The lending community has a much stronger appetite for healthcare facilities located on hospital campuses versus off campus because they are perceived as less risky investments.
That’s the consensus of a panel of healthcare finance specialists who assembled Dec. 1 at the InterContinental Hotel in Atlanta for the Interface Medical Office: Southeast conference.
Sponsored by France Media, the conference attracted more than 160 industry professionals who gathered to network and attend panel discussions on a range of timely topics.
“There’s a meaningful spread of default risk between on- and off-campus deals, and lenders certainly take that into account,” said John Nero, a panel participant based in New York and associate with Hammond Hanlon Camp, an investment banking and financial advisory firm.
Despite the lending bias, Jim Barnes, senior vice president of healthcare real estate at Regions bank in Atlanta, said that the finance community has demonstrated a willingness to fund off-campus facilities on a selective basis.
For example, NorthMarq Capital arranged $3.75 million in first-mortgage financing for Dean Lakes Medical Office Building, an off-campus property in Minneapolis in October. Bremer Bank-Minnesota provided the loan.
Still, the emergence of multi-specialty clinics off campus is a trend that hasn’t yet gained enough traction to tip the scales. “There is simply not a large enough sampling of off-campus properties to really compare with the market preference for on-campus,” said Barnes.
Steve Hewett, senior vice president of The Sanders Trust in Birmingham, Ala., which assists healthcare systems with their real estate needs, said “the bias is more about the lack of the right type of product off campus.”
A multi-specialty clinic located in the suburbs with ambulatory capabilities is ideal, but Hewett said the demand for that type of product outstrips the supply.
The high demand for medical office buildings is cause for some concern, concludes Emerging Trends in Real Estate 2012, a joint publication of the Urban Land Institute and PricewaterhouseCoopers.
“Health care trends — rising older demographics and skyrocketing costs — make medical office space a logical play,” wrote the author of Emerging Trends. But with limited opportunities to invest in smaller medical office buildings, this niche sector “could easily be overwhelmed by capital.”
The breakout session began with each panelist providing an overview of transaction volume at his company and loan terms in today’s market.
Borrowers who are either acquiring or seeking to refinance medical office buildings today can expect loan-to-values ranging from 65 percent to 75 percent, 5- to 7-year terms and approximately 5 percent interest rates.
The panelists also addressed the art and science of underwriting the value of their transactions. Some of the panelists, like Barnes, rely on a third-party appraisal team.
Erik Tellefson, senior vice president of loan originations at GE Capital working out of Chicago, said that his company takes a different approach. “We do get third-party evaluations, but GE puts its emphasis on internal evaluation.”
Jim Groves, vice president of Healthcare Capital Markets at Siemens Financial Services in the Chicago area, looks mostly at the equity side of the equation when vetting a potential deal. “The thing I care most about is if we have sufficient equity from the borrower,” said Groves.
As part of the “lightning round” portion of the program, moderator Scott Evans, managing director of Cain Brothers & Co. in Atlanta, asked the panel to predict where mortgage rates, unemployment, the European debt crisis and unemployment will stand a year from now. Here are their responses:
* Mortgage rates: Groves — Higher; Nero — Steady; Hewett — Steady; Barnes — Unchanged
* Unemployment Rate: Groves — Steady improvement; Nero — Modest improvement; Hewett — Modest improvement; Barnes — Higher
* Presidential Election: Groves — Obama; Nero — Republican; Barnes — Obama
* European Debt Crisis: Groves — Unresolved; Hewett — Unresolved; Barnes: “I think the European Union will figure out a way to emulate the Americans and kick the can down the road for a few years.”
— John Nelson