At-risk model is at work for developer

HEALTHCARE DEVELOPMENT PARTNERS GOING STRONG AT 15 YEARS, $1.6B

 

By John Mugford

It was by accident – well, sort of – that Todd Bryant got into the business of developing medical buildings two decades ago. That chance involvement led to the founding of his healthcare development firm, Chicago-based Healthcare Development Partners LLC, back in the early 1990s.

Now, some 15 years after starting the company, Mr. Bryant is quite happy with the way things have turned out for him and the folks at Healthcare Development Partners (HDP).

After all, the company has done quite well – developing more than 60 medical projects for a total value of about $1.6 billion over the years. And the company is presently as busy as ever.

In fact, HDP has more than $100 million worth of projects currently under construction and about $150 million in the potential development pipeline.

“We’re going to do 10 to 12 projects this year and while we could possibly find more work than that, it makes sense to limit ourselves to that many projects,” says Mr. Bryant, whose firm currently has 32 professionals in its two offices – one of which is in Phoenix.

“It’s an industry that requires people with very special skill sets, and we’re looking to grow our professional staff by about 10 percent a year over the next several years, which is aggressive, but manageable in a way that we can keep growing our bottom line,” he says.

Mr. Bryant pulls no punches when he talks about the bottom line. It’s one of the major points he makes when talking to clients and potential clients about developing a medical building for them, be it a medical office building (MOB), ambulatory surgery center (ASC), imaging center, replacement hospital or a variety of others.

That’s because HDP set up quite a unique business model from its earliest days. It’s a model that calls for putting much of the risk – if not all of it – in the hands of the developer. HDP also touts its physician recruitment efforts, saying it can enhance – even add new – service lines at a hospital, because of its successes in such endeavors.

For off-balance-sheet, third-party ownership projects in which HDP will be the majority owner – even in cases where physicians and hospitals are investors – the company requires no pre-leasing before beginning construction.

“If we like a project and think it can work, we’ll start the project without any leases signed because we feel that’s our job and we’re confident we can fill that building and make it a revenue generator for the hospital,” Mr. Bryant says.

“Our business always involves us taking the risk – any consulting we do is pro bono for our client,” he adds. “When a client calls us up and is interested in building a building, or adding new service lines to increase their revenue, we’ll perform that market study and not charge them. So the only time we make money is when we build a building.”

“We get a lot of business because of our at-risk model – it gets the client in the ground quicker, gets the facility open quicker and gets them earning revenue sooner,” Mr. Bryant says.

“We build these facilities to bring in revenue for the hospital; the real estate aspect is not the most important part of the piece,” he continues. “We don’t look at the cost or expense side of a project as much as we look at building facilities to enhance the profitability of the hospital – that’s a message that hospital executives really understand. A while back they looked at the rent as an expense, but that’s not what we’re trying to do.”

Its own nickel

As with most developers, HDP typically develops a facility for a hospital or health system as a design-build model or as a third-party ownership, off-balance sheet project. (Mr. Bryant likes to say that “off-balance sheet” is a misnomer because his firm’s projects usually enhance that balance sheet.)

HDP typically retains the ownership of about 80 percent of the projects it develops; those projects can also involve physician, clinic or hospital ownership. On build-to-suit projects in which the hospital or health system will retain ownership, HDP guarantees a price, completion date and, when HDP is in charge of leasing and recruiting, a certain level of occupancy by a certain date.

“We’re not a consulting firm, we are not a fee-for-service firm, not a program manager, not an owner’s representative,” Mr. Bryant notes. “We are looking at how we can add services to provide a greater range of services for our hospital clients.”

An example of one of HDP’s build-to-suit projects can be found in Rolla, Mo., where last fall it completed a 140,000 square foot, $25 million medical office and surgery center for the 232-bed Phelps County Regional Medical Center (PCRMC), about 80 miles southwest of St. Louis. The project was completed on a fast-track basis in about 18 months.

“We guaranteed the price of the project and guaranteed the completion date and if we didn’t meet those it was our nickel,” Mr. Bryant says. “If we miss the completion date we pay damages. So we really eliminated the construction risk and the real estate risk for the hospital. So even if we don’t own the facility, we eliminate all of the risk of the overruns and delays.”

