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Industry Spotlight: Real Estate Acquisition in Healthcare
Everest experts navigate the complexities of this specialized sector.
Though often overlooked, real estate financing is a critical aspect of the healthcare industry. It enables the development and maintenance of healthcare facilities. The specialized nature of this sector of real estate requires a deep understanding of both the financial and regulatory aspects of healthcare and how they affect each client’s unique needs in terms of location, amenities, and square footage.
This month, our featured Everest expert, Zishe Jacob, will be helping us delve into the key considerations, challenges, and strategies involved in the real estate process for healthcare facilities.
Healthcare real estate is treated differently.
Healthcare is distinct from other types of commercial real estate due to the unique requirements of healthcare operations. These properties must meet stringent regulatory standards in order to operate.
“In all areas of their operation, healthcare facilities have to maintain strict compliance with health and safety codes,” says Zishe. There are also requirements for accessibility as well as demands on technological infrastructure in order to support medical equipment.”
In addition, healthcare facilities often require significant customization, such as specialized ventilation systems, reinforced structures for heavy medical equipment, and specific layouts in order to facilitate patient care.
Currently, one of the largest areas of growth in this area of real estate is for senior housing and skilled nursing facilities. As our senior populations continue to age, and human life expectancy continues to extend, demand will continue to rise for these types of accommodations.
So let’s get down to the details. Where do real estate reps and investors come in? Thankfully, Zishe had some insights on that too:
“In any business, it’s important to know your target audience. What do your clients want? If you’re in investing more than direct-to-client service, what sorts of features are your target buyers looking for? For healthcare real estate in particular, it’s important to become familiar with the key considerations that organizations are facing when searching for properties – as well as what sorts of financing options are available to them.”
What are healthcare real estate buyers looking for?
Regulatory Compliance
Healthcare facilities are subject to a wide range of regulations at the federal, state, and local levels. Building regulations can impact the cost and timeline of construction projects. For example, compliance with the Americans with Disabilities Act (ADA) is mandatory and requires modifications to ensure accessibility for all patients that may enter the building. Failure to comply with these laws can lead to costly delays and legal complications.
Because of this, many clients seek out buildings that already meet the requirements for these laws. If they cannot find something like that within their range, they will often opt for one with the closest features, along with enough flexible space to make the necessary modifications.
“Changes in healthcare regulations can hit existing organizations hard,” Zishe explains. “Things like reimbursement policies or even zoning regulations can affect a facility’s revenue and operational costs. Real estate professionals can help you take these into account when considering acquisitions and financing options.”
Location & Market Analysis
Just like any business, the location of a healthcare facility is crucial to its success. Factors such as proximity to population centers, ease of access, and local demographics play a significant role in determining the viability of a healthcare real estate project.
“Experienced real estate professionals can help you choose a site or building by conducting a thorough market analysis. The data helps them to identify areas with high demand for healthcare services,” explains Zishe. “This ensures that the facility will be well-utilized and financially sustainable. Real estate investors can use this data to help market specific sites to their clients.”
Long-Term Viability
Real estate financing for healthcare often involves long-term commitments, given the substantial initial investment required for construction or renovation. Lenders and investors need to assess the long-term viability of the facility, considering factors such as the aging population, technological advancements, and changes in healthcare delivery models. This process includes evaluating the facility for potential to adapt to future needs.
Revenue Streams & Stability
Financial health isn’t just important to the organization or investors. It’s also a critical factor in securing real estate financing. Lenders typically require a detailed assessment of the provider’s revenue streams. This includes things like patient volume, reimbursement rates from insurance companies, government program funding, and other income sources. They’ll also want to evaluate the operational concerns that could put that income at risk. Strong revenue streams, along with stable risk management strategies, increase the likelihood of securing favorable financing terms.
All four of these points touch on one important aspect of healthcare real estate: financial health.
“The amount of capital required to acquire, develop, or even renovate healthcare facilities is substantial and often requires large initial investments,” Zishe explains. This can be a barrier for smaller healthcare providers or those operating in less lucrative markets.”
Securing financing for these projects can be challenging, especially in a competitive lending environment. That is why it is so beneficial to partner with a skilled commercial real estate financing representative, such as those on the Everest team, to help you gain an edge within the market. They can also help you explore some of the options out there specifically for healthcare acquisitions.
3 Financing Sources for Healthcare Real Estate
#1: Regional Banks
Traditional bank loans are common in every industry – and for a good reason. These agreements are typically secured by the property itself and may offer fixed or variable interest rates. Regional banks in particular tend to focus on larger loan amounts and portfolios rather than on single assets.
Regional banks have assets between 10 and 100 billion and lend to a specific region of the country – so there are only about 130 in the entire United States. Because of their size, these banks tend to know the broader healthcare market better. They have more experience in funding within the industry.
#2: Community Banks
These smaller financial institutions offer similar services to a regional bank, but focused on local areas. There are over 4,000 banking groups throughout the country. Because they focus on smaller areas, they are more likely to offer more competitive rates on loans – especially for underperforming facilities and less-seasoned operators.
“Community banks have less than 10 billion in assets,” Zishe says. “They can usually take more time to understand the borrower’s situation. They’re literally closer to these people and their assets.”
While going through the funding process, partnering with an experienced real estate funding professional will be your greatest asset. They can use extensive research to source the best deal for your unique situation – including advising whether or not you should go with a regional or community bank for your project.
#3: Non-Bank Lenders
These lenders are often divided into two categories: finance companies (aka. FiCo) or HUD shops. Regardless of the category, these types of institutions are less regulated than banks. They also do not require deposit relationships which can be a huge draw for certain borrowers.
“There are many financial institutions that focus on facilitating HUD loans and have bridge programs for loans that aren’t able to go to HUD right away,” explains Zishe. “Then there are finance companies that don’t necessarily focus on the HUD exit and would lend even on non HUD eligible facilities. Those are sometimes better for a borrower because they won’t scrutinize the borrower the way HUD does.”
In many cases, loans from these lenders tend to close faster and are able to go higher in terms of leverage. However, they can also be more expensive for the borrower.
When shopping for real estate, healthcare organizations and investors are strongly advised to partner with experienced real estate professionals. The right team can help you acquire diversified funding sources with favorable terms, so you can create a stable, yet flexible, financial foundation. By collaborating with those with a deep understanding of both the financial and regulatory landscapes, you’ll be able to navigate the complexities of healthcare real estate and facilitate the delivery of high-quality care to communities in need.
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