Outpatient Projects: A joint venture for the times

Cleveland Clinic picks Rendina for first partnership with a third-party developer

By John B. Mugford

The Cleveland Clinic’s real estate portfolio is a vast one, as it owns and/or operates about 32 million square feet of medical facilities, with the vast majority being in and around its home base in northeastern Ohio.

However, the health system continues to experience increased demand for its services in South Florida, where its 150-bed Cleveland Clinic Florida hospital in Weston, a master planned community about 20 miles west of Fort Lauderdale, is typically 90 percent occupied.

As the health system looks to expand its reach and brand in Florida, where it has eight locations and opened its first outpatient clinic in Fort Lauderdale in the late 1980s, it recently broke ground for a medical office building (MOB) with a surgery center in Coral Springs, about 20 miles north of its main hospital campus.

There, on a 5.3-acre site that Cleveland Clinic has owned since 1996, the health system is co-developing the $32 million (not including equipment), 72,000 square foot Family Health Center and Ambulatory Surgery Center, allowing its local patients to receive outpatient services as well as undergo surgical procedures without having to venture south to the main campus.

The three-story facility will have six operating rooms, 24 prep and recovery bays, 40 exam rooms, two endoscopy suites and an imaging center.

What’s particularly interesting about the Coral Springs plan is that it marks the first time that the Cleveland Clinic, which has historically owned the vast majority of its real estate, is developing an MOB in partnership with a third-party developer. The Cleveland-based provider has formed a joint venture (JV) with Rendina Healthcare Real Estate, one of the healthcare real estate (HRE) sector’s oldest and best-known development firms, to finance, develop and own the planned MOB in Coral Springs.

According to executives involved in the venture, Cleveland Clinic asked for proposals from a number of development firms, eventually narrowing the field to four finalists – all of which were interviewed and made in-person presentations – before selecting Rendina.

“From our point of view, we think Cleveland Clinic appreciated the flexibility that we brought to the table in terms of the ownership structure, the joint venture partnership,” Stephen K. Barry, executive VP of development and leasing with Jupiter, Fla.-based Rendina, tells Healthcare Real Estate Insights^™. “It was important to them that the developer they chose could execute the project and get it done on time and on budget, and we’re certainly on course to have that happen.”

Peter Volas, senior director of real estate for the Cleveland Clinic system, tells HREI^™ that all of the developers making proposals were quality firms with fine proposals.

“The developers were all good and we were impressed with their reputations in the market, their integrity, their cultures and their abilities to get projects done,” Mr. Volas says. “We really talked a lot about what criteria we need to look at and how to evaluate choosing a partner, because as we move forward as an organization and continue to grow we’re continuing to learn how to be a partner as well, because in healthcare’s post reform era we’re also learning that we don’t necessarily have to, and maybe shouldn’t always go it alone.”

Perhaps what landed Rendina the assignment was its knowledge of the local market and its flexibility as privately funded firm, meaning decisions, including financial decisions, can be made quickly, Mr. Volas notes.

The ownership structure

Neither Mr. Barry nor Peter Volas, senior director of real estate for the Cleveland Clinic system, would provide further details into the JV structure, except to note that the facility will be owned 50/50 by the provider and developer. After the facility is completed, scheduled for June 2018, Cleveland Clinic will enter a 15-year lease with potential extensions, and Rendina will provide asset and property management services.

“Cleveland Clinic utilized the land value that they had as an equity contribution for the project, and having Rendina being able to bring cash to the table and both of us owning the facility was an interesting structure and something that I think they were pleased with how we were able to execute on that,” Mr. Barry adds.

Completing the Coral Springs development on time is quite important to Cleveland Clinic, Mr. Volas adds, because of changes underway on the main hospital campus in Weston, where construction started in late 2016 on a 75-bed, 180,000 square foot tower. The emergency room there is also being expanded by 25 percent.

“Many capital projects are planned at our Weston hospital campus to address the growth in that market,” Mr. Volas says. “The projects there are scheduled to open in the third quarter of 2018, and the new facility in Coral Springs will allow us to decant certain services. Coral Springs needs to be complete first, in the second quarter of 2018, so all activities are carefully sequenced for access, patient care and safety.”

“We’ve made sure we were able to start the building on time and have made sure it will be completed on time and on budget,” Mr. Barry says. “In addition to decanting some of the pressure on services on the Weston campus, this new project is going to help them to expand their reach and also allow for growth of certain services on the Weston campus. And it is certainly important to increase the Clinic’s surgical capacity in an off-campus location.”

As part of the development selection process, Rendina, like the other finalists, brought together a team to make its proposal. The general contractor is West Palm Beach, Fla.-based Anderson Moore Construction Corp.; the architect is Brentwood, Tenn.-based Davis Stokes Collaborative. “We had to work closely with our contractors and the design team with Cleveland Clinic, and their user groups, to make sure the timeline could be achieved, the budget could be met, and that we were designing a facility to meet their objectives.”

Are similar JVs on the way?