According to Jerry Paule, the CFO and operations officer at Phelps County Regional, the hospital is by far the largest acute-care facility within 80 miles or so. Several years ago, the hospital’s executives realized they were running out of space for surgery and the hospital’s growing outpatient service lines. The hospital also needed MOB space in order to recruit physicians.

The building developed by HDP has helped with those recruiting efforts, has added outpatient space and services, and helped the hospital free up space in the hospital for inpatient surgery and care.

“Our top priority was physician recruitment, but when I’d invite doctors to town they would always ask where the other physicians had offices,” says Mr. Paule. “All we really had to offer them was some vacant general office space in town. But with the new building, we’ve recruited more than a half-dozen physicians already and we’re leaving about one-third of the space open for our recruitment efforts in the future.”

In marketing the project to PCRMC’s executives, its board and its physicians, HDP interviewed doctors about their space needs and wants, did most of the legal and zoning legwork, and basically guided the hospital and its decision-makers through the process, according to Mr. Paule.

“Their cost estimates, including the estimated rental rates, were right on,” he adds. “And they helped us determine that we should increase the size of the building from our original three-story plan to a six-story building to accommodate our future growth.

“We have 100 docs on our staff and about 40 of them make up our core business. In order to service this town like we feel we need to do – because we figure about 50 percent of our market drives out of the area for healthcare services – we’d like to increase that number from 40 to 60 docs over the next few years or so, and even more so in the years beyond that. We think we could increase our medical staff by 50 percent and still be very busy.”

Even though a doctor could find space in town for $7 per square foot or $8 per square foot, the hospital’s medical suites rent for about $10 a foot, Mr. Paule says.

“But the building is right next to the hospital and the doctors understand that by locating there they can probably save themselves an hour a day, which means a lot to a doctor which can mean a lot to a hospital’s bottom line,” Mr. Paule notes.

Phelps County Regional executives believe the new building can be part of a strategy to help the hospital meet a goal of increasing market share from above 40 percent to about 80 percent in the next five to seven years, at which time the hospital might need another MOB.

“I think we’d go right back to HDP if and when we need a new building,” says Mr. Paule, who also offered high praise for Chicago-based Proteus Group, which is often the project architect and programmer on HDP projects, and the general contractor, C.D. Smith of Fond du Lac, Wis. HDP often hires local contractors on its projects.

Accidental entrance

Healthcare Development Partners was founded because of Mr. Bryant’s desire to get into general office development. After graduating from the University of Wisconsin in Madison, Mr. Bryant went into banking in the 1980s, hoping to learn as much as he could before starting his career in office development.

His first job in real estate was as a leasing director for Equitec Properties of San Francisco. But when lenders told him he still needed more experience before starting his own development firm, Mr. Bryant landed a job in the mid-1980s with a medical development firm in Milwaukee, which led to another job with another healthcare developer.

“I’d gone to work in the healthcare sector to gain the experience I needed to move back to Chicago and develop office buildings,” Mr. Bryant recalls. “But then a recession hit and I stayed in healthcare because it was more recession-proof, and healthcare is less cyclical than other types of real estate, even though it is susceptible to fluctuations and construction costs. So I stayed in healthcare and it’s been a blessing. To say that my going into healthcare real estate was planned would be a mistake.”

By the early- to mid-1990s, Mr. Bryant was ready to start his own firm. Because he’d earned his development stripes in healthcare and had gained valuable knowledge about the industry, he decided to stay in the sector. After starting HDP with a partner, a corporate real estate attorney, Mr. Bryant bought the partner out in 1998. Today, the firm has several junior partners with a stake in the business.

“We have a model in which most of the staff and certainly most of the executive staff participate in the profitability of the projects and of the overall company,” he says. “We have very little turnover. Long-term, it’s been a very successful model.”

That staff includes a high number of former hospital and healthcare executives, who can often be instrumental in landing clients because they understand what a hospital or health system needs to do to succeed, Mr. Bryant says.

