The traditional financing methods in medical real estate development are becoming increasingly difficult under the pressure of today’s capricious market. Now more than ever, accessing capital through creative and cost-efficient structures is key to successful execution and delivery of your new medical real estate facility.
Below, we discuss how we arrived at this moment and, more importantly, how to take advantage of the resourceful financing options at your disposal.
The current market and its impact on financing medical real estate development
It’s been an unpredictable 12-18 months — to say the least. Higher interest rates, five-plus years of compounding inflation, and the sticker shock that comes with purchasing just about anything are all symptoms of the market’s volatility.
To mitigate the impact of these macro trends on your business, you’re being asked to do more with less, like leverage your balance sheet to fund operations and capital projects — all in respect of existing, higher acuity assets. And yet you still want and need to respond to the undeniable shift from inpatient care to outpatient care — as well as grow your geographic footprint and patient base — by developing new ambulatory care and outpatient centers.
Creative financing solutions in healthcare real estate
Further complicating matters, the menu of financing options we’ve all grown accustomed to (in medical real estate and beyond) is shifting alongside the market. This current dislocation is clearly making it more difficult to choose between the traditional options of leasing vs. owning your real estate.
It’s time to embrace the notion that, where others might see obstacles to their real estate challenges, you see opportunity. Welcome to the gray area of neither leasing nor owning — but both. In layman’s terms, one might describe this gray area as the rent-to-own option. Qualified health systems can now access a bespoke structure that allows for short-term leasing of their new medical outpatient facility at a much lower occupancy cost. They can also preserve maximum flexibility as well as optionality for transition into an ownership position at a later point in time.
3 tips to achieve flexible financing for your new medical outpatient facility
This kind of flexible, firmly-in-the-gray financing requires expertise and innovation. Here are three tips to achieve it:
1. Proactively seek your best financing option
You want to find the financing option that aligns with the strategic objectives of your business and your medical real estate development project. That starts with knowing the right questions to ask during the early planning stages.
An above-board car broker might decipher whether owning or leasing a car is right for you by asking how often you drive, how tough you are on your vehicles, if having the latest detailing is important to you, and so on.
Similarly, someone experienced in financing medical real estate developments will ask questions like:
- Do you prefer a higher rent in exchange for more flexible terms or a turnkey solution?
- Would you rather have a longer-term lease to drive down your end costs?
- Do you favor long-term ownership of the asset?
An expert will also ensure everyone involved has a solid understanding of what property ownership truly entails. Owning a property means being solely responsible for the asset, including paying property taxes and keeping up with common area maintenance.
Proactively and thoroughly gauging the answers to these and other crucial questions is how we eventually land on the custom financing structure that gets your project off the ground.
2. Think outside the box to secure effective funding
When it comes to financing any asset, banks only “win” in one scenario — you access a loan through them. Others in positions to finance projects often think in similarly black-and-white terms — to their and your detriment.
Consider how master-planned communities function. If you want to live in one of these communities, you’re presented with options A, B, or C for home design and options X, Y, or Z for buying or renting said designs. Period.
An effective partner wants more for you than extreme or off-the-shelf financing options when it comes to standing up a new medical outpatient facility for your healthcare system. They want everyone to win by securing the best outcome for each stakeholder. And they’ll be creative to get you there.
The NexCore team pulls levers based on your unique needs. For example, we might keep your costs down by:
- Matchmaking. We have long-standing relationships with debt and equity providers who are knowledgeable and experienced in medical real estate development. So, we’re able to identify your ideal solution when it comes to who and what will finance your project.
- Leveraging economies of scale. We can leverage the quantity and size of deals we do across the country to keep costs at bay on any one deal.
Additionally, we always adapt with the market. For example, we know important deal points like lease terms, purchase options, and rent escalators are currently evolving. We offer the most effective custom financing available given the present market by looking beyond the status quo.
3. Move toward your financing decision with conviction
Capital markets evolve rapidly. So while there are always options when it comes to financing your new medical outpatient facility, the options available today won’t be available in perpetuity.
That’s why being decisive about your financing choice and maintaining your conviction once you choose a path are critical to project success. Indecision or second-guessing in an already variable market leads to a less cost-effective and outcome-oriented venture. On the contrary, decisiveness and timely action make for the most efficient, effective project possible.
A trusted healthcare developer can make the difference between project success and failure
There are countless organizations out there ready to finance and construct a building for you. But at NexCore, we work exclusively with the healthcare industry. We understand the mindset of the health system administrator, patient, physician, employee, family member, and more. It’s this understanding that allows us to effectively design medical facilities and optimally finance them.
With NexCore as your partner, you’ll gain access to the relationships we’ve cultivated through decades of financing development deals just like yours. Having conviction about your financing plan doesn’t have to be intimidating when you have a pure-play healthcare real estate developer guiding the way.
Written by: Michael Ray, Chief Investment Officer and Craig Fimple, SVP, Treasure & Capital Markets