Saturday, December 29, 2012

Update on Fiscal Cliff: What's at Stake for Real Estate

As we go into the final weekend of 2012, Congress continues to wrestle with what to do about the fiscal cliff, the hundreds of billions of dollars in automatic tax increases and federal spending cuts that take effect at the end of the year unless Congress acts to avert it.

NAR is monitoring the situation closely. To help explain the real estate interests at stake, NAR Chief Economist Lawrence Yun and NAR Director of Tax Policy Linda Goold sat down today for a short discussion on the issues.

With Congress and the White House expected to negotiate through the weekend, NAR will be sending out another update on the fiscal cliff situation next week.

Click the link below to access a 6-minute video of their conversation and a short post summarizing their remarks.

Monday, December 24, 2012

ACA is Boost for Medical Office Real Estate- By guest blogger Mark Alexander, CCIM

Mark is a specialist in medical office
and national team leader for Sperry Van Ness

Regardless of how you feel about the Affordable Care Act (ACA), the cloud of uncertainty has been removed. The ACA was passed by Congress and signed into Law by the President on March 23, 2010 and upheld by the Supreme Court on June 28, 2012.  This new direction for health care will ensure dramatic change in demand for real estate used by hospitals and doctors. This is especially true locally given the large number of elderly Americans that retire in Florida, combined with our large proportion of poor uninsured and under-insured who will soon be added to the ranks of medically insured.

There are two main segments of medical office real estate: hospital-controlled buildings and doctor-controlled buildings. The problem over the past three uncertain years during health care reform debate was that neither hospitals nor doctors knew how health care reform was going to wind up. Well, now we know. 

Health care (HC) systems have been more proactive regarding their real estate needs than doctors over the past three years while the debate raged. While not knowing for sure how reform was going to shake out, most hospitals felt change, was inevitable in one form or another, which would lead to more Americans becoming medically insured.  Many HC systems have already taken steps to expand their real estate needs to accommodate this anticipated increased demand for care.  Now that the Presidential election is over, eliminating any reasonable speculation about ACA repeal, many hospital systems across the U.S. are accelerating their expansion plans.  HC systems are partnering with developers to construct new projects while others are using Sale/leaseback transactions involving existing facilities to self-fund their expansion.

Most private practice physicians adopted a “maintain the status quo” attitude over the past three years while hoping for an eventual repeal of ACA. This MD uncertainty fueled today’s pent up demand for medical real estate that is now being released. This is a new environment for doctors and is causing them to change the way they manage their businesses. I find that doctors focus on the bottom line today more than ever before.

For example, over the past twenty years it had become common for doctors that owned their own medical buildings to have their medical practices pay themselves (as Landlord) rent that often exceeded fair market rental rates. This was a popular way for doctors to create exceptional “in-house investments” where their medical office building (MOB) investment returns where often quite remarkable. But this meant their practices often paid very high rental rates that sometimes exceeded fair market rental rates by as much as 200%. When many of these doctor/MOB owner’s decided to sell their buildings prior to retirement, they quickly learned that a sale/leaseback to an investor created much higher sale prices than selling to another doctor or even to their own practice.

The reason for this phenomenon is that owner occupied MOB’s get appraised as though vacant because the appraiser is not allowed to use the existing lease (that would normally drive value higher) because the lease is between related parties and not deemed “arm’s length”. This is great for the acquiring practice but it causes the seller to leave a lot of money on the table.

On the flip side, when the MOB is sold in an arm’s length transaction to an investor and the MOB is then leased back by the medical practice, the appraiser must use the lease to calculate value. The market rent lease steers price much higher and in some cases by as much as 40% higher compared to selling the same MOB to another doctor. 

Consequently, over the past 20 years, doctors that understood these advantages employed the sale/leaseback approach, often choosing the highest rental rate possible to set the highest possible sales price.  This “pushing the envelope to the top” of fair market rental rates created some eye-popping sale prices and saddled medical practice tenants with very high future rents. While this was not a significant issue under the old way of doing business for doctors over the past twenty years, it is today.  Now that ACA is anticipated to bring lower reimbursement rates to doctors in the future, doctors are very concerned and look to keep overhead as low as possible.

Today I see doctors doing the opposite of the past two decades and are either choosing a moderate rental rate for their lease back future; or they pick a below market rent sufficient to retire debt so they can lock in the lowest possible rent to maximize future practice profitability. This is a sound business move as doctors’ incomes are expected to be reduced. This is the fiscally responsible approach, in my view, and it is one example where ACA is helping to reduce the overall cost of health care in America.

Since ACA rewards doctors who work in bigger groups or alliances, there is a trend for single practice doctors to merge with larger medical practices or switch employment to hospital systems. Since stronger tenants are preferred by MOB investors, this trend of smaller groups merging into bigger medical groups is helping the single practice MD get a better price for his MOB than he would have when he was a solo practitioner.

Some forward thinking medical groups were ahead of this curve and started alliances years ago. Others are just getting started. But the trend is clear. Large medical groups are becoming more prevalent.

The Affordable Care Act is not perfect, and most doctors don’t like it because it reduces their future income. But ACA will add millions of individuals to the roles of the medically insured, and this will create higher future demand for health care services. This, in turn, will create higher future demand for medical office space for doctors to treat patients.  There are strong, long-term, underlying business fundamentals for medical office building investments. 

Monday, December 17, 2012

Sperry Van Ness Property Management Services

Kevin Maggiacimo-SNV President

IRVINE, CA-Sperry Van Ness International Corp. has launched a new property-management franchise product called Sperry Van Ness Property Management Services. The franchise offers real estate investors comprehensive property-management services including strategic local-market advice, sales and leasing, building maintenance and service-call response, tenant retention, capital-improvement management and detailed account reporting.
In addition, the product includes a newly launched master insurance program that brings lower deductibles and more comprehensive property-insurance coverage to SVN/PM Services clients. The system helps investors achieve greater operational efficiency and maximize return on investment.
SVNIC achieved significant growth in 2012 and is poised for additional expansion in the coming year. “This has been an exceptional year for Sperry Van Ness International Corp.,” said president Kevin Maggiacomo in a prepared statement. “Not only have we outperformed projections, but we have expanded our foundation in a way that sets the stage for an even better year in 2013. In addition to our expansion in services and franchises, we have brought on some key executives to continue to build the infrastructure and platform and will be making more announcements of exciting hires in the first quarter of 2013.”
Twelve new franchise offices and 10 satellite offices were added in the last year, with several more expected to open prior to year end. The company also experienced 29% increase in revenue in addition to launching an auction-services platform—on which previously reported—and expanding into specialized markets such as marinas.
Maggiacomo tells, “The launch of our property-management platform is a natural fit for our model and allows us to apply our leasing and investment-sales expertise to the value-add side of management.”
In terms of expansion, Maggiacomo says the firm has been pleasantly surprised with the interest in the PM Services product. “We quietly launched mid-year and have quickly grown to 14 offices. Our aggregate under management is now just over 35 million square feet and 19,600 apartment units.”
In terms of winning new assignments, the PM product is proving to be strong out of the gate, he adds. “Last week, we signed on an equity fund that has properties coast-to-coast, and we were able to take on the assignment for both property management and disposition services.”
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Carrie Rossenfeld Carrie Rossenfeld is a reporter for the West Coast region of and Real Estate Forum. She was a trade-magazine and newsletter editor in New York City for 11 years before moving to Southern California in 1997 to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics ranging from intellectual-property licensing and giftware to commercial real estate. She recently edited a book about profiting from distressed real estate in a down market and has ghostwritten a book about starting a home-based business.