue that a personal opinion certainly, but the benefit of remote work again, as we said earlier as it relates to being a retention tool, as it relates to attracting talent, as it promotes sort of counterintuitively the work-life balance as some people have experienced.

Matt Crawford: I think those benefits far outweigh the challenges associated with figuring out how to securely print something. And look at those roles require those types of activities, they shouldn’t be remote all the time. And then again, doesn’t that all speak to the flexibility of what we’re trying to provide and still get the work done that is requisite for our organization. I couldn’t tell you the color of the cabling and our office spaces, but I can sure tell you that we’ve thought about what it meant to not have that available in your house in rural Virginia, for example. Certainly something we need to address and tackle that everybody knows.

Heidi Hohendorf: Yeah. Along those lines and I don’t know the answer to the solution either, but I know that we’re certainly considering technology that will allow for a seamless connection between virtual off-site workers and those that are onsite. I know there’s been some struggle with say there’s two folks in an office, and then they’re on a teams call and trying to get everybody and the sound and the interaction between the two that are offsite and the ones… I know that’s been talked about and will be looked at and being implemented into our facilities is how to get some sort of seamless analogy between the off-site workers, the remote workers and the onsite workers.

Cindy Black: All I can say is it hasn’t been an issue for my teams and the teams I work with. So maybe that speaks to the fact that our system and specifically our ISIT folks are handling it really well. I mean, prior to the pandemic, we all migrated to a single platform. Our company uses teams, it’s a really robust platform. It works really well. And I think in healthcare, we’re all used to hand-offs and working as teams to deliver care and our administrative teams are doing the same thing. Somebody’s microphone doesn’t work, cameras are working, or they can’t figure out to do this or that everybody’s been jumping in. So I really has not been an issue for us. I think the question was wifi coverage. And I’ve really not had any experience with anybody in our system, but I don’t work in IT. So I’m sure there’s somebody out there and that is an issue for the ISIT department.

Rene Larkin: Yeah. And to your point, it’s probably driven more by the areas that you serve, rural, urban, et cetera. And then where your colleagues are. Let’s just hit on maybe one last question that we have a couple of questions relating to lease concessions, TI repayment, TI allowances reduced rent, kind of what were you seeing as a landlord, what are you offering especially peak of the pandemic related to those terms if you guys are willing to share.

Matt Crawford: Months and months and months of free rent, unlimited TI, bargain basement rates across the board, it’s been smart it’s been non-skid. I mentioned that again, we’ve been successful in working with our partners and landlord partners to get again, longer periods of time to spend TI allowances. Some of those flexibility provisions we talked about, some of your typical deal terms, termination on longer-term deals with termination options with penalties, et cetera. Maybe it’s not a deal term, but something Cindy, you said earlier, that kind of stuck with me more over the landlords would be great. Maybe that’s a shocking thing to hear from the mouth of a tenant, but it’s true. Landlords have been great as it relates to the difficulties we’re experiencing in the healthcare system and what we have to do to keep our patients safe in buildings, where we might not be the only occupant or whether we might be the only healthcare organization using the space.

Matt Crawford: I can honestly say that we’ve got 12 and a half million square feet of ambulatory real estate alone, not including the hospitals. The number of landlords we interact with is incredible. And I could not make any single one, nor would I that was anything but accommodating as it related to our need to set up a tent or to provide testing or to lock down a door to make sure there was a temperature taken, those sorts of things. We really enjoyed a lot of really nice collaboration. I think it made a substantial difference, or it changed our interaction with a lot of our landlord partners, largely for the positive.

Matt Crawford: Again, maybe that’s just another positive unintended consequence of having to deal with something like this. That’s worked out great. But generally speaking, I think maybe more of a willingness to accept the short-term going on the middle Eastern stuff. I mentioned the flexibility. I’ve said it a thousand times, but we don’t always do the five-year deal. I’m not going to do a three-year deal. And a lot of times it’d be a short conversation when that came out. That’s not the case anymore. And really any term commitment associated concessions is on the table whether it’s helping the organization because demand has been impacted accordingly. I’ve surely observed that in our lease portfolio.

Cindy Black: So yeah, to Matt’s point, I can tell you our landlords have generally taken the stance that short term is better than no term. And because of the pressure that they’re seeing in the market, they have more of an appetite for those shorter term leases. And obviously we as the tenants were looking around saying, are we at the top of the market here? Do we really want to go long in a lease right now at this rate? So we’re both sides of the table are seemingly willing to take that shorter term. They’re also willing to again, extend the amount of time to deploy, attend improvement dollars, recognizing that when you have pandemic restrictions in place, you can’t start swinging hammers if you can’t even go in the building.

Cindy Black: So they’ve been very amenable to that and they’ve been very good to work with. You’re starting to see some softness in the market in particular assets and particular asset classes, perhaps. But I would say healthcare real estate is healthy and there seems to be people with money that they want to deploy and invest, seem to want to flock to healthcare, because it seems to be a stable market in this economy and that’s putting upward pressure on rates. So I can’t see that we’ve seen really any kind of softening in rates as of yet, hopefully, but I haven’t seen it.

Rene Larkin: That’s great. Thank you all the panelists, it’s been a great and robust discussion.

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Stark Law Final Rule – Impacts on Health Care Leasing Arrangements

Stark Law Final Rule – Impacts on Health Care Leasing Arrangements

Hall Render attorneys from four offices across the U.S. discuss CMS’ Final Rule modifying various Stark Law regulations, including those specifically geared toward health care real estate arrangements. CMS issued the Final Rule on November 20, 2020, and starting January 19, 2021, health care organizations nationwide were required to comply with the new regulations. The podcast discussion addresses key guidance provided by the Final Rule, and covers topics of fair market value, commercial reasonableness, and Stark exceptions that may be available to health care organizations.

Podcast Participants

Libby Park

Attorney, Hall Render
Denver Office

Gerard Faulkner

Attorney, Hall Render
Dallas Office

Joel Swider

Attorney, Hall Render
Indianapolis Office

Kiel Zillmer

Attorney, Hall Render
Milwaukee Office

Libby Park: Hello, everyone. And welcome to the Healthcare Real Estate Advisor podcast. My name is Libby Park and I’m an attorney with Hall Render, the largest healthcare focused law firm in the United States. Thanks for tuning in today. We have some great content for you. Today, we’ll be talking about CMS’s final rule aimed at modernizing key fraud and abuse regulations under the Federal Stark Law. CMS issued the final rule in November, 2020, which became effective as of January 19th, 2021. These regulations have now been in effect for a few weeks. So, we hope that this podcast has content that is relevant and timely to our listeners. Today, we’ll hear from three Hall Render attorneys from different geographic locations around the U.S. Joel Swider is joining us from our Indianapolis office. Hi there, Joel.

Joel Swider: Hi, Libby. Thanks for having me.

Libby Park: Of course, welcome. Kiel Zillmer is based out of our Milwaukee office. Hi, Kiel.

Kiel Zillmer: Hi, Libby.

Libby Park: And Gerard Faulkner is from our Dallas office. Hey, Gerard.

Gerard Faulkner: Hey, Libby. Happy to be here.

Libby Park: Thanks for joining us. I’ll be moderating our conversation today, and I’m located in Hall Render’s Denver office. Thanks, everyone, for joining me today. Today, we’ll discuss the big three areas of the Stark law final rule changes that will impact healthcare leases, fair market value, commercial reasonableness, and exclusive use. Joel, let’s start our conversation with fair market value, as it relates to the final rule. Can you tell us what changes did CMS make to its interpretation of fair market value in the real estate context?

Joel Swider: Thanks, Libby. When it comes to fair market value, CMS did a couple of things in the final rule. The first is that they finalized changes to the structure of the definition of fair market value, the structure itself. CMS advanced a general definition of fair market value, as well as some more specific definitions that apply in the rental of office space and rental of equipment contexts. The general definition of fair market value that was finalized is, and I’m quoting here, “The value in an arm’s length transaction, consistent with the general market value of the subject transaction.” So, they’ve really scaled it back and made it more basic.

Joel Swider: And then, CMS went on to give additional definitions for, in our context, the rental of equipment and the rental of office space. And so, part of that definition, from the rental of office space exception or the new language from the final rule says, “With respect to the rental of office space, fair market value means,” and I’m quoting here, “the value in an arm’s length transaction of rental property for general commercial purposes, not taking into account its intended use, without adjustment to reflect the value that the perspective lessee or lessor would attribute to the proximity of convenience to the lessor where the lessor is a potential source of patient referrals.” So, this was a concept that appeared previously, but was somewhat disjointed and they kind of brought it down into one definition.

Joel Swider: And then, furthermore, and I’m quoting again here, it says, “It must be consistent with the general market value of the subject transaction.” So, the CMS also updated the definition of general market value to sort of bifurcate it into multiple parts, applicable to different scenarios and applications. They had one part for assets, one part for compensation, and there’s a separate definition for general market value that is specific to the rental of office space and equipment. And what CMS finalized there is, it says, “With respect to the rental of equipment or the rental of office space, the general market value is the price that rental property would bring at the time that the parties enter into the rental arrangement, as the result of bonafide bargaining between a well-informed lessor and lessee that are not otherwise in a position to generate business for one another.”

