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Design-Build Growing, Study Finds

WASHINGTON – A new study analyzing the design-build project delivery method in the United States shows it was used, on average, in more than 40 percent of non-residential construction projects in 2010.

The study, which was commissioned by the Design-Build Institute of America (DBIA) and conducted by RSMeans Reed Construction Data Market Intelligence, shows slightly more than 40 percent of market share for design-build, with a 10 percent increase in the use of the delivery method since 2005. Usage rates and market size were calculated for projects bid between 2005 and 2010. The research team estimates that 95 percent of public projects and 75 percent of private projects were captured for the analysis.

For purposes of comparison, the delivery methods analyzed include design-bid-build and CM-at-Risk in addition to design-build.

What Is Design Build?: Design-build is an integrated approach that delivers design and construction services under one contract with a single point of responsibility.

“This report reinforces that design-build is a growing and popular method of project delivery and is becoming more commonplace across the country,” said Lisa Washington, executive director of DBIA. “As an educational resource for the industry, we can help owners learn more about the merits of design-build and help them to make informed contracting decisions.”

In addition to analyzing market share, the report further breaks down the percentage of design-build projects within nine non-residential building categories. Data shows that design-build is most popular in the military sector, where it holds 80 percent of market share by dollar value. Many investors buy shares in the sector because they know it’s a reliable investment due to the massive market share it holds. The design-build method is also widely used in the medical, industrial and commercial sectors, holding more than 38 percent of market share in each category.

The analysis also found that design-build is more likely to be used on larger projects. Between 2005 and 2010, the use of design-build advanced on project values above and below $10 million, although its rise was particularly marked on projects valued above $10 million, where design-build was the delivery method on more than half of the projects.

“Anecdotal evidence, including significantly increased demand by owners for DBIA education, pointed to design-build’s rising market share,” said Washington. “The desire for both hard data and third-party validation of the growth of design-build, as well as data to support where DBIA educational efforts need to be focused, prompted us to commission the research.”

Geographically, the report shows that the design-build delivery method is used most frequently in the Pacific Census Regional Division (Alaska, California, Hawaii, Oregon and Washington) and the South Atlantic Division (Delaware, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, West Virginia and the District of Columbia).

Design-build is least likely to be used in the New England Division (Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont) and the West North Central Division (Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota) regions.

The fact that some divisions lag behind the rest of the country in adopting design-build project delivery comes as no surprise to DBIA and its members. Officials at the state level in these areas of the country have been slow to authorize their agencies to use the delivery method for building projects, although Minnesota and Missouri, for example, have allowed the use of design-build for transportation projects.

“This report makes clear that design-build is an established and proven method of project delivery and is becoming commonplace in much of the country,” said Richard Thomas, DBIA’s vice president of advocacy and external affairs. “It is our hope that public owners in states that limit use of design-build among their agencies will reconsider their policies now that hard data shows design-build is increasing market share.”

The research team used RCD RSMeans’ proprietary database of historical and planning construction projects data as the basis for the study. In addition, the study incorporated other publicly and privately available data sources.

Detailed data on nearly one million construction projects, 300,000 plans and specifications, historical and current material, and labor construction costs and historical and projected demographic data was integrated for valid comparisons.

Although both water, wastewater and transportation are areas in which design-build is growing rapidly, the DBIA study focused exclusively on vertical construction markets.

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Single Source Model Said to Eliminate Cost Overruns

It’s no secret that the recession has had a major impact on virtually all segments of the construction industry, including the institutional market. But one property developer’s model for hospitals, colleges and other institutions is proving to be especially cost-effective — a welcome relief in these tough times.

Scarborough Properties, which is based in Gibbsboro, N.J., developed a single-source model that essentially ensures that institutions are not on the hook for cost overruns.

“The budget set at the beginning is the total amount paid,” explains Sean Scarborough, president of Scarborough Properties. “The model works because we understand the risk and create value for the institution by insulating it from cost overruns and unnecessary delays. A construction manager would not be financially liable until several months before construction started, long after decisions about budget and design had been made.”

Founded in 1945, Scarborough Properties has developed and owned its own residential and commercial properties, working every element of the development process, marshalling design professionals, construction specialists and banks to build a project the company would own. The firm now owns a wide variety of income-producing properties, such as marinas, retail shopping centers, freestanding pad sites, and single-tenant office buildings.

“We approached (a) project as if we were going to own the building,” recalls Scarborough. “We hire and supervise a professional team including land use lawyers, civil engineers, traffic engineers, architects and structural engineers.

