The following is a summary of advantages and disadvantages of building, buying and leasing space for the new orthopedic line at Trinity Community Hospital. Included in this summary, is the option I recommend and my basis for this choice. When considering building, buying or leasing space for the new orthopedic service line, one must consider current trends in healthcare. Hospital construction continues to struggle to recover from years of unfavorable economic news. As hospital building activity has spend the last few years under the shadows of Wall Street’s financial meltdown and Capitol Hill’s health reform debate, industry planning, design and construction professionals found themselves riding out an extended down market (Hrickiewicz, 2010).
Construction costs for building the space is estimated at $600,000 (5,000 square feet @ $120 per square foot).
The advantage to this option is the potential for the building to increase in value resulting in increased equity for the hospital. Additionally, the hospital would retain total control of design and modifications to the building.
In a leasing scenario, any modifications would require landlord approval. Also, Trinity Community Hospital would have the ability to lease any excess space within the building to others to generate additional revenue. Costs for purchasing the building adjacent to the hospital to house the orthopedic service line is estimated at $700,000 ($525,000 for the building and $125,000 for the lot).
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As with building, an advantage to this option includes the potential for this space to increase in value and build equity for the hospital. Also, expansion and modifications to the space are only limited by licensing and budget and not under landlord control. Additionally, to generate extra income, the excess space could potentially be leased to outside service providers. Leasing costs for the 5,000 square-foot medical office building adjacent to the hospital are $20/square foot (including necessary renovations).
This is a triple net lease so Trinity Community Hospital would be responsible for taxes and repair costs. The advantage to this option is less cash is required up-front (as compared to building).
This would leave additional monies to fund the orthopedic line start-up and allow for the purchase of state-of-the-art equipment and technology for the facility. Also, with leasing there is no risk of large investment losses as with building or purchasing. The volatility of the current real-estate market makes this advantageous. Many questions concerning the future of commercial property and their values remain unknown (Spohn, 2010).
Additionally, lease payments are a valid tax-deductible business operating expense and leasing requires significantly less paperwork at tax time than owning (Spohn, 2010).
There are multiple disadvantages to building space for the new orthopedic line. There is a large cash outlay or debt accumulation upfront. The need to construct the building would severely delay the hospital’s ability to open the new orthopedic line. If the building requires selling in order to raise cash, current real estate market conditions may make this impossible. Additionally, there is risk that the project would exceed budget and completion timeframes. As with building, the disadvantages to buying space for the new orthopedic line are similar. There is a very large cash outlay upfront.
Also, there is the risk the property would not maintain its’ value long-term. The alternative to this would be to finance but results in the accumulation of long-term debt. There is a longer-lead time to move in (verses leasing) due to real estate closing procedures (Spohn, 2010).
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Additionally, if down the road cash flow becomes an issue, a quick sale of the facility may not be possible. Disadvantages of leasing include the zero accumulation of equity. Also if the lease period is too long, you could be locked into an agreement for space that no longer serves your needs. Additionally, the property manager or landlord can limit expansion and modification (Spohn, 2010).
These issues would need to addressed with the landlord prior to avoid any issues post-signing.
There are several reasons I recommend Trinity Community Hospital choose to lease space for the new orthopedic service line. Financially, this option results in the lease amount of cash outlay upfront. This would allow monies to be more effectively utilized for other expenses related to the new line. From a time stand-point, leasing would allow for the orthopedic service line to be opened much earlier than buying or constructing the space. Also, the current volatility of the market does not make this an optimal time to invest in real estate. Additionally, health care reform is still in it’s’ infancy and it is difficult to gauge the effect it will have on Trinity Community Hospital’s finances. The leasing option provides the hospital with the least amount of exposure and risk during this period of uncertainty.
Works Cited
Hrickiewicz, Mike (2010).
Trends in Healthcare: To Build or Not?. Health Facilities Management. Retrieved from
http://hfmmagazine.com/hfmmagazine/jsp.?dcrpath.
Spohn, Rachel (2010).
The Costs and Benefits of Leasing Your Medical Office Space.