Joel Swider: So, these concepts in verbiage are really consistent with how those definitions read in the past. But they’ve been consolidated and they’re easier to find. And so, really to my mind, from a practical perspective, I don’t know that this necessarily changes the end result of what would be considered fair market value. But I do think that it makes it easier for a health provider to find and use the definitions. It also makes it easier when we are, let’s say, reviewing an appraisal that has come in from a third party. We can make sure that they’re using the right definitions and that they’re using them in the right contexts.

Joel Swider: So, the other thing that I’ll mention about the fair market value definitions for real estate arrangements was CMS removed part of the text that used to say a rental payment does not take into account intended use if it takes into account the costs incurred by the lessor in developing or upgrading the property. And CMS had originally added this language to the Stark regulations to basically clarify that rental payments may reflect, they are allowed to reflect the value of improvements or amenities, which I think to most of us practicing in the real estate realm or anybody that’s an appraiser or works with valuations frequently would realize that that is a base assumption upon which the fair market value of the space is based, is those costs that were incurred in improving it. But CMS basically said this was really confusing to people. It wasn’t necessary. And so, they took it out.

Joel Swider: So, I guess, in summary, the CMS in the final rule, they modified that definition of general market value to more closely align with valuation principles that are already used. And any sort of FMV appraisal or broker’s opinion of value that a provider might have previously used is probably still accurate, even if it’s based on those old definitions. But, from a practical matter, I think one takeaway for me and to those listening is, consider updating your template fair market value reports, your fair market value policies, your lease templates, because these definitions have changed. And to the extent that an appraiser would, in his or her professional judgment, base an opinion on these, obviously they’re going to be very important for those purposes.

Libby Park: Thank you, Joel. And thanks for offering some practical tips for folks listening in as to how we can apply some of these changes. Another question, in regard to fair market value, Joel, did CMS opine on any methodologies for setting FMV in real estate transactions?

Joel Swider: They did. So, what CMS said in terms of methodologies was basically that CMS will not prescribe any particular method for coming up with fair market value. And CMS said it would accept a range of methods, appraisals, comparables, looking at documentation of other transactions. They even talked about cost plus a reasonable rate of return, which is something that hasn’t appeared in commentary for a long time. Basically they will accept any method that’s reasonable.

Joel Swider: And I think, from a practical perspective, this really gives providers a bit more leeway to use their discretion, which is a good thing for providers. And I think that’s where too, from a legal perspective, some of our guidance comes in the form of let’s look at this arrangement, let’s look at the stakes involved and the parties involved. And maybe we can apply a cheaper, or faster, or easier method to come up with fair market value, as opposed to getting an appraisal, which is really sort of the gold standard. And that’s something that you would want to use in a more high-risk type of arrangement. So, I think in general though, it was good because CMS gave additional leeway to providers in this area.

Libby Park: Thank you, Joel. Appreciate your thoughts on the fair market value portion of this. Let’s shift to commercial reasonableness. Gerard, can you please tell us a little bit about what changes did CMS make to the definition of commercially reasonable?

Gerard Faulkner: Yeah. So, CMS’s definition of commercially reasonable was sort of expanded in order for them to try and take a more objective approach to their analysis. And so, they ended landing in the final rule on commercially reasonable meaning that the particular arrangement furthers a legitimate business purpose of the parties to the arrangement and is sensible, considering the characteristics of the parties, including their size, type, scope, and specialty. CMS also kind of added in there that an arrangement may be commercially reasonable, even if it does not result in profit for one or more of the parties.

Libby Park: Gerard, thanks for that definition. How will CMS determine if an arrangement is commercially reasonable? And how does the new definition impact this analysis?

Gerard Faulkner: So, now under the final rule, the new rule, CMS’s determination is based on a case by case analysis that turns on whether or not the arrangement makes sense as a means to accomplish the party’s legitimate business goals. And so, when CMS is making this determination, they’re going to look on a case by case fact specific inquiry on the characteristics of the parties. And that will kind of depend on which parties are involved. So, they’re going to be looking at things like the size, the type, and scope and specialty of the parties.

Gerard Faulkner: CMS indicated in the publishing of the final rule that it views this updated standard is more objective since it requires assessment of the characteristics of the parties themselves rather than the previous rule, which had more of a focus only on the perspective of those parties as they entered the arrangement. So, that’s really how the previous CMS commentary had framed this commercial reasonableness discussion. It’s important to remember though that just because an arrangement ultimately achieved a legitimate business purpose, that doesn’t mean that that arrangement was necessarily commercially reasonable. We can take from the final rule that the focus here will not, obviously, be on that result of the arrangement, and moreso a fact-based inquiry, case by case inquiry into whether or not it was reasonable to enter that arrangement in the first place for the parties.

