Approaches to Healthcare Development in Small-Town America
By: Dave Arnold, executive vice president, Irgens
A major driver of the project was the 13 area physicians who signed on as investors in the Oconomowoc Physicians Center.
Sandwich, Illinois was at a crossroads. The once rural town was quickly being absorbed into the extended reach of Chicago. Kish Health System, one of the region’s largest healthcare providers, saw an opportunity to expand its services beyond the walls of its already successful hospital in order to meet the growing demand of area residents and to satisfy the need to provide new physician recruits with a Class A office environment in which to practice.
However, the stagnant economy and Illinois’s challenging regulatory environment posed significant challenges to funding, building and leasing any new project. Not only must the project comply with certificate of need regulations, but financing and equity needed to be secured amidst the historically tight lending climate.
Irgens uses a surveying process for both on-staff and competing physicians that helps them understand current rental rates that drive project pro forma.
To overcome challenges in the Valley West medical building project, Irgens implemented a unique approach. The firm sought traditional debt financing through long-standing lending partners and created strategic alignment between the hospital and its key providers by raising equity through physician tenants. As investors in the project, these local medical professionals would in-turn have a strong vested interest in a successful outcome and play an integral role in the success of the project and the growing hospital. With a modest cash investment, the physicians were able to realize a significant return on investment.
Irgens recruited a complementary mix of physician tenants, including: family practice, pain management, Ob/Gyn, urology, cardiac rehab, home healthcare and mental health professionals to join the Kish Health System team. The pre-leasing was crucial in the development of the $7.2 million, 38,000-square-foot medical office building, which is strategically located in a growing area and an integral part of Kish’s future growth. Additional growth was recently realized by the hospital with the successful recruitment of an orthopedic group which will now practice full-time oncampus, increasing the hospital’s surgical volume tremendously.
A full-service diagnostic imaging center offering an open MRI and an endoscopic and minor procedure suite are also part of the Oconomowoc Physicians Center.
“Throughout the entire development process Irgens’ goal is for the lenders, the hospital and the physicians to conclude the transaction feeling that it is a win-win-win. Irgens does this by maximizing the bottom line, by minimizing unnecessary risk and by involving both the hospital and physicians from the concept and design to build-out and move-in, said Mark F. Irgens, CEO & president of Irgens.
Identifying Opportunity: Physician Owned MOBs
Over the course of several months, Irgens and a core group of physicians discussed the concept for a physician-owned medical office building in the expanding suburbs of Milwaukee. A new hospital in the immediate vicinity promised to anchor what would be a growing medical park, and a prime opportunity for the development of a multi-specialty outpatient clinic was there for the taking.
After researching the idea and meeting with key stakeholders, Irgens identified a greater opportunity for the project and successfully approached ProHealth Care, Inc. about developing an ambulatory care center on their outpatient campus.
To achieve desired tenancy with an understanding and respect for physicians’ issues, Irgens recommends developers coordinate with health providers on physician recruitment efforts and create a strategy to target preferred physicians.
The facility was to be developed under an ownership structure that allowed for investment in the building by the healthcare provider, physician tenants and the developer. Several key tenants and a critical mass of pre-leasing were obtained, including a large orthopedic group that today is the anchor to a musculoskeletal institute.
Thirteen area physicians signed on as investors in the building. The physician investment opportunity was a major driver in the project and represents approximately 40 percent of the ownership group. The pre-leasing period lasted approximately five months and resulted in a 67 percent pre-occupancy rate. A pivotal point was the signing of a major orthopedic group, which attracted other specialties to the facility. Additionally, ProHealth Care invested its own capital into the project, which created a strong strategic alignment with its key providers.
The resulting Oconomowoc Physician Center is comprised of a two-story, 30,000-square-foot Musculoskeletal Institute and a three-story, 54,500-square-foot Physician Office Center, complementing the existing 22,000-square-foot primary clinic.
The Oconomowoc Physicians Center in southeastern Wisconsin was 67 percent pre-leased and has a physician ownership group of 40 percent.
