A ‘build to suit—lease back arrangement’ can help healthcare facilities reduce debt while maintaining programs
Capital partnerships come in a variety of different shapes and forms. They mean different things to different people. A growing trend in today’s healthcare market is utilizing capital partners and/or developers to provide facilities for hospitals and healthcare organizations. This delivery process is known as the “build to suit—lease back arrangement.” Many times, we think of a hospital as a single entity in a community, but most often, these organizations have many sub-partnerships with other healthcare providers or equity partnerships.
My first encounter with this type of partnership was in 1998 when I was asked to design an ambulatory heart center for a major hospital. This arrangement was unique because we were working for the developer (capital partner) and working closely with the hospital to develop the program, special space requirements, and the guiding principles. Because we were working with a private developer, we were able to keep the cost of construction down and deliver the project six months ahead of schedule. This project became a huge success for hospital and the community.
Capital partnerships provide a unique solution that addresses the cost challenges that hospitals and healthcare facilities face and allows them to develop new facilities that still meet their programmatic needs. Utilizing a capital partnership with a private developer helped a major hospital to provide its community with a new ambulatory heart center.
Several years after the completion of the heart center, I was asked by the same developer to be a partner to develop an ambulatory women’s center for a rural hospital. This was my first-hand look at the workings of a capital partner delivery approach. This project was to be located adjacent to the existing hospital, and because the hospital owned this property, it presented many challenges. The hospital board voted to sell us the property at market rate to build the clinic.
After many proposed design options and rent structures (at no cost to the hospital), it became obvious that the hospital was not going be able to afford the desperately needed clinic. So, we came back with a solution—we recommended that the hospital infuse capital into the project by selling us the land for half of its appraised value. By getting the land at a lower rate, it provided a lease structure that the hospital could afford, and the clinic would be turned over to the hospital in 30 years. This was a great win for both parties.
Before determining if a capital partnership is right for your organization, I recommend thinking through the following:
- Finding the capital partner that is right for your organization. Does this partner share the same vision for your organization? Will this partner be willing to be flexible in the future—additions, alterations, or subleasing?
- Will you be willing to commit to a long-term lease? These types of projects are unique and take a lot of planning and capital to develop, and most projects come with a longer lease so that it amortizes out for the developer. Leases from 10 to 15 years are not uncommon.
- Can you sell it to the stakeholders in the organization—hospital board, board of trustees, etc.?
The ambulatory heart center’s flexible design allowed the hospital to successfully complete a future expansion.
With the increasing cost to provide healthcare and the many difficult challenges that hospitals are faced with today, maintaining the quality of care is even more challenging. The capital partner delivery approach may be the solution to reduce debt and keep debt off the balance sheets, while maintaining programs and great facilities.
Many times, hospitals or healthcare providers just need some guidance and maybe an independent look at possibilities that may be an option. The team at Stantec can help define your needs with our advisory services and capital partners.
About the AuthorMore Content by Don Ness