Finding the Right Space for Your Venture

Finding the Right Space for Your Venture

By David M. Thoene

If you’re considering a new ambulatory surgery center (ASC) project, then you know how important it is to make sound real estate decisions upfront. Real estate related questions surface in every surgery center project.

Should you lease space or buy a building? How much space will you need? Are you paying too much for the space? Should you allow for future expansion? Where should the center be located — in an existing building or a new one? How much should you budget for construction?

The list of questions is short and predictable, but the decisions you make will have meaningful consequences for the surgery center’s short- and long-term business goals and operations. For example, the lease/buy decision influences the capitalization strategy adopted for a surgery center (a short term consequence that frequently drives project feasibility). However, the lease/buy decision also provides long term capital flexibility, expanded ownership opportunities and investor liquidity.

Another real estate issue centers on the cost to build the surgery center. How much should be budgeted? New surgery centers frequently offer our first exposure to the range of costs and assumptions inherent in construction budgeting.

You may be surprised to learn that the budget is only partly driven by the general contractor’s cost of time and materials; much of the budget will be driven by the requirements of your lenders. The expense categories used by most lenders include direct construction costs, non-construction “soft” costs, and financing costs. Your lender will expect you to address all three categories in your feasibility analysis as a pre-condition of loan approval and funding.

You may find that site availability or the requirements of project capitalization force you to house the surgery center in leased premises in a building owned by a third party. While there are dozens of issues inherent in long term facility leases, the one that attracts the greatest attention is base rent. The factors that drive base rent are diverse and interesting.

However, you may find it unexpected to learn that market forces are not always among them. As often as not, the landlord’s costs and bank financing arrangements drive rental rates in leased premises. Understanding those drivers can help when negotiating the favorable terms for your surgery center.

The fundamentals of outpatient surgery center development have changed very little since I started in the industry 20 years ago. It remains a very positive and creative process undertaken by bright people with a common interest. What has changed, however, is the sophistication of the approaches taken and the understanding of project economics.

today’s surgicenter is hosting a conference in September that brings together top experts in ASC development and operations. I’m pleased to be a part of the conference faculty and to be presenting a talk on ASC real estate issues. The session will be interactive, affording surgeons, administrators and others who are undertaking new surgery center projects the opportunity to dialogue with experts in facility design, construction, development, financing, and operations. My role will be to ensure that all of the important real estate related issues related to new surgery center projects are identified and discussed.

David Thoene is vice president of development for Titan Health Corporation. He has developed and consulted on more than 50 surgery center projects for surgeons and anesthesiologists. Thoene can be reached at dthoene@titanhealth.com.