Upon completing the land entitlement process, which typically takes twice the time of actual construction, he says the plans were sent to a variety of contractors for competitive bidding. Following selection of the contractors, Scarborough supervised all aspects of the construction process and simultaneously provided financial management and processed draw requests, lien releases, payment of real estate taxes and various financial reports. Upon completion of the construction, all occupancy permits were secured and the building was ready to go into service.

The single-source model appealed to Shore Memorial Hospital, also in Somers Point, which hired the firm in 2004 to build its cancer center.

Scarborough had contacted the hospital a number of years previous to see if it would consider selling a small piece of property adjacent to a property the hospital owned. Following that meeting, the hospital CEO invited Scarborough back to discuss ideas concerning aspirations for their entire campus.

“The concept grew into a master campus plan, including the development of a new cancer center, surgical pavilion and medical office,” Scarborough says.

Construction began on a $125-million campus expansion in early 2009 with Scarborough overseeing all design, permitting and construction activities. Project improvements include a new hospital entrance, state-of-the-art operating and recovery rooms, a 130,000-square-foot surgical pavilion, 30,000-square-foot medical office building and 650-stall parking garage, connected via an elevated concourse across a public street.

“It will also house the entire Shore Memorial Surgical Services Department, including endoscopy services, cardiovascular imaging and all pre-admission testing services,” says Bob Robertson, Shore Memorial’s administrative director of logistics.

“The project was necessary to replace our current operating rooms, which were constructed in 1976 and in need of upgrades to improve efficiency,” he says. “The new operating rooms will be capable of supporting the latest technology, as well as future surgical advances.”

“The entire process [would normally] be ten years from the planning stage to completion,” Scarborough says. “Actual construction will be approximately 30 months. The rest of the time was consumed by the entitlement process. At this time, the project is expected to be completed in the summer of 2011.”

Performance-Based Approach

Scarborough performed its services under a “pay-for-performance” model where compensation is built around performance milestones. For example, a pre-set fee based upon the magnitude and scope of the project was set. The fee is earned as follows: 25 percent at the completion of submission of governmental approvals, 25 percent upon receipt of approvals, and the balance, 50 percent, earned over the course of construction.

Other benefits of this model include allowing the hospital CEO and top management to regularly sit in on meetings for unvarnished project updates.

“The single-source model is an effective and efficient method of communication in that it eliminates multiple points of contact,” says Robertson. “The hospital’s main communication is with Scarborough Properties, and they in turn communicate with the contractor and subcontractors.”

The single-source model has proven to be successful, Scarborough says, largely because the company manages the team of professionals from the outset. Global costs remain in the forefront of the decision-making process during approvals, design and construction.

“There are many trained competent professionals involved in delivering a complex real estate development project,” says Scarborough. “They all serve a role, but none have global responsibility.”

While some might point to the construction management model as an answer, Scarborough adds that it falls short in terms of managing a global budget.

“For instance, the construction manager is not responsible for the entitlement process or design — often under way for years prior to the ground breaking,” he says.

Future of Model

It would appear that with so many positives pointing towards the single-source model, it would soon become commonplace. But Scarborough doesn’t see this happening any time soon.

“There are few industry professionals that have the skill-set to replicate the model,” he says. “The marketplace — architects, construction managers, attorneys and engineers — to name a few — consider it a disincentive to be controlled in the front end of the process by a professional developer. Too often they want to have control of the owner without financial risk.”

In emphasizing this point, he says construction professionals often work on an hourly basis and expect to be paid whether or not the project is a success. Construction managers often operate on a cost-plus model.

As to why this model has not been thought of before, Scarborough says it is because real estate advisory and development services are often made on a consultancy basis and not a performance-based approach. Scarborough manages the process from the owner’s perspective, just as it does for its own developments.

“The single-source model stands this concept on its head because our entire team works for Scarborough Properties, which is paid based upon performance.”

Lisa Kopochinski is a freelance writer and can be reached at lisakop@sbcglobal.net.

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Cancer Centers a Growth Area for Hospitals, Investors

By 2030, the incidence of cancer in the United States will increase to 45 percent; by 2050, that rate will hit 50 percent. Americans born today have a 40 percent chance of developing the disease and one in three will be diagnosed by age 65.

The healthcare industry is well aware of what some experts are calling the “slow motion” cancer epidemic, and with the demand for oncology care expected to skyrocket 36 percent over the next decade alone, most healthcare systems are scrambling to add cancer care services to their repertoire, either by building new cancer centers on existing hospital campuses or expanding treatment facilities.

