An alternative to real estate ownership: selling a property doesn't mean losing control. A variety of options will let you maintain control while freeing cash to invest in core services

Healthcare Financial Management, May, 2004 by Sydney Scarborough

One-third to one-half of total healthcare organization assets typically take the form or land and buildings. Yet many organizations could do a better job of optimizing the considerable financial, operational, or strategic potential of these huge real estate investments. Office buildings, surgery centers, and other outpatient facilities can tie up capital and drain precious management resources. Hospitals can obtain capital from their real estate assets by traditional mortgage financing or through some form of monetization, such as a sale, joint venture, or condominium structure.

If the hospital's properties have vacancy issues or the hospital occupies a large percentage of the building, monetization may not be the best option. A fully occupied building will generate more cash flow and a greater offer from the buyer. So if vacancy is the issue, leasing the building prior to sale would be advisable. And if the hospital occupies more than 55 percent of the available space in the building for clinical or administrative purposes, the cost of leasing that space from a third party may outweigh the benefits of a sale.

After conducting strategic reviews of their real estate holdings, many healthcare organizations are finding that alternatives to outright ownership and in house management of outpatient facilities can significantly improve real estate asset performance. Additionally, depending on your assumptions regarding the use of proceeds and the returns you can achieve from rein vesting in securities or service lines, you may be able to improve cash flow, cash position, profit margins, and return on assets. After performing a financial pro forma transaction and a break even analysis for alternatives to ownership, healthcare financial managers will be armed with data to help them choose the best option. One option is to monetize, or sell the property title, to investors with a ground lease or other arrangement to retain control of the asset. When choosing this option, healthcare organizations often transfer facility management to the investor or a management company.

Some benefits of monetization include:

> Capital infusion. Selling property with long-term ground lease options generates cash, often millions of dollars, for other investments while retaining control of strategic properties.

> Increased access to capital. Taking underperforming properties off the books can boost debt capacity by reducing debt. In addition, rating agencies will take this information into consideration when calculating financial ratios and credit ratings. If not applied to debt, the cash proceeds can be held in liquid investments to enable healthcare organizations to increase their leverage.

> Improved cash flow. Investing the cash proceeds in higher yielding assets can bring in hundreds of thousands of dollars annually. And the healthcare organization is no longer responsible for capital improvements to the buildings.

> Enhanced management effectiveness. Outsourcing facilities management can free healthcare organization managers to focus on core health services.

On the other hand, by monetizing real estate, the healthcare organization does not retain total control of the buildings after the sale. For example, although the new owner is limited to leasing to physicians on staff and leases are written to prevent tenants from competing with the healthcare organization, the healthcare organization does not have absolute control.

Financial benefits from monetization can be realized without giving up control of strategic locations and facilities. The sale of strategically valuable properties is typically subject to long-term ground leases or partnership agreements that give the organization the right to determine what services are offered in the property, how it will be developed, who the tenants are, and right of first refusal to repurchase the property if the new owner or partner decides to sell.

Achieving these results requires that real estate holdings, uses, and operations be examined and restructured to maximize financial and operational support for the healthcare organization's strategic plan. Locations and facilities are retained or disposed of depending on whether they can support core healthcare service and market goals. Monetizing retained properties is an option for meeting strategic initiatives, such as investing in new technology, inpatient expansion, or needed equipment.

Such alternative ownership arrangements involve long-term partnerships with investors and/or property managers. To succeed, the partners need to have significant commitment to health care property ownership and/or management, and the transaction should be carefully structured to achieve the organization's goals. Eight steps can lead you through the process of choosing a partner and closing the deal.

Step: Consolidate Internal Support

A monetization effort starts with building enterprisewide commitment to the strategy's objectives, goals, and priorities. Critical questions include: