The COVID-19 pandemic is affecting every sector of the real estate market, and the health care sector especially is directly responding with specific considerations. As we’re grappling with the short-term effects of the pandemic and looking to forecast how it will influence real estate management moving forward, we thought we’d share insights from what we’re seeing on the front lines of health care, life science and medical office real estate portfolio management.
Many practices are dealing with cash-flow crises due to executive orders reducing or eliminating their ability to perform elective or non-emergency procedures.
Existing force majeure and act of God clauses in most cases aren’t providing any relief for tenants; however, we’re seeing new leases and purchase agreements include language to allow for flexibility of timing should the process be interrupted due to COVID-19.
On March 30, 2020, the Centers for Medicare & Medicaid Services issued a blanket waiver relaxing many of the Stark Law regulations, retroactive to March 1, 2020. This could present a pathway for hospital systems to provide rent relief to struggling physician practices which may be considered below the fair market value.
Since we’re all in this together, we’ve been successful in developing strategies to alleviate short-term cash flow issues tenants are facing by having open and transparent dialogue with the landlord to find a mutually agreeable solution outside the existing lease if needed. Additionally, many practices are finding success with reaching out to their lenders to defer debt payments.
Parking lots are being used for drive-up testing and mask drop sites. Since the parking lot is typically outside the leased premise, landlords and tenants are having to navigate lease issues to allow for these uses. Most can accommodate this with a license agreement.
As many practices staff down to reduce expense, the transaction pace has slowed. That being said, groups are still working to maintain trajectory on their long-term strategy while navigating the COVID-19 pandemic.
While tenant construction is still proceeding, expect to lose a week or more if a worker is found to have contracted COVID-19. Additionally, expect delays in permitting or governmental reviews as some municipalities have shut down or limited non-essential services. These delays may affect your occupancy dates.
Considerations for Leased Properties
If you haven’t yet approached your landlord, we’re happy to help you develop a strategy and messaging to your landlord to provide short-term relief without hindering long-term strategies. We’ve been able to achieve rent relief without having to enter a term early renewal. Consider adding force majeure or specific language regarding government orders into any new leases or renewals that you may have coming up soon.
You can use rent relief as an opportunity to develop a long-term relationship with their tenants and position themselves for future opportunities. This may also be a time to early-renew some of your tenants.
Considerations for Owners
Just as tenants are negotiating with their landlords, many real estate owners are having success negotiating debt service deferment strategies with their lenders.
As many hospitals and practices are starting to burn through cash reserves and seeing their investment portfolios diminish, some are looking to monetize real estate assets to build cash. Investors are still active in the capital markets seeking health care properties. Traditional buyers include:
For hospital systems seeking to pull equity out of their real estate assets, 501(c)(3) non-profit real estate organizations offer terms more favorable than traditional buyers. These favorable terms could include purchase options, rent deferment and lower yield requirements. In some cases, due to their non-profit status, these organizations are also able to maintain property tax exemption, which would be a pass-through cost for most traditional buyers.
Our team is available to discuss any concerns or questions you have with regards to real estate or simply have a conversation about your current situation. Most importantly, we hope you're staying safe and healthy.
All the best to you, your families and your teams.
Brian Bruggeman, CCIM, SIOR
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Louis Suarez, CCIM, SIOR
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