“Three of our recent major new medical campus projects have included separate cancer centers and one of our long-term not-for-profit clients is in the planning stages for a new cancer center on their main medical campus,” said John Kemper, CEO of hospital facilities service firm KLMK Group.

The projects include Firelands Regional Medical Center in Sandusky, Ohio; Atrium Medical Center in Middletown, Ohio; Children’s Medical Center in Dallas; and South Jersey Regional Medical Center in Vineland, N.J. In addition, Upper Chesapeake Health in Bel Air, Md. is in the early design phase of a new cancer center and Duke Medicine in Durham, N.C. has a $220 million cancer center under construction.

“We have observed an increase in cancer center construction in both the for-profit and not-for-profit sectors,” he said. “In the past four years, we have worked with clients on five major cancer center projects. We see this particular market sector growing in the future.”

We won’t know how healthcare reform will affect either sector until reforms are deployed but for now, oncology-related construction is booming in both sectors, Kemper said.

A Sea Change

Cancer treatment delivery is undergoing a “sea change,” said Scot Latimer, a healthcare facility planning expert who in January joined investment firm Jones Lang LaSalle’s Capital Asset Strategy segment – a growing part of the company’s National Healthcare Solutions Group that provides services to the healthcare industry ranging from program management, strategic consulting, financial strategy, advisory services and facilities and property management. JLL is known for its financial advising and real estate management, and in 2010 was ranked as the number two-hospital management firm in the U.S.

“The future of cancer care is in the integrated hospital setting,” rather than in the standalone cancer centers that have seen an increase in construction over the last three years, Latimer said. “Most commercial hospitals are trying to integrate specific services that favor providing cancer treatment and providing for co-morbid specialty needs and social services to treat the whole patient.”

JLL recently partnered with Detroit-based Beaumont Hospitals to service an 8.5 million-square-foot hospital facilities and medical real estate portfolio. To gain momentum for this hospital, JLL was said to have the best dividend stocks and share tips, presenting them to investors in order to gain more capital for their new investment. By the same token, investing in healthcare is often thought to be enticing. After all, everyone needs medical care at some point in their lives and almost everyone uses health services of some kind. When it comes to investing in what you know, health stocks, which can range from hospitals to pharmaceutical and insurance companies, certainly qualify. Moreover, thanks to developments in financial technology like apps and online trading platforms, investing in the healthcare industry has never been easier. In developed countries like Germany, healthcare is often valued as a secure investment opportunity. Correspondingly, you can discover a few of the most popular trading apps out there by taking a look at this Investment App Vergleich (Investment app comparison) guide.

Jones Lang LaSalle at Beaumont Hospitals, as it is now called, will provide all of Beaumont’s healthcare facility services including facility management, construction program management, utility operations, energy and sustainability services, property management, biomedical equipment maintenance and service management, lease administration, portfolio strategy and real estate transaction services. The deal involves 5.1 million square feet of acute care hospital space, 1,744-licensed acute care patient beds and 101 owned or leased off-campus patient care or business sites in metro Detroit.

“We do not believe the trend is that cancer centers are replacing traditional hospitals as the number one treatment option,” KLMK’s Kemper said. “Rather, healthcare owners are adjusting their model of care delivery to better meet patient needs. Cancer treatment facilities are being added to supplement the care being provided in the traditional hospital setting.”

Kemper explained that while the cancer centers that many integrated hospitals are building are physically separate from the main hospital structures, they are still part of the integrated model that is allowing hospitals to adjust their care delivery model and supplement the oncology care already available in the hospital.

“More cancer centers are beginning to offer post-treatment options – exercise classes and activities, yoga, massage therapy, counseling and mind-body studios are becoming more common as medical facilities extend the traditional boundaries of healthcare,” Kemper said. “It allows them to maintain relationships with the patients, as well as to meet patient demands for more complementary and alternative approaches to wellness.”

Kemper also noted that separate oncology facilities allow patients to better navigate their treatment while still benefitting from expanded care options.

“A free-standing facility offers a more intimate, comfortable atmosphere for the patient as opposed to a large sterile hospital,” he said. “It is more convenient for the patient to access this type of service from a smaller facility than from a large, sometimes confusing hospital.”

An unexpected driver lies behind the trend toward integrated hospital oncology care – healthcare reform and its changes to reimbursement schemes and treatment delivery.

“As people anticipate reform, they anticipate the winners will be those who can integrate a continuum of care,” said Latimer. “Future reimbursement makes it tougher for them because reimbursement will be reduced in physician-owned and investor-owned places. A lot of freestanding cancer treatment centers are selling to hospitals,” and consequently, “there will be fewer specialty hospitals,” he said.

Despite the trend toward the integrated hospital care model, not all integrated hospitals will win once healthcare reforms come online. Experts predict some of them will be forced to shut down or merge with stronger hospital systems to successfully operate under the new rules.

Last year, Standard & Poor’s’ U.S. not-for-profit healthcare analysts predicted that while the nonprofit care sector will remain stable in the near term, the next four to six years will likely result in consolidations for nonprofit providers who, among other things, are unable to integrate healthcare reforms into their operations, particularly changes to reimbursement schemes and the care delivery system.

The care delivery reforms emphasize standardized care – wherein physicians treat patients according to protocols designed by determining which treatment strategies work most successfully and consistently on the greatest number of patients in order to raise the quality care while reducing expenses. In order to incent doctors to treat patients according to the standard protocol for their particular condition, standardized care reforms will require that all Medicare reimbursements be tied to “quality metrics,” meaning that doctors who do not treat patients according to protocol, or who do follow protocol but get a poor outcome, will not be reimbursed for that care. Many private insurers are introducing similar incentive programs.

Nonprofit vs. For-Profit

For now, the picture looks rosy for for-profit hospitals and healthcare facilities. Investor-owned firms now own 19 percent of hospitals, up from 14 percent in 2004, and that trend didn’t slow down in 2010, a year rife with for-profit takeovers of nonprofit healthcare systems. The top ten hospitals M&As of 2010 were valued at about $3.8 billion and experts predict that trend will accelerate this year.

But whether for-profits will remain profitable once healthcare reforms are introduced is another story. Studies show that for-profit hospitals and healthcare facilities in the U.S. are more expensive, have higher mortality rates, and provide lower-quality care than their nonprofit counterparts. On average, for-profit hospitals cost Medicare 18 percent more than do non-profits, and death rates are 2 percent higher. For-profit renal dialysis centers, two-thirds of which are privately owned, have a 20 percent higher death rate, though their costs are equivalent to non-profit clinics. No data exists on for-profit cancer centers. From this data, it may be summarised that non-profit could be more beneficial to the healthcare system, however, they do struggle to find funds. There is the usda qualifying map that non-profits can look at to see if they are eligible for a loan in their area to help them serve their communities without being taken over by for-profit companies.

“We do not know, definitively, what accounts for for-profit hospital’s higher death rates,” said Harvard Medical School professor Dr. Stephani Woolhandler. “However, relative to private, nonprofit hospitals, for-profits spend less on nursing and more on ancillary costs.”

If for-profit hospitals consistently register negative patient outcomes and churn out higher bills, it is unclear whether Medicare and private insurers will continue to reimburse them.

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5 Things the Best Children’s Hospitals Have in Common

Some children see a visit to the hospital as an adventure; for others it is terrifying. The best children’s hospital show their patients that their facility is a place where healing occurs, where people go to get better. Design matters immensely when it comes to children’s hospitals because receptiveness during treatment and rapid recovery can be profoundly influenced by environment.

Here are several design ideas that will make your children’s hospital among the best:

Encourage inclusiveness

Make public spaces appealing to preschoolers as well as teenagers, since both are children’s hospital patients. In waiting rooms, keep toys on one side of the area and fish tanks, televisions and other items of general interest on the other side of the room so teens can choose where they want to sit. Vary color, texture and interest items throughout the hospital to create a soothing environment from the moment a child sets foot inside. Interior themes, such as aquatic, astronomy and sports, can be used to identify corridors for easier recognition by the patient and family members.

Think like a parent

Wall-mounted diversions and healthy food vending machines can sooth and engage people in waiting rooms. Design these areas with family clusters of upholstered chairs and tables, rather than long rows of stiff individual chairs, so families have the comfort of their own space. Make sure the waiting area is far enough away from elevators so that small children don’t wander away.

Family Style.

Dining with others helps child patients eat better. Hospital food can be strange to anyone, but easy access to the cafeteria or a communal area on each patient floor where children can interact mitigates the trauma and enhances healing. Playrooms, often supervised by volunteers, are a necessity on each floor, and can be the place for computers with Internet access, as well as the site for family visits. The playroom must be carefully designed to be sunny, spacious, safe and alluring, so that children are motivated to move and interact. There may well be nursery wall decals used to add color and points of interest to the room that keep the children happy and entertained.

