MOB MENTALITY
Medical office buildings are interesting investment opportunities with some unique considerations for developers .
Every area of every market in commercial real estate is subject to changing trends large and small — from a small tweak in how people can order retail , for instance , or the complete upheaval of a business model thanks to a global pandemic . But medical office buildings ( MOB ) are an especially interesting opportunity for developers because of their long-term stability . We will always need medical space . Demographics tell us baby boomers are continuing to enter retirement years , which will require an even greater need for medical services . Even with the widespread adoption of telehealth in the wake of COVID-19 , increased consumer demand still trickles down to office visits .
Looking at a specific case study is a great way to start the discussion of what commercial real estate professionals can do to take advantage of opportunities that arise with MOB developments . As with any project that involves millions of dollars and plenty of resources , complexities or unique characteristics in any deal will arise . But answering a few initial questions can help you understand the major factors involved in the early stages of MOB development .
THE CASE FOR MOB For our hypothetical case study , let ’ s assume Larry Pass , MD , is an internist and Mary Peach , MD , is an orthopedic surgeon . They ’ re both on staff at a few local hospitals , but Health Co . Hospital has communicated that it would like to bring them aboard in a more meaningful way . Health Co . has excess land on its major campus , meaning a MOB could be built on-site with the two doctors potentially having ownership . For the doctors , the idea is appealing because they are tired of paying rent , and they ’ re both familiar with other doctors greatly benefiting from owning real estate .
Profit Potential for a �ee Developer Case Study
Medical office buildings ( MOB ) are an especially interesting opportunity for developers because of their long-term stability . We will always need medical space .
One of the nuances in a MOB development is understanding unique medical concerns such as Medicare rules and the socalled Stark Law , which aims at prohibiting doctors from realizing non-market benefits from a hospital to discourage self-referrals . In addition to helping them navigate the regulatory dos and don ’ ts , your role as a skilled CRE professional in this area includes helping Peach and Pass get a better understanding of what ’ s feasible for two professionals in their situation . One of the first questions for the doctors is pretty simple : Would it be better to lease the space or own it ?
Like first-time homebuyers , Peach and Pass will need to consider economic and subjective pros and cons . How long of an investment do they expect this to be ? Are they realistic in their expectations for building maintenance , operations , and management and how would they differ if they lease or own ? How long do they expect to practice ? Do they expect to have growth needs ?
50,000-sf Medical Office Building |
Cost |
Turnkey Construction Cost ( psf ; without development fee ) |
$ 204.44 |
Total Cost ( without development fee ) |
$ 10,222,000 |
Development Fee |
5 % |
Total Fee |
$ 511,100 over 24 months
($ 21,296 per month )
|
Once they decide it would be beneficial to develop and own the MOB , the doctors then ask what your role , as the MOB development expert , will be in the project . Here , there are two common possibilities — an investor / developer and a fee-based developer . As expected , the investor / developer is a partner with the doctors , where some of the payment comes in owning a piece of the pie , while a fee-based MOB developer is compensated for the time and energy spent putting the project together . That fee , which is separate from any compensation for acting as broker or leasing agent down the line , is agreed to upfront , before the project gets off the ground .
In practice , MOB developers in both roles do much of the same work . In either approach , you will need to agree on a development agreement that will lay out the terms of how decisions will be made and what each party can and will do . This agreement will cover things like hiring architects , attorneys , accountants , and contractors ; securing entitlements and zoning approval ; creating budgets and a pro forma ; securing financing ; and deciding on ongoing building management . In addition to this document , investor / developers will also require an operating agreement with the other parties — in this case Peach and Pass — to detail the building ownership relationship because part of the compensation is directly tied to the MOB .
CALCULATING OPPORTUNITY Let ’ s pencil things out in both cases to see the best path forward for you as the CRE expert in this MOB development . First , let ’ s examine the fee-based option to see what opportunity for profit is available in a more straightforward MOB . Because you ’ re getting paid as a function of time , it ’ s important to understand just how long this project may take . For our case study , let ’ s assume the acquisition will take three to six months , design will take another three to six months , permitting and bidding will take a month or two , and construction can take from six to 15 months — in addition to the lease-up which will start immediately . For a rough estimate , the MOB development from start to finish will be in the neighborhood of 24 months .
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34 COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE SUMMER 2022