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Can Selling an ASC's Real Estate Enhance the Surgery Business?

The business concept of selling your ASC building, then renting it from a real estate investment company such as The Sanders Trust, is an interesting one. An excerpt of an interview with Bruce Bright, the director of business development for The Sanders Trust, follows below. To see the full text in the Jan./Feb. issue, be sure to subscribe to Becker's ASC Review. The business concept of selling your ASC building, then renting it from a real estate investment company such as The Sanders Trust, is an interesting one. An excerpt of an interview with Bruce Bright, the director of business development for The Sanders Trust, follows below. To see the full text in the Jan./Feb. issue, be sure to subscribe to Becker's ASC Review.

Stephanie Wasek: What is the property management model you follow?
Bruce Bright: Our business is to be a long-term holding company; our only focus is to develop, acquire and manage medical offices buildings and ASCs. We buy the real estate - the physical building and land - at full market value and lease it back to the ASC business entity on a long-term basis. Essentially, we become the landlords.

SW: For background, can you speak briefly about types of leases and how they work?
BB: On one end of the lease spectrum there's the triple net lease. In that model, the tenants are responsible for everything. They pay a rent check each month to their landlord, and everything inside is their responsibility. The tenant manages electric, water, maintenance, they're in control and can keep expenses to a minimum.

On the other end is the full-service lease, where the tenant pays one rent check at the end of the month, but the landlord responsible for everything. This may sound as if it's better, but the landlord has to charge in order to prepare for the worst-case scenario. As a result, the rent will be much higher, because the landlord is charging what he thinks the overall cost might be for all issues, major and minor. This arrangement is not typical in a single-tenant ASC building.

We prefer triple-net leasing, letting the tenant better control costs, even though we get a smaller rent check. There are a million ways to modify any part of a given lease to fit a group's specific preferences and needs.

SW: Isn't real estate ownership preferable?
BB: Well, there are pros and cons to both sides. While pride of ownership can be a rallying point and there is some appreciation in real estate, many issues in commercial building ownership overshadow those advantages. So, in most cases, I'd advise physicians to lease their building.

First of all, there is a risk in real estate ownership: Physician-owners have to ask themselves whether they're willing to put personal capital at risk on bricks and mortar, whether they're willing to sign a personal guarantee on a mortgage and be liable for that money.

They also have to ask whether real estate provides a better return on investment than other similar-risk ventures. ROI on real estate is about 8 percent, but you get more than that back on a surgery business itself; it's never that low. Physician-owners might, therefore, prefer to put that money into the higher-margin asset, the ASC business. Real estate ownership isn't essential to the delivery of healthcare; surgeon-owners might rather reinvest the money in higher-margin, mission-critical activity, such as MRI or other equipment.

Even if they have that capital and are willing to take the risk on bricks and mortar, there's also the matter of whether they're willing to tie it up long-term on an ill-liquid investment. 

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