The institute offers a variety of services, like orthopedic care, physical and occupational therapy and pain management. Other tenants include a diagnostic imaging center, a joint venture endoscopy procedure center and medical office space for private practice physicians. A full-service diagnostic imaging center offering open MRI and an endoscopic and minor procedure suite are also part of the center.
Aligning Two Health Systems in One Facility
When Children’s Hospital and Health System (CHHS) in southeast Wisconsin sought to expand its footprint beyond its main hospital campus in metro-Milwaukee, Irgens implemented another strategy: aligning two healthcare providers in one facility. Already developing a new outpatient care center in a rapidly growing area for Froedtert Health, Irgens identified an opportunity for the two groups to collaborate and establish a destination campus for ambulatory care in a key target growth area.
The first step was successfully brokering land use, sale and lease agreements between the two parties, which proved to be relatively straightforward given the complex city and neighborhood negotiations. Within seven months of finalizing the deal, Irgens performed due diligence on a site that had many challenges (including wetland and environmental issues), closed on the land and broke ground. The regional teaching hospital and academic medical center Froedtert Health and the Medical College of Wisconsin provided the equity to develop and own the project, which was in turn leased to CHW. The entire transaction and resulting project was conceived and implemented by Irgens as ownership and development manager.
The Children’s Hospital of Wisconsin Clinics – New Berlin combined two non-competing health systems into one facility, attracting new physicians with a broad range of specialties and establishing a destination campus for ambulatory care.
Irgens assembled a team to design and construct a three-story, 74,600-square-foot pediatric and specialty outpatient clinic for CHHS in the 34-acre medical office park. Children’s Hospital of Wisconsin New Berlin Clinic opened in August 2009. The facility offers a variety of pediatric primary care and specialty care outpatient clinics, a four-room pediatric sleep lab, pediatric diagnostic imaging center and physician and administrative offices.
But perhaps the biggest indicator of the project’s success is that not only did Irgens bring two providers together in one facility but it also attracted new physicians with specialties offering a broad range of clinical and diagnostic services that parents might seek for their children.
Ultimately, no two projects are alike, no matter what the opportunity might be — an on-campus medical office building, an off-campus ambulatory care facility or a physician-led real estate initiative. However, the secret to a successful project is consistent across the board. It’s about identifying opportunities in strategic markets, working together with all stakeholders throughout the process, and investing heavily in the development of high-quality facilities from the ground up.
Keys to Healthcare Development
The key to any successful healthcare development partnership is joint-value creation. A feasibility analysis is intended to optimize project costs and maximize future revenue opportunities by focusing upfront on project attributes that are critical to achieving ultimate project success. The following upfront elements are critical in the healthcare development arena:
To overcome challenges in the Valley West medical building project, Irgens sought traditional debt financing through long-standing lending partners and raised equity through physician tenants.
Market Research & Analysis
Identifying Competitive Opportunities
Components of the analysis include demand forecasting, competitor studies, local real estate market analysis, site and building plan studies, surveys, appraisal evaluations and more.
Site Selection & Analysis
The “Right” Location
To ensure a potential site is properly aligned with the growth goals and objectives of the health system, Irgens performs a thorough analysis to evaluate the location using a critical set of factors.
Market Rental Surveys
Meeting The Fair Market Value Test
One main tool used by Irgens is a surveying process for both on-staff and competing physicians that helps understand current rental rates that drive project pro forma.
Physician Marketing & Leasing
Achieving Desired Tenancy
This is perhaps the most critical element. To achieve desired tenancy with an understanding and respect for physicians’ issues, developers should coordinate with the health providers on physician recruitment efforts and create a strategy to target preferred physicians.
Creative Use of Capital
Sometimes clients desire to finance projects off balance sheet. In this case, it is critical to develop custom financing, ownership and/or lease structure that fit the health system’s business objectives.
Functional & Space Programming
Right Size, Right Use
When planning a new facility for a healthcare system, including all key providers allows for extensive information gathering and sharing, to program highly functional space that will be conducive to all short and long-term needs. Oftentimes, healthcare providers are not highly experienced in all facets of design, construction and engineering.