Libby Park: Thanks for those thoughts, Gerard. And can you tell us how will this definition, what are your thoughts on how the definition of commercially reasonable will work in conjunction with the requirement that lease space does not exceed the amount of space that is reasonable and necessary for the legitimate business purposes of the leasing arrangement?

Gerard Faulkner: Yeah. So, that’s a bit of a mouthful, but CMS essentially clarified the additional requirement that the leased space does not exceed that which is reasonable and necessary for the legitimate business purposes of the lease arrangement. In the office space exception, it’s separate entirely from this commercial reasonableness standard. According to CMS, the language in that office space exception is more geared towards the prevention of sham lease arrangements where the rental charges are for office space for which the lessee rather has no genuine or reasonable use. So, it’s not serving legitimate business purpose.

Libby Park: Great. Thank you for your thoughts on this topic, Gerard. Kiel, let’s close things out today with a discussion on the changes to the rental of office space exception. Did CMS make any other noteworthy adjustments to the rental of office space exception that providers should be aware of?

Kiel Zillmer: Thanks Libby. Yes. In addition to the changes to FMV and commercial reasonableness that Joel and Gerard have discussed, CMS finalized another significant change to the rental of office space exception and how we view leasing arrangements in the healthcare context. One of the requirements of the rental of office space exception is that the lease space be used exclusively by the tenant. The rationale for this requirement was to prevent, as Gerardo alluded to previously, sham or paper leases in this case where a landlord receives payment from a tenant for space that the landlord continues to use itself. However, without further clarification, this requirement was also interpreted to mean that the tenant could not share the space with other tenants contemporaneously. So, when we had clients who wanted to structure part-time or shared space arrangements, we were inclined to rely on the timeshare exception to protect the arrangement, which does permit non-exclusive use. But, as those who work with the timeshare exception know, it does have a number of strings attached to it and a number of hoops to jump through.

Kiel Zillmer: In the final rule, CMS incorporated a comment in the rental of office space exception, which clarifies that the exclusive use, as used in the exception, means that the tenant and any other tenants of the same space uses the space exclusion of the landlord or any person or entity related to the landlord. So, in other words, the landlord may not be an invitee of the tenant to use a space, but the tenant and any other tenant operating in the same space may use it at the same time. So, this is a significant clarification by CMS, particularly in light of the trend of hospitals employing more physicians, as value-based healthcare becomes more prevalent. It allows for greater flexibility in how leasing arrangements can be set up, and provides more collaboration between tenants in clinical space.

Kiel Zillmer: So, a prime example of the situation would be where a physician invites another physician into its clinical space to treat a mutual patient for the patient’s convenience. This may have previously been considered a Stark violation, given our understanding of the rental of office space exception and the exclusive use requirement. However, with the revisions to the exception, CMS has made it clear that these types of arrangements would not pose a risk of program or patient abuse, provided that they continue to meet the other requirements of the rental of office space exception. And lastly, I should also mention that CMS also incorporated a similar change to the exclusive use requirement in the rental of equipment exception. So, there is some additional leeway there as well.

Libby Park: Thanks, Kiel. It sounds like the final rule added in some flexibility, which will be beneficial to providers and further clarification as well. Another question, does the final rule provide any other insight on Stark exceptions that may be available to providers in structuring real estate arrangements?

Kiel Zillmer: Yes. As I mentioned, when we look at protecting real estate leasing arrangements, we have typically looked at the rental of office space and timeshare exceptions. However, in the final rule, CMS made clear that leasing arrangements may also be protected under the fair market value exception. But this is also a drastic departure from CMS’s position in previous rulemaking and is significant, particularly in light of the fact that the fair market value exception does not have a one-year term requirement like the rental office space exception does. This provides healthcare entities with greater flexibility for one-off arrangements that may be shorter than one year or arrangements that otherwise do not qualify under the rental of office space or timeshare exceptions.

Kiel Zillmer: In the final rule, CMS also confirmed its position that other exceptions, even beyond the rental of office space and fair market value exceptions, may protect space lease arrangements. For example, CMS reiterated that the arrangements with hospitals exception could cover certain real estate arrangements like, for example, rental payments made by a teaching hospital to a physician to rent his or her house, as a residence for a visiting faculty member. Likewise, CMS repeated that the payments by a physician exception could protect payments by a physician for the lease or use of space other than office space, such as for leases of hospital owned storage space or residential real estate.

