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44 Executive Briefing Raising the ASC Value Ceiling Through Real Estate T he real estate component of ambulatory surgical centers (ASCs) has long been a back seat driver when perform- ing ASC valuations. With strong capital markets having turned healthcare real estate investing from a niche market to mainstream investment platform, real estate for ASCs has begun to take a more visible front seat location when it comes to maxi- mizing the value of your ASC. Facilities that are encumbered by a longer-term lease, or occupied by credit tenancy are currently in strong demand from real estate investors on a national basis. Historically, the business valuation of the ASC has taken the spotlight in strategic planning and determining value for surgi- cal centers, with multiples generally in the 6 to 8 range. Ad- ministrators were actively trying to increase EBITDA in order to generate a higher valuation for the ASC practice. In a lot of instances, this was generated through reductions in real estate rental payments. However, over the last several years, savvy ad- ministrators and operators have been actively trying to lower EBITDA through increasing real estate rental payments (and subsequently real estate net operating income), given that capi- talization rates for ASC real estate currently range from approxi- mately 6.0 to 9.0 percent. This has led to a surge in ASCs setting up operating companies "OpCo" and real estate companies "PropCo" for ownership of the ASC. When entering into new leases for existing ASCs, or contemplat- ing new construction rental rates, the market has witnessed a sub- stantial push towards higher real estate rental payments (within FMV ranges, of course) in order to fully maximize current capi- tal market trends for good-quality, well-leased healthcare real estate. To illustrate this point, let's assume that a 15,000 square foot surgery center is contemplating a new financial structure that would increase rental rate lease payments by $100,000 per year (and subsequently reduce EBITDA by the same $100,000 – the "OpCo" side), or keeping the rental rate payments the same and increasing EBITDA by $100,000. Applying a business valua- tion multiplier of 7.0 yields a value estimate of $700,000 for this $100,000 revenue stream if it remains on the "OpCo"business valuation side. However, by increasing the real estate rental pay- ments by $100,000 (and subsequently increasing the NOI attrib- utable to the "PropCo" side) and applying a capitalization rate of 7.0 percent results in a value estimate of $1,429,000. This gener- ates an additional $729,000 in overall ASC value by simply utiliz- ing the existing real estate as an asset. As the real estate side of the healthcare market continues to re- main strong, increasing lease rates and real estate values have generally led to an increase in fair market value rental rates for surgical centers. This allows practice owners and administrators to employ this strategy and maximize value. ASC real estate is largely financed through obtaining debt on the facility through traditional mortgage payments. As interest rates for healthcare real estate lending continue to remain favorable, this strategy of maximizing real estate value is expected to continue through the short term. HealthCare Appraisers continues to see related real estate activ- ity from a strategic planning standpoint, as savvy operators and administrators work to employ this strategy. Given the longer lead times associated with real estate transactions versus busi- ness valuations, this strategy is becoming more employed as existing real estate leases come up for renewal, as numerous operators are actively trying to transfer value from OpCos to PropCos, as real estate oftentimes can be viewed as a more at- tractive investment. n Jeffrey A. Piehl, MAI | Partner Mr. Piehl, a Partner in the Firm's Colorado office, leads the Real Estate Valuation Ser- vice Line at HealthCare Appraisers. A 20- year real estate veteran, he has been active in the valuation and consultation of health- care-related real estate since 1995, includ- ing the valuation and consultation of over 500 medical office and healthcare related properties on a national basis. Mr. Piehl also performed national Fair Market Value ("FMV") work for sev- eral national and regional healthcare systems, with facilities lo- cated in both urban and rural markets. In addition, Mr. Piehl has been involved in several consultation assignments with health- care systems and property owners regarding asset selection for acquisition/disposition as well as site selection for new medical office placement and rental rate disputes. Prior to joining Health- Care Appraisers, Mr. Piehl served as Executive Director at Cush- man & Wakefield of Colorado's Valuation and Advisory Group. He earned a Bachelor's degree in Economics from the University of Colorado and is a Certified General Real Estate Appraiser in (11) states. Mr. Piehl is a Designated Member of the Appraisal Institute. Sponsored by: HealthCare Appraisers, Inc., a nationally recognized valuation and consulting firm, provides services to clients nationwide exclusively in the healthcare and life sciences industries, including: • Fair Market Value opinions for compensation and service arrangements (e.g., physician employment, call coverage, medical directorships, co-management arrangements, hospital-based collections guarantees/subsidies, and equipment lease/use arrangements); • Business Valuation for all types of healthcare entities and transactions (e.g., ASCs, hospitals, physician practices, diagnostic/treatment facilities, fixed assets and intangible assets); • Real Estate Valuation (e.g., medical offices, hospitals, ASCs and LTAC/specialty hospitals); • Transaction Advisory and Strategic Consulting; and • Litigation Support