As far as Mr. Barry is concerned, there is a potential for more joint ventures between health systems and developers in the future.

“From what I gather in my talks with health systems, I think that the ones who typically prefer to develop and own facilities internally are willing to look at the possibility of joint ventures,” he says. “Some of them might not want to get out of owning their facilities completely, but I do think being able to spread some risk while allowing a system to be able to deploy capital in other areas of their business presents them with an attractive option.”

“Capital is finite, even for the most well-capitalized systems,” Mr. Barry adds. “If those systems want to execute a strategic growth plan, there is going to be a certain point in time when their dollars are better served investing into their core business rather than into a real estate expansion strategy.”

Mr. Volas notes that while the Cleveland Clinic has a long history of owning the properties in which it provides services – most of its leased space is in smaller, community clinic locations – there is a chance it could, perhaps, form more partnerships such as the one with Rendina.

“I would love for this project to be a big success, which I think it will be,” he says. “And that’s because we really do, as a system, pause and think about how we would like to proceed on each project that we do. And just as we use a team approach to providing care to our patients, we can look at using a team approach to projects as well.

“We’re a strong, financially healthy healthcare system, but as we’re growing our capital spending is at a historical level and we are in prioritization mode,” Mr. Volas continues. “When you own so many properties outright, as we do, you also have to continue to re-invest in those to keep them viable or they are going to fail and be a burden on you. So why not have a partner who is willing to take on that burden and is a professional real estate firm that knows how to make that scenario work?”

The growth that Mr. Volas speaks of has Cleveland Clinic expecting the delivery of more than 1 million square feet of space in the next two or three years, with the potential for more growth through mergers and acquisitions (M&As).

Mr. Volas is not sure that the Cleveland Clinic will engage more third-party developers to build and own properties, but the JV structure, like the one formed with Rendina, presents a “possible solution” on future projects.

“It certainly makes a lot of sense especially on this development,” he says. “If it is a success, perhaps we will look at it more.”

Rendina’s activity is strong

Rendina, which has developed more than 7.5 million square feet of healthcare real estate in its three decades in the business, has been quite busy of late, Mr. Barry notes. “We have quite a few irons in the fire,” he says.

Among other projects, the company recently completed an 87,000 square foot medical office/ICU addition in Belleville, N.J., at the Clara Maass Medical Center, part of West Orange, N.J.-based RWJBarnabas Health. It also recently completed the 80,000 square foot Barnabas Health at Bayonne, N.J., an urban redevelopment project in what is known as the historic Broadway shopping district of the city.

In addition, the company is working on a 60,000 square foot MOB for Bristol Hospital in downtown Bristol, Conn. (Please see the following story for more details on the Bristol development.)

“The project in Bristol is also an urban renewal project, an ambulatory care center,” Mr. Barry says. “We’ve been working quite a bit on urban renewal healthcare projects on downtown campuses, and we’re developing a strong niche in that type of project, which takes some expertise that you gain with experience. So we’re actually looking for other opportunities on those type of projects.”

Rendina to break ground
in fall 2017 on ambulatory
care center in Bristol, Conn.

BRISTOL, Conn. – In more news from Jupiter, Fla.-based Rendina Healthcare Real Estate, the company says it plans to break ground this coming fall on a 60,000 square foot ambulatory care center (ACC) in downtown Bristol, a city of about 60,000 residents.

The project, which will replace a former retail mall, is being hailed by civic leaders as a potential catalyst for spurring new development in the city’s downtown. The planned Centre Square ACC, which is slated for completion in 2019 and will be owned and managed by Rendina, will offer services by Bristol Hospital, including cardiology, endocrinology/diabetes, neurology, orthopedics, rheumatology and urology.

“This is going to be the showpiece of downtown,” Mayor Ken Cockayne said during a recent unveiling of the facility’s design, which was held at Bristol Hospital. “It’s going to bring an average of 400 to 500 people downtown – professionals, doctors, nurses, staff and patients. And those people are going to need a place to eat, a place to go shopping.”

The mayor added that city officials have been talking to another developer interested in taking a 5-acre parcel in Centre Square that could lead to the development of up five new two-story buildings. Other developers are showing interest in building retail stores, office buildings and apartments on the former mall site.

Rendina’s facility at the corner of corner of Main Street and Riverside Avenue, less than a mile from Bristol Hospital, will be a mix of stone and brick, with abundant windows to provide natural light to the interior.

Brian Cich, chief operating officer of Rendina, told the Bristol Press newspaper that building will resemble a “downtown retail” establishment to coincide with the vision city officials have for further development. The building will have a two-story atrium space in the lobby and a café for both staff and patients.

Officials with Bristol Hospital, which acquired the site from the city, say the facility is needed to keep up with demand for its services. The main campus is “busting at the seams,” Kurt Barwis, president and CEO, told the local newspaper.

The former mall site will be redeveloped under a master plan put together by the city and a consulting firm, Cheshire, Conn.-based Milone & MacBroom.