Real estate investors seek health benefits

FORT COLLINS ? An alliance of Colorado businessmen and East Coast investors have formed a $100 million real estate trust, targeting the acquisition of medical office properties in Colorado and Wyoming.
CommTerra Development LLC, with offices in Fort Collins and Golden, plans to benefit from structural changes in the health care industry. The need for more cash flow has persuaded growing numbers of hospitals and physician practices to sell and lease back their real estate assets.
Health-care oriented real estate trusts are not new, but most focus on high-profile properties in major urban areas, said Bruce Wilson, the Fort Collins-based CFO of CommTerra. The trust, which sealed its funding in March, plans to focus its energies on secondary and rural markets.
?The competition does tend to be for larger properties ? those in excess of $10 million valuation,? Wilson said. ?We?re not opposed to looking at things like that. But we see opportunity in smaller properties ? those under $10 million in value ? and those are located in more rural parts of Colorado.?
CommTerra?s mission is reflected in its first wave of purchase offers. The company is currently negotiating on five different properties with a total value of about $25 million, or an average of $5 million per property.
All five offers stem from private-party negotiations, in which CommTerra identified a potential seller and approached them independent of a third-party broker.
The practice of selling medical real estate, which carries the bureaucratic label ?monetization of non-core assets,? has surged since the beginning of the decade.
According to Real Capital Analytics, an industry research group, new investments in medical office buildings totaled $945 million in 2002, a 20.2 percent jump from the year before. Totals for 2003 were not available.
Hospitals or physician practices have become willing sellers in order to free up cash for other needs. According to industry estimates, hospitals and physicians can have between 35 and 60 percent of their balance sheet committed to real estate expenses.
But the cash is needed for basic needs, such as medical equipment and regulatory compliance, as well as to counter declines in investment income and the tighter fist that managed care companies have put on payments.
The timing is also right for practical reasons.
Investors are looking for a place to put money outside the stock market, which is raising the value of medical office buildings.
According to an August 2003 report in Modern Healthcare magazine, medical buildings are considered stable investments because doctors tend to stay put. First, they like to stay close to a hospital, which allows for few property options. Second, they don?t want to abandon a site in which they spent top dollar for tenant-finish costs.
One reflection of that stability is the portfolio of Lillibridge Health Trust, a Chicago-based investor that focuses on properties near hospital campuses. Lillibridge reports 97 percent occupancy and 99 percent tenant retention, Modern Healthcare said.
While the price of medical office buildings appears to be rising, CommTerra said it?s less concerned about appreciation and more on regularity of lease payments.
Wilson said the company even wants to structure deals that give the seller an opportunity to buy the property back at a price that?s a discount to market value.
?The investors we have are looking for a long-term, stable return of cash and return of the original investment,? he said. ?It?s pretty much like buying an annuity.?
Currently, capitalization rates on medical office properties range between 9 and 10 percent in the United States. In other words, lease payments are likely to cover the purchase price of the building in 10 to 11 years.
Assuming the building could then be sold for at least the original purchase price, the investment appears lucrative.
?Whether I share in the future appreciation, I don?t care,? Wilson said rhetorically about the investment rationale. ?All I care is I get a stable, better-than-average cash on cash return today.?
CommTerra is the brainchild of four business partners.
Wilson, a long-time CPA in Fort Collins, is joined as a managing member by Rick Kemple, CEO; Tony Bosch, general counsel, and Bill Grant, vice president of operations.
Kemple, who maintains his office in Golden, previously worked in the dot-com arena as well as for Qwest Communications International. Bosch was once general counsel for Berger Funds. Grant also held an executive post for a dot-com company.
The partners came together late last year through a long-time business relationship between Wilson and Grant.
?Bill knew the other two fellows, and all three were looking for something new ? all of them were looking at real estate,? Wilson said.
The foursome eventually found an East Coast investment banker that tied together an investment syndicate, which became the limited partner for CommTerra. Wilson declined to identify the bank.
?They haven?t given us free range,? Wilson said. ?We have to do all the due diligence work prior to buying properties.?
If successful with the early deals, the investment bank has indicated it would look for more backers for CommTerra. Although money could come from other sources.
?We?re not opposed to maybe doing something separate and apart,? Wilson said. ?There?s no exclusivity with the investment banking firm.?
In the meantime, the CommTerra team expects the investment process to require some handholding for clients.
?Ours is not a traditional deal,? Wilson said. ?It will take some time to educate the sellers on what we?re trying to do and how it can benefit them.?

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