Be in the Testing Zone

Design imaging equipment rooms to be adjacent to each other to reduce the walking distance young patients must travel. Locating the MRI, CAT scan and labs in the same area improves the efficiency of the caregivers and reduces patient stress. Naturally, it also helps to contain infrastructure costs. Harnessing electrical surges and supporting equipment weight are necessary precautions that can be more easily applied to a designated area. Medical imaging equipment is a major investment for any institution, but it can be less costly if equipment is located together with the support of the proper infrastructure.

Sunshine heals

Provide some patient rooms with movable walls so a single room can be expanded into a double room to accommodate supplies, equipment, family and loneliness. Although the trend in pediatric design is toward private rooms, a child who is going to be in the hospital for an extended stay and whose parents cannot stay with him or her may want to be in a room with another child.

Provide patients with internet access to allow them to stay connected through computers in the playroom or provide wi-fi in every patient room. It may seem like a small design issue, but if you give patients the ability to control the lighting in their room, they will feel empowered to take control of aspects of their illnesses. Most importantly, ensure that the sun can shine into all patient rooms. Besides the research that documents the biological importance of adequate levels of Vitamin D, sunshine makes people feel good, a factor in healing that cannot be overemphasized.

Tony Kelly, AIA, PE, LEED AP, is a healthcare architect with EwingCole, a national architecture, engineering, interior design and planning firm, with offices in Philadelphia, Washington DC, and Irvine, California.

EwingCole

http://www.ewingcole.com/

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Q&A: Erin Rae Hoffer, Autodesk Manager

Building information modeling, a technology that allows architects, engineers and contractors to create integrated, three-dimensional digital design documents, is at once a catalyst for tremendous change within the design/construction community and a source of confusion among design professionals and project owners.

Design firms willing to embrace the technology have the potential to create 3-D models of a project, complete with graphical or non-graphical representations of architectural and structural information — down to the weight of the last support beam and the type of bolt used to secure it — and electrical and mechanical systems, including the make and model of individual HVAC units. Owners have the opportunity to see how their projects will look early in the design phase, while contractors may experience fewer construction clashes in the field.

However, as awareness of the technology grows and its capabilities evolve, the definition of BIM becomes more nebulous and far-reaching, and questions begin to arise about potential drawbacks and issues of responsibility. Erin Rae Hoffer, an architect and industry programs manager with Autodesk Inc., a San Rafael, Calif.-based company that specializes in BIM technology, discussed the topic with School Construction News.

Q: There are many definitions of BIM. Some say it’s a process and others say it’s a tool. How would you define it?

A: Autodesk definitely defines it as a process. Initially, it was attached to certain products from certain vendors, but, over time, the industry evolved in its use of building information modeling.

Q: What are some common misconceptions about BIM?

A: The most common misconception is that it’s just another CAD program. It’s a bigger change than that. People also think that it’s just one product that comes in a single software package.

We try to correct that because I think BIM has more opportunity than that. There are several products, from the twinkle-in-the-eye stage to concept and design to planning, analysis and simulation. All of these lead ultimately to construction, then management, then ownership.

Q: How has the need for new skills impacted the rate at which architectural firms adopt BIM?

A: When you’re talking about a move to BIM, it’s not just upgrading your CAD package. In order to leverage it and get the benefit, you have to rethink your whole approach to a project and your whole business model.

There are many practices that have a lot of people who are ready to learn something new. Some firms are bringing in younger people who have been exposed to the latest technology in school programs. Each firm has a different way of refreshing the skill base. There is a lot of access out there to training; It’s more a matter of finding the time.

Q: What role are clients playing in the adoption of BIM?

A: Clients are probably the No. 1 driver of change. A few years ago, I was at an academic institution and the president of the institution came to me and said he had heard a lot of people talking about BIM and wanted to know why. So, I went to survey my colleagues’ market interest, called a bunch of people and asked what was going on with their practices and whether they were looking at BIM. Many of them said, “Well, we have heard that the U.S. General Services Administration is going to require projects to be done using BIM, so we’re going to do it.”

The GSA is the biggest owner in this country. So, the owner’s voice has been heard very clearly and strongly.

Q: What are some other hot topics surrounding BIM right now?

A: One of the hot topics is interoperability. People always ask about that. If you look at BIM as being a multiple-vendor universe of options, how do you navigate it? Just within the Autodesk products, people want to know how to get from authoring their model to doing sustainable analysis to making a movie to show a client.

