Guest Column: Obamacare and Commercial Real Estate

By Lee Eastwood

This will be a four-part series on practical application of how the Affordable Care Act will impact commercial real estate.

There is no question commercial real estate will be impacted by the implementation of the Affordable Care Act. The greatly increased numbers of insureds coming online in America in 2014, coupled with the influx of Baby Boomers reaching retirement age, is already forcing changes to the healthcare system that will trickle down to the buildings housing various functions. Property owners and brokers will need to adapt to this rapidly changing market, but they will certainly encounter benefits, as well.

Let’s start with hospitals.

There will be consolidation. Because of greater pressure to keep down the cost of healthcare under Obamacare, hospitals will receive less reimbursement for services. Some of the one-off, smaller hospitals will not be able to adapt to be able to stay in business. Many of them will be purchased or taken over by the larger hospital systems.

Since some of these smaller hospitals are functionally obsolete, they may be closed or moved to another location. If the hospital moves or is closed down, the surrounding medical officers and services will be drastically affected. The loss of value could be immense.  Typically, physicians want to be near the hospitals. If the hospital moves, so will the physicians housed in the medical office buildings nearby. When considering a purchase of hospital campus property, make sure you perform due diligence on the viability and functionality of the hospital.

To take this one step further, if the hospital is in good financial shape but the buildings themselves are not functional, the hospital may be moved to another location, perhaps an entirely new campus. Again, this will leave behind vacant buildings that will lose value. It will take some smart developers to find ways to repurpose those building and improve their value.

Another change underway is an interest among hospitals in purchasing medical practices. By the end of 2014, according to forecasts, 80 percent of practices will be owned by hospitals.

From a brokerage standpoint, if you have had a relationship with medical practices that are purchased by a hospital, you will have to form new relationships with the hospital that has replaced the doctor or practice administrator as the decision maker.

Then there is the question of value. When a practice is purchased, typically, the real estate is part of the deal. If the practice owns the building, they are probably paying themselves rent that is higher than market. When a hospital owns the practice, the Stark laws come into effect. They state that a hospital cannot “pay” a doctor to refer to the hospital.  What does that mean for the price the hospital pays the doctors for that building?  They can’t pay over market.

The same is true for a lease. Instead of the doctor’s being on the lease, usually personally, the good news for owners is that they will now have the hospital on the lease, which can be much stronger than an individual medical practice. In that case, when the lease expires and the hospital is deciding what to do with the space, they are not allowed, according to the anti-kickback laws, to arrange for the space to be valued at less than market rates.

Next quarter, I will look into the way medical and hospital space is used under the new ACA laws.

Lee Eastwood is president of Eastwood Real Estate Services L.L.C., an Atlanta-based, women-owned healthcare commercial real estate firm whose clients include hospital systems, physician practices, MOB owners, dentists and veterinarians. They can be reached at 770-390-9970 or at www.EastwoodRES.com.