Equity option boosts Chicago-area MOBs

PHYSICIAN INVESTMENT OPPORTUNITY HELPS TO FILL TWO NEW NEXCORE BUILDINGS

 

By Jessica Griffith

 

A pair of new medical office buildings (MOBs) will complement expansions at two hospitals owned by Alexian Brothers Health System in suburban Chicago.

Denver-based NexCore Group developed the buildings and as part of the package, offered shares of real estate equity to physician tenants.

“We are trying to attract and retain physicians, as is our client,” says Peter Kloepfer, senior managing director at NexCore. “Many physicians think it is attractive to be able to invest in the buildings they occupy.”

Two projects; one vision

Alexian Brothers Hospital Network is in the midst of a five-year, $400 million plan to upgrade and expand the St. Alexius Medical Center in Hoffman Estates and the Alexian Brothers Medical Center in Elk Grove Village. But the two hospitals needed additional medical office space to support the increased services and lure and keep physicians.

“We are running out of medical office space on our campuses and at the same time we have more and more physicians who do procedures and want to be conveniently located near the operating rooms,” says Penny Davis, vice president of Alexian Brothers Hospital Network. The healthcare company is headquartered in Arlington Heights, Ill.

Alexian Brothers engaged NexCore to build two MOBs. Like many hospital systems, Alexian Brothers preferred to finance the project off its balance sheet and use developer capital rather than its own cash reserves.

“The buildings help us recruit and retain physicians while using our own dollars to bring additional technology to our clinical services,” Ms. Davis says. “We might not have been able to afford that if we had to build the buildings ourselves.”

Each MOB is attached to the neighboring hospital via a medical mall with glass entryways, seating, a coffee shop and a check-in area for patients.

“We created new front doors for the hospitals,” Mr. Kloepfer says.

At the Alexian Brothers Medical Center, that door opens into a medical mall with a diagnostic imaging center, cardiovascular center and education center. Visitors continue to the left to enter the existing hospital or to the right to enter the new MOB. A central registration area directs patients to the appropriate department for care.

A similar mall at St. Alexius medical center includes radiology, the Women’s Breast Center and the Alexian Heart Institute. Patients turn left to enter the MOB, which also includes an ambulatory surgery center. Both malls feature quick-draw labs as well as cafes and other amenities.

Although the new MOBs already are open, the malls are under construction and are scheduled for completion later this year.

Physician equity

The 114,000 square foot, five-story St. Alexius Medical Center MOB III already is fully leased. The Alexian Brothers Medical Center MOB is three stories and 65,000 square feet, and at press time it was about two-thirds leased. NexCore did not release the dollar value of the projects.

NexCore offered physician equity to tenants in both buildings as a way to help the hospital build long-term relationships with its doctors, Mr. Kloepfer says.

“That is why hospitals build MOBs,” he says. NexCore completed its first MOB with physician investment in 1989 and since that time, about 350 to 400 doctors have invested in the company’s buildings.

Alexian’s doctors are accustomed to this type of arrangement, Ms. Davis adds. On the Alexian campus, physicians own equity in another MOB through a limited partnership, and at St. Alexius, one of the MOBs features condominium offices purchased by doctors.

“Physicians like to make a commitment into a space in which they have some ownership, and real estate generally is a good investment,” she says. “It has brought many doctors stable returns, more stable than the stock market.”

Equity deals also tend to make physicians more loyal to the hospital, she says. Doctors with an equity stake are more likely to participate in campus projects and offer their input regarding development and growth at the hospital.

The equity deals allow the hospitals to structure longer leases for their physician tenants, Mr. Kloepfer adds. Most of the leases in the two buildings are between 10 and 15 years, although terms vary.

NexCore’s goal was to have physicians invest about 20 percent of the equity of the buildings. The numbers are not finalized but Mr. Kloepfer says the St. Alexius participation will not be that high. It is too early to tell for the Alexian building but he expects more participation from physicians compared with the first building. The remaining equity is owned by a partnership between NexCore and its new capital partner, RREEF.

“The more savvy physicians are looking at potential revenue sources related to the tools in their trade,” he says. “We’ve long had a trend toward physician-hospital joint ventures with regard to ancillary services and in some ways this is the same thing.” q

Jessica Griffith is a business writer specializing in commercial real estate.

INFO BOX

St. Alexius Medical Center MOB III

HOFFMAN ESTATES, ILL.

STATS

+ Size: Five stories, 114,000 square feet, plus a 380-space parking deck

PLAYERS

+ Owner: NexCore Group and physician investors

+ Developer: NexCore Group LP, Denver

+ Architect: Proteus Group, Chicago

+ General contractor: M.A. Mortenson Co., Minneapolis

+ Asset manager: NexCore Properties LLC, Denver

SECOND INFO BOX

Alexian Brothers Medical Center MOB

ELK GROVE VILLAGE, ILL.

STATS

+ Size: Three stories, 65,000 square feet, plus a 570-space parking structure

PLAYERS

+ Owner: NexCore Group and physician investors

+ Developer: NexCore Group LP, Denver

+ Architect: Proteus Group, Chicago

+ General contractor: Power Construction, Schaumburg, Ill.

+ Asset manager: NexCore Properties LLC, Denver