Surgery centers are comprised of two distinct parts that are forever connected. The first is the business that operates the ambulatory surgery center (ASC) and the second is the facility that the surgery center occupies. The real estate project, whether it is ground-up construction or a renovation of an existing building, will need to follow a clear path in order to be successful.
Hire Legal Counsel
It is very important in the ever-changing political environment to get the proper legal advice. This is true whether you reside in a certificate of need (CON) state or not, doing a joint venture, or considering a specialty or acute-care hospital. An attorney that specializes in surgically- based facilities can help navigate the changing legal climate. The attorney will also be needed to complete the legal entities for the surgery center and the real estate as well as preparing the private placement memorandums.
Hire a Qualified Management Company
The function of the management company in this initial phase is to analyze the number of cases the physicians will bring to the surgery center as the backbone for a feasibility study. This is the most crucial step as it is important that the business makes financial sense. It is also critical to evaluate the number and type of cases in order to size the project. This is not a step that can be accomplished by a physician or an administrator. As is the case for a financing source relying on an appraiser for real estate values, the financing source is looking for a feasibility study completed by a management company that has been involved in numerous successful projects.
Hire an Architect/Developer
At the same time the management company is conducting interviews to develop the feasibility study, the architect is conducting interviews with the management company and physicians to provide preliminary floor plans. It is important that the architect/developer works with the management company to size and layout a real estate project that fits within the budget of the feasibility study. I call this designing to a budget — which is different from designing and hoping that the project fits within the financial constraints of the surgery center. As was the case with the management company, hire an architect/ developer who has a proven track record of successful projects. This will help in financing as well as making sure the project is well defined and spaced properly.
Hire an Equipment Planner
Another key component of the feasibility study is the equipment budget. Again, as is the case with the building budget, the equipment selection and its overall costs must fit within the feasibility of the surgery center. The early selection of the equipment also allows the architect to design the facility around the equipment in the operating rooms (ORs) rather than designing and then having the potential to be exposed to redesign of the facilities when the equipment does not work in the plans.
At the end of this initial period, which should take about six to 10 weeks, you as the potential owner of the ASC (as well as potentially of the real estate), will receive a detailed feasibility for the business and the real estate. This analyses will layout a five- to 10-year pro forma that will give you the confidence that your project will succeed or to reevaluate going forward with your project.
The other area to consider when going through the initial phase is to evaluate how you will finance the project. Financing can have a significant impact on the cash flow, particularly on the real estate project. If you consider a typical four OR facility of about 16,000 square feet, with a value of $350 per square foot, and the amount borrowed on an 80 percent loan; a 2 percent savings in your borrowing rates will improve your yearly cash flow by almost $90,000. I have seen too many projects where the long-term financing is not well planned out and the rate on the loan is not competitive.
There are lenders that have expertise in the types of loans that you will need for both the business and the real estate. The loan types are:
Line of credit of the surgery center to help fund the start up
Equipment loan for the furnishings of the surgery center
Construction loan for the real estate
Permanent loan for the real estate
Physician lines of credit to aid the physicians in providing cash into both the surgery center and the real estate
These are the basic steps that every project should go through to truly evaluate the project from all potential angles and to help create a project that will meet the owner’s financial goals.
Gordon J. Bruinsma is president of Byron Center, Mich.-based Physician Planning & Consulting.
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