Kiel Zillmer: And finally CMS finalized this proposal for a new exception for arrangements with limited remuneration. Provided certain requirements are satisfied, this exception would protect remuneration from an entity to a physician for the provision of items or services that does not exceed $5,000 per calendar year. So, this exception could be available to protect one-off or short-term lease arrangements with terms that are set in advance, even if the arrangement is not set in writing, that is not a requirement under this exception. So, obviously, it provides some greater flexibility there as well.

Kiel Zillmer: And lastly, I just wanted to mention two other changes CMS made that could also be relevant for those who practice in the healthcare real estate realm. First, CMS revised its position with regard to missing signatures and the writing requirement rules. Previously, if a written agreement lacked the party’s signatures, they were allowed to obtain the signatures within 90 calendar days following the effective date of the arrangement, provided the arrangement complied with all other required elements of an applicable exception. In the final rule, CMS expanded the scope of the late signature exception to include a grace period for the required writing, along with the missing signatures. In the event the parties fail to compile a written agreement for a particular arrangement, if that’s a requirement under the applicable exception, they now have 90 days from the arrangement’s effective date to compile a collection of documents that evidences the course of conduct and the terms of the arrangement between the parties and reduce that collection to assigned writing. So, we’re expanding it, not just to the signature, but also to the required writing requirements for certain exceptions under the Stark.

Kiel Zillmer: The second change is with regard to the isolated transaction exception. Healthcare entities have historically used this exception to protect a one-time transaction involving a single payment or one that involves integrally related installment payments. In the leasing context, we typically see this exception called upon in the instance of a missed rental payment or a similar oversight in an arrangement. But the final rule clarifies that the forgiveness of an amount owed in settlement of a dispute, so for example, the payment of back rent or a missed rental payment, is itself a separate arrangement which may be covered under the exception. However, the important thing to note here is that the compensation arrangement, which is the subject of the underlying dispute, is not retroactively made compliant simply because a settlement arrangement is achieved by the isolated transaction exception.

Kiel Zillmer: So, it gets to be a little complicated and convoluted when you go down this path of trying to figure out if an arrangement or a back payment could fit under the isolated transaction exception. So, if there is any confusion or any question as to whether an arrangement would comply with the exception, we often tell our clients to go through the facts and consult with their attorney to figure out if they can rely on the exception in that case.

Joel Swider: Yeah. And, Libby, this is Joel. The only thing that I would add there, and I think Kiel makes a great point, that these additional exceptions that CMS has allowed providers to avail themselves of in the leasing context is a really big and important departure from past guidance, and one that I think a lot of our health provider clients will be able to utilize.

Joel Swider: So, I guess, two quick notes. One is on the isolated transactions exception. As Kiel noted. I mean, I think the important thing to consider there is that CMS didn’t have a lot of guidance on that particular exception in the past. And so, one of the big, I guess, departures or clarifications that was made was the fact that it doesn’t make the underlying arrangement compliant. And Kiel noted this, but I just want to highlight that, that even if we have a payment that needs to be made to settle a dispute, that payment itself might qualify or be compliant under the isolated transactions exception, but it does not make the underlying arrangement compliant, if it otherwise wasn’t, otherwise didn’t meet the other standards.

Joel Swider: The other thing I wanted to point out too is the fair market value exception, because I think that that one, in particular of all of the three or four that CMS pointed out and sort of opened up to leasing arrangements, I think the fair market value exception is going to be really important and provide a lot of flexibility to providers because it can sort of help cure or cover arrangements that, as Kiel noted, they maybe don’t fit within the realm of office space exception. Maybe the term is less than a year. And they maybe don’t fit in the timeshare exception, because it’s actually a lease. It’s not a license. It’s conveying a possessory leasehold interest. But nonetheless, it can meet the other elements of the fair market value exception and, in some ways, that might be easier for certain arrangements. So, I think that’s another one that I think it provides a really good backstop for providers who are really trying to do the right thing with their arrangements, but for whatever reason, the terms of that arrangement don’t fall neatly into the rental of office space exception.

Libby Park: Thanks for jumping in, Joel, and for those additional thoughts on the two exceptions and highlighting their relevance to our listeners today. That’s all that we have on our discussion format for today. Thanks to all of our listeners for tuning in and to Joel, Gerard, and Kiel for joining me today. Please feel free to email any of us directly with follow-up questions. Our emails and contact information is located in the show notes of this podcast and also on Hall Render’s website at www.HallRender.com. And additionally, I’d let listeners know that we prepare a newsletter called the Healthcare Real Estate Advisor. And, to be added to this list, please email me directly at LPark@hallrender.com. Thanks again for tuning in, and have a great day.

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