The Strategic Role of a Developer in an Orthopedic Practice

Self-Development VS Using a Developer
Orthopedic surgeons have the financial capability to acquire financing, raise equity, own 100% of an asset and can hire a qualified architect and contractor, so why use a developer?

What the self-development model doesn’t cover:

• Municipal approvals for site plan, zoning, and building permit.
• Project delivery guarantee by General Contractor (GC) before completion of schematic, design development, and construction drawing and the setting of a completion date.
• The GC will only guarantee construction cost, not total project cost and construction loan.

Managing the Project-Time and Role
Orthopedists already have a full-time job, and the time requirement to manage a large real estate project is significant. 

• Developers are willing to bring capital for design, legal fees, and other third-party expenses, and guarantee completion date based on the tenant seeing their first patients.
• Developers will guarantee rental rates/tenant improvement allowances early in the project planning and assume the risk for interest rate increases, construction financing, pre-leasing, entitlements, and de-risk elements of the project including, but not limited to construction cost increases, and schedule delays for tenants.
• Developers can add value in the planning and programming stage, helping the physicians optimize facility size with an eye on cost of occupancy and value of the asset.
• Contracts and other legal documents required to have a financeable project and limit risk are a must have. An experienced real estate developer with in-house counsel is a significant value add.

But What About Ownership?
Orthopedists today are facing pressure on reimbursement and need to find alternative revenue. Real estate can be one avenue to harvest just that.  NexCore, a leading healthcare developer, offers physicians an array of co-ownership options that enable the physicians to invest significantly in the project, retain decision making and control, as well as shielding physicians from personal guarantees and debt liability. Developers take this calculated risk on behalf of the partnership and in essence, they are compensated for this risk and their project delivery expertise.  In a typical 60,000 SF project that involves a clinic, imaging, therapy and an ASC, the total project cost is likely to be $375/SF or $22.5M. The equity requirement for efficient financing might be 30% to 40% of total project costs or $6.75M to $9M.  In addition, there could be another $7M to $8M in tenant improvement costs as well as Furniture, Fixtures and Equipment. Typically, the operating company for the surgery center will provide a higher return than the real estate investment, so many physicians choose to individually invest more in that than in the real estate. NexCore has structured ownership models to accommodate the amount of equity the physicians want to invest and provides options where the physicians can remain as owners long or short term.  Having a partnership with a developer, like NexCore, brings value to the physicians by providing significant alignment between the parties through a joint venture on real estate.

“We identified NexCore early on in our search for a developer. They had the size, the bandwidth and the experience we needed to handle the unique regulatory and compliance challenges we faced with our development,” says Dr. Mack, an orthopedic surgeon at Doctors’ Pavilion located on the HCA North Cypress campus in Houston, TX. “We had a very specific vision for what we wanted to do and NexCore was flexible and willing to do whatever it took as our partner.”

Conclusion
When planning a new orthopedic Center, the physicians should consider interviewing, and working with, seasoned developers. Experienced developers will provide significant advantages to the contractor/architect delivery model, added expertise, reduction of risk, and leverage of your valuable time.