Making the move to medical

DENVER-BASED AARDEX IS GROWING WITH ITS ‘USER EFFECTIVE DESIGN’ CONCEPT

 

By Dan Emerson

 

For Denver-based Aardex LLC, the 185,000 square foot Signature Centre in Denver West may be the most important project the 24-year old firm has ever developed. Scheduled to open this month, the $46 million facility is the first, bricks-and-mortar manifestation of Aardex’s “user-effective buildings” concept – an approach Aardex officials hope will have a major impact on healthcare facility design.

With a design rated at 48 LEED (Leadership in Energy and Environmental Design) credits, the facility will be certified “Platinum,” the highest rating a building can achieve under the LEED Green Building Rating System, the nationally accepted benchmark.

Swedish-based medical manufacturer Gambro, whose North American headquarters is in Denver, has leased 75,000 square feet in the Centre. Aardex will occupy 20,000 square feet.

Until fairly recently, Aardex was primarily a developer of build-to-suit general office buildings, including a number of facilities for federal agencies. One of its most recent project for the federal government is the 185,000 square foot National Archives and Records Administration office and storage building in Perris, Calif., which Aardex also manages.

However, in a relatively short time, the company’s involvement in healthcare projects has grown from zero to about 70 percent of its business.

Aardex’s other current healthcare projects include:

■ Moreno Valley Professional Village, a major, speculative health care project set to open this spring in California’s Inland Empire. The 10-acre campus includes seven buildings totaling 130,000 square feet, with an adjacent 16-acre parcel, where Aardex is considering the development of a rehabilitative hospital. Leased spaces range in size from 1,000 to 53,000 square feet.

■ Veterans Administration outpatient clinic, a 36,000 square foot facility nearing completion in Santa Maria, Calif.

Integration plus sales

In January, Aardex continued it recent string of healthcare momentum when it was awarded the contract to build an MOB for the Northeast Arkansas Clinic (NEAC) in Jonesboro, Ark. NEAC is the largest physician group in northeast Arkansas.
The three-story, 120,000 square foot facility will consolidate a number of NEAC’s real estate holdings in the region. Along with designing and building the new structure, Aardex is also handling the sale of five smaller facilities owned by the clinic, which employs 83 physicians in 19 locations.

Aardex’s entrée into the healthcare industry has helped accelerate its robust growth. In 2005, Aardex founder Richard Butler told the Denver Business Journal that the company was growing about 35 percent annually. The company anticipates 2007 earnings of $85 to $100 million.

Aardex officials contend the company’s “vertically integrated” menu of real estate development, architecture, construction management and property management services makes it unique in the marketplace.

“When you put everything under one roof and all of (those functions) are only answerable to one person, you achieve terrific cost-management and speed-to-market advantages,” says Chief Marketing Officer Steve Grund. Mr. Grund notes that Aardex remains the on-site manager of most of the facilities it develops.

While some degree of vertical integration is somewhat common among real estate developers, Aardex says it bring into the fold “extra services that are not usually part of the development process,” according to Chris Ernst, a senior vice president with Aardex.

“In a case such as Jonesboro, with existing properties to be disposed of in an advantageous way, it’s real estate brokerage and financing services,” Mr. Ernst adds. He notes that instead of relying on third-party financing, the firm looks for other, often innovative ways to finance projects.

Tim Long, the company’s healthcare development director, says Aardex’s healthcare projects are typically physician-driven; therefore, physicians are typically involved in the ownership. Aardex provides services such as a market assessment to determine the service and facility needs of the community, and to determine the unmet needs of physicians.

“These projects are typically physician-driven,” he explains. “If a project doesn’t have a physician-champion behind it, it typically doesn’t come off.”

A physician involved in “selling” a project to his or her colleagues is much more effective than “a hospital administrator trying to force the issue,” Mr. Long notes.

Financial engineering

“Financial Engineering” is the term Aardex uses to sum up its deal-making capabilities.

“(That) means we have the in-house capacity to create flexibility and tax-savings, and structure loan guarantees that work for our customers, lenders, and ourselves,” says Aardex’s president, Shane Fowler. “The key is putting ourselves in the shoes of each person who is involved with a development (the tenant, owner, construction lender, and permanent lender) to satisfy their needs regarding risk, flexibility, guarantees, and underwriting criteria.