About one-third to half of HDP’s professionals have worked, at one time or another, on the operational side of healthcare, according to Mr. Bryant.

“So when we go recruit physicians we can demonstrate that we truly understand referral patterns, we understand profitability for physician practices, and we understand how crucial it is for a hospital to increase its revenue,” he says. “We can tell that story and we let the executives know that we are experienced at bringing in physicians and services lines that can enhance the hospital.”

A whole new line

An example of HDP’s recruiting services can be found in Phoenix, where HDP developed a 52,000 square foot MOB and ambulatory center on the campus of St. Luke’s Medical Center. HDP owns the building, which opened in fall 2006, and has a 99-year ground lease with St. Luke’s.

As HDP did its homework for the project, it determined a need for Bariatric services in the area – St. Luke’s did not offer such a service line. As things turned out, HDP helped St. Luke’s launch a new diabetes center within the MOB.

“We brought in three to four new surgeons – one of whom wasn’t even in Bariatrics but had been a general surgeon – which translated into millions of dollars of new revenue per year for the hospital,” Mr. Bryant says. “We had prior experience in recruiting Bariatric physicians and understood the business model and were able to tell that story to the physicians we recruited, as well as the hospital.”

Over the years, HDP has done about 3.7 million square feet of physician recruitment, according to Mr. Bryant.

“We come in and customize a program for the specific hospital in their specific location that really maximizes the revenue through a mix of physician specialties and ancillary service lines that take into consideration the demographics and future demographics for that location.

“We don’t want to just fill a building, but we want to fill a building for revenue for today and for well into the future,” he adds. “So there’s a real art to it – that’s what allowed us to grow our business through referrals.”

Other recent projects completed or under construction by HDP include a 30,000 square foot urgent care center in Yorkville, Ill., for Provena Health and a 45,000 square foot ambulatory care facility in Peoria, Ariz., for Sun Health. Clients over the years have included, among others, Grossmont Medical Center in La Mesa, Calif.; Loyola Healthcare in Illinois; and Rush-Presbyterian St. Luke’s Medical Center in Chicago.   

More than bottom line

At the beginning of this Company Profile, it was noted that Mr. Bryant is glad that he stumbled into healthcare development. As it turns out, his satisfaction stems not just from his company’s success.

The fact is Mr. Bryant finds himself in a business that he considers more interesting, challenging and complex than developing general office buildings.

“In a general office building, sure there are strategies to building and then filling a building, but the main goal is to fill that building and maximize returns,” he says. “I got into the healthcare development field for another reason and then saw an opportunity and I’ve been able to stay with it for 15 years.

“It’s an industry driven by technology and relationships and strategies,” Mr. Bryant continues. “And it’s an industry that’s going to stay dynamic and that’s going to continue to grow for years to come; we’ll keep figuring out new models and methods to continue to serve our clients and attract new ones.”

As Mr. Bryant looks to the future, he realizes the industry is changing and getting more competitive.

“There’s a lot more competition in the development arena than there was 10 years ago. There’s more of a competitive bid process today,” he says. “And the reason for that is that the level of sophistication in choosing a developer has changed for the hospitals and health systems in recent years.”

While the number of competitors continues to increase, the number of hospitals around the country is finite, Mr. Bryant notes.

“To say that we go into a project, or any potential project, without competition is a misnomer,” he notes. “We face competition every time, which is why we’ll continue to expand and tweak our business model – even though we’ll always be an at-risk developer to take that risk away from the hospital.” q

INFO. BOX:

 

(LOGO)

CHICAGO

STATS

■ Employees: 32 professionals

■ Founded: 1994

■ Projects completed: More than 60; $1.6 billion

■ Ownership: Private

■ Services provided: Development, feasibility study, physician recruitment, design management, property management, financing, construction management, lease management.

■ Product type: Medical office buildings, ambulatory centers, clinics, outpatient centers, replacement hospitals, etc.

CONTACTS

■ Key officers: Todd B. Bryant, president and managing member; Robert D. Wagner, senior vice president; Nathan R. Ernst, vice president of business development.

■ Main phone: (312) 332-7600.

■ Web site: www.hdpartners.com