A Joint Venture “Free Equity” Business Model

For Healthcare Providers

The American health care real estate sector is valued at $750 billion. This market, while driven by healthcare providers, is primarily owned and controlled by financial institutions and investors, not by the healthcare providers who create the value. Healthcare Realty Development Partners (RDP) specializes in developing healthcare retail/office buildings with healthcare providers as joint venture partners. RDP’s joint venture program provides the opportunity for healthcare providers to earn “free equity” in real estate by participating in the development of, and occupying, real estate that is custom designed for their specific practices. RDP does all the work and provides 100% of the funds needed to complete these buildings, but the rewards are shared between MCI and its physician partners.

The Facts:

 Healthcare professionals are among the most reliable and desirable tenants.

 Healthcare practices tend to stay in the same location for long periods of time.

 Healthcare offices demand higher rents than general office space.

 Tax benefits and increases in value belong to the landlord.

 Healthcare office buildings are marketable to a variety of investors.

 Healthcare office buildings demand higher prices than most other real estate.

HOW THE PROGRAM WORKS

THE PARTNERSHIP:

A partnership consisting of healthcare provider partners and RDP will be created for the purpose of developing and occupying a new, custom-designed healthcare retail/office building.  The partnership is structured as a limited liability company (“LLC”) in which “partners” are commonly referred to as “Members.”  The example LLC in this summary will have two partners (Members) and is called XYZ Healthcare Professional Center, LLC.  Membership in the LLC will be divided between the Healthcare Provider owners/tenants and RDP. 

FREE EQUITY:

Healthcare providers earn “free equity” by executing long term leases on the portion of the property that they occupy.  Rents are at current market rates and reflect the competitive market conditions for a particular submarket.  Each healthcare provider will lease space according to his or her specific needs and earns his equity proportionate percentage of the property.  Therefore each tenant is also an owner in the property and shares in all of the benefits of ownership.

MANAGEMENT:

RDP will be the Managing Member of the LLC.  RDP will provide the financing for the land acquisition, design and construction and invest the cash equity required by the construction Lender. 

BUILDING AND OFFICE DESIGN:

The interior space can be as simple or as elaborate as the healthcare providers prefer.  Each tenant/owner will be given an equal finish out allowance.  Finish out above the allowance will be at his or her expense. 

RESPONSIBLITIES OF MEMBERS:

RDP

• Provide ALL construction debt and equity for the new healthcare retail/office building

• Oversee architectural and engineering design of building

• Manage the project’s approval process with various government agencies

• Apply for and obtain applicable special use permits

• Develop parking layout and dedicated (private) parking for Members

• Oversee office designs and interior design selections

• Cost management and final budgets

• Manage construction of building, common areas and site improvements

• Manage construction of  interior improvements

• Prepare leases.

• Prepare quarterly and annual project accounting reports for all Members along with tax return information.

• Own 65% of the new medical office building

Healthcare Providers

• Approve space planning designs

• Meet with design team for office, interiors and technology design choices

• Healthcare providers execute leases.

• Own 35% of the new healthcare retail /office building

DISPOSITION ALTERNATIVES

ALTERNATIVE 1 - SELL THE BUILDING

The completed, fully leased real estate is sold to a real estate investment trust or other investor.  Because the building is leased to healthcare professionals at market rates, the property will command a high price, and its sale is likely to be very profitable for the Members of the joint venture group.

The purchase price is a function of the income that the building will generate.  This is called “Capitalization Rate” or “Cap Rate.”  This is the financial rate of return an investor would receive based upon the relationship between the annual lease income of the building and its purchase price.  For example, a 10% Cap Rate would be the result of investing $100 and receiving $10 per year in net operating income.  Buildings that are deemed riskier to investors are generally sold at a higher Cap Rate, and buildings that are viewed by investors as low risk generally sell at lower Cap Rates.  Investors look at the age and quality of a building, the credit worthiness of its tenants and the lengths of the leases to determine the price that they are willing to pay.  Because healthcare professionals tend to be very stable, fully leased medical office buildings in the current market often sell at prices that generate Cap Rates to their investors of 6% to 7%.  The lower the Cap Rate, the higher the sale price of the building.

ALTERNATIVE 2 - HOLD THE BUILDING FOR INVESTMENT

The completed, fully leased building is held for long term investment.  The healthcare providers will occupy their new healthcare retail/office building and pay rent to XYZ Healthcare Professional Center, LLC.  The tax benefits of ownership, the monthly operating cash flows and the appreciation in value will then go to the LLC and its Members.

Of course, the building could always be sold to a real estate investment company in the future.  The market conditions at the time of sale would dictate its value and the resulting profit to the LLC.

ALTERNATIVE 3 – BUY OUT

The Members of the Healthcare Provider Group could elect to buy out RDP and own the XYA Healthcare Professional Center alone.  The group may elect to purchase the interest of RDP for the same amount of money that RDP would have received if the building had been sold as provided in Alternative 1, above.

ALTERNATIVE 4 – COMMERCIAL CONDOMINIUM CONVERSION

CONDITIONS AND VARIATIONS:

From an income approach, the value of the property at a 6.5 capitalization rate is a function of the lease rate.  The higher the lease rate the more valuable the property.  An increase in the lease rate over the term of the lease would have a positive effect on the value.