“We start every deal by looking at the pro-forma and asking ‘Who is the property most valuable to during each stage of development, and shall the property be owned by the user or a third party?’” Mr. Fowler says. “In some markets, the monthly debt service cost of ownership is commonly exceeded by rents. Ownership is often structured off-balance sheet or as a retirement strategy for principals upon exiting the business. Financing is often arranged for little or nothing down. Existing properties may be acquired by the developer and exchanged for the new UE property, pursuant to Section 1031 of the IRS Code to reduce debt and defer income taxes. Whether a leasehold or ownership strategy is adopted, options are needed to accommodate flexibility for future growth.”

Aardex seeks its payback by developing and holding a property – through a ground lease – for at least fives years. At that time its profits are considered capital gains by the IRS instead of ordinary income. After five years, the client has the option of buying out of the ground lease.

As an example of its financial engineering, Aardex is handling the sale of several buildings owned by the NEAC in Arkansas, executing a 1031 exchange by rolling equity into the financing of new construction, which, of course, yields sizable tax-savings.

Getting to know you

In Arkansas, the officers at NEAC say Aardex has done a good job of familiarizing itself with the Jonesboro market.

“Obviously, having Aardex come in from 1,500 or so miles away and spend the time and energy they have to understand this market, and understand our organization, has been very beneficial,” says NEAC Chief Operating Officer E. Scot Davis.

“From a development standpoint, they have been very creative in structuring deals,” Mr. Davis says. “This is a ‘win-win’ for us and Aardex. They’ve shared some of the risk in the sale of our existing buildings, and have guaranteed us a price. Any downside (in the sale) will be spread out over time, into the development. Based on their years of experience, we’re confident they are going to market our buildings and help us get the best price we can.”

According to Mr. Davis, NEAC is incorporating as many of Aardex’s user-friendly design concepts as possible into the new facility. “We particularly like the planned placement of HVAC ducts under the floor, and the ability to regulate temperature in a more efficient manner.”

Aardex also plans to incorporate additional design features into the Jonesboro facility to maximize staff efficiency, provide access to patients and regulate traffic-flow.

The showplace

In Colorado, Aardex officials consider the Signature Centre to be showplace for their concepts, spelled out in “User-Effective Buildings,” a 208-page book they published in 2004 covering elements such as natural lighting, office noise, security issues, air quality and design-flexibility.

According to Aardex’s analyses, individual lighting controls built into the Signature Centre can increase worker productivity by about 7 percent. Temperature and ventilation controls for each worker will increase comfort levels, resulting in about a 3 percent increase in productivity, according to the Carnegie Mellon Center for Building Performance and Diagnostics. Also, better indoor air quality could reduce absenteeism, based on data from the U.S. Environmental Protection Agency.

The long, narrow shape of the Signature Centre is intended to optimize views and natural light, angled to the south and southeast to take advantage of the sun’s energy. The building’s interior has reflective devices to bring natural daylight 40 to 50 feet into the building’s core, Mr. Grund says.

A “chill-beam” technology is used to reduce heat loss through outside windows, which are tinted to promote energy efficiency. The telecom, power and other infrastructure are contained within raised floors, which also contain quiet HVAC systems. The building features 43,000 square foot floor plates.

The Signature Centre was designed by architect Binh Vinh, a recent Aardex addition who has designed high-profile buildings for major clients such as the National Institutes of Health, Pfizer and Wyeth-Ayerst. Mr. Vihn also designed a 2.5 million square foot R&D headquarters facility in Research Triangle Park, N.C., for GlaxoSmithKline (GSK), as well as GSK’s 2.8 million square foot Global Medicines Research Centre in the United Kingdom.

Even with the addition of Mr. Vinh to the Aardex staff, the company is not planning an expansion into facility-development for pharmaceutical and biotechnology companies – at least not in the immediate future, according to Mr. Ernst.

“For now, we want to stay within our mission and business plan, and get our first large hospital project under our belt,” Mr. Ernst says. “But we do project a robust future.” q

Dan Emerson is a business writer who often reports on healthcare real estate.

INFO. BOX:

 

(LOGO)

DENVER

STATS

■ Employees: 50

■ Projects: Three nearing completion

■ Ownership: Private

■ Services provided: Development, design, construction, property services, financing, investment

■ Product type: Medical office buildings, clinics, outpatient centers, facilities for the aged, hospitals

■ Healthcare as a percentage of company: 70

■ Project focus: New construction, renovation, expansion, replacement

■ Founded: 1983

CONTACTS

■ Key officers: Richard Butler, founder and CEO; Ben Weeks, president and executive principal.

■ Main phone: (303) 987-9000

■ Web site: www.aardex.com