There is one format, gbXML, which is for green building. It was invented by Autodesk, but now it is managed by a consortium. Autodesk is a participant, but doesn’t control it. We want it to be open as a standard. Our products will write a gbXML file that can then be read by other programs for sustainability analysis. That is something people want to be able to understand how to do.

Q: As an open, continuously updated database, who is ultimately responsible?

A: The American Institute of Architects and the Associated General Contractors of America, which is connected to ConsensusDOCS, have helped out with this question by developing a set of documents that cover integrated projects.

One answer is to look at those groups, because they have BIM documents that lay out a project in detail: If you want to work jointly, here is the way someone should manage the process. However, that’s not the way you have to do it, so other companies have created their own approach.

Some firms are really open. I think it’s something that has to be negotiated on the project, but it can go many different ways.

Q: On the owner’s side, is there an increased risk of unrealistic expectations?

A: I think owners are expecting more because of growing awareness. At a conference I attended this month for commercial developers, several people came up to me and asked about BIM and were wondering if it would be appropriate for different kinds of projects.

People know enough about it now to know that it’s valuable. They aren’t at the point yet where they’re specifying it. I think owner demand will increase, but I don’t know that expectations will ever spiral out of control.

Erin Rae Hoffer is an architect and industry programs manager with Autodesk Inc. She is a LEED-accredited professional with more than 25 years of experience in computer-aided design.

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Developers Can End Project ‘Freezes’

Capital constraints, a shortage of debt financing and the poor economy are creating difficult times for many. Hospitals officials are facing several factors outside of their control that could have the potential to severely inhibit continued growth.

The current do-nothing or capital-freeze approach many hospitals are taking can be detrimental to their necessary future growth. Today’s economic conditions are not as favorable as they once were, but even though resources are down, needs remain and hospitals must continue to grow.

If projects are put on hold for too long, the opportunity to gain future market share and keep existing infrastructures up to date could be in jeopardy. Outpatient medical offices and other ancillary facilities continue to be essential investments for continued success.

There is no reason for hospitals to wait another year or two before they implement a plan — most likely financing will still be tight in 2011.

Hospitals can start working with developers that have money available now. Even if a hospital is experiencing a capital freeze, now is the perfect time to interview developers and identify which ones have the resources to help meet their goals.

While hospitals might not be able to raise the capital for a much-needed medical office building or outpatient facility, they can benefit greatly by partnering with an experienced healthcare real estate developer.

Even in today’s economy, a strong developer will have access to capital and the relationships with investors and lenders that are necessary to obtain construction and permanent financing.

The best developers will also have a highly successful track record and will have many examples of recent healthcare projects.

When working with a good development partner, a hospital should not be required to make an upfront investment, assume any debt or even sign a master lease for the space.

Many developers will also perform a free and comprehensive feasibility study before the development officially gets under way. Instead of costing hospitals money, new developments can be designed to generate additional income.

On-Campus Space

It can be very beneficial for a hospital’s bottom line to work with a developer to shift space from within the hospital that does not generate revenue to a new on-campus medical office building.

To take maximum advantage of a new on-campus MOB, hospitals can establish additional revenue-generating services that they previously could not accommodate, such as a single-specialty ambulatory surgery center that can drive incremental surgery to the campus or a joint-venture imaging center.

In late 2008, Pacific Medical Buildings of San Diego, partnered with St. Joseph’s of Orange Hospital in Orange County, Calif., to develop a new on-campus 130,000-square-foot MOB and a 1,086-space parking structure.

PMB owns and manages the new MOB and St. Joseph Hospital has a long-term lease for approximately half of the 70-story facility. This mutually beneficial agreement allows the hospital to maintain control over building tenants and medical-related services in the building.

The hospital will utilize its leased half of the facility for a rehabilitation center to complement its growing oncology program with a cancer registry, comprehensive breast center, palliative care support offices and a specialized oncology-related appearance center.

The new MOB provides a better economy for developing a new acute care hospital facility, making the decision a profitable one for the hospital.

Off-Campus Space

When hospitals expand their market share and establish a presence in a new location, they can become more profitable. When they can expand their market share by using a developer to finance and build a new off-campus space it can be a winning situation for both entities.

Officials at Providence Holy Cross Mission Hills Hospital in Mission Hills, Calif., worked with PMB to identify and purchase land for a new three-story, 78,000-square-foot off-campus outpatient facility, 15 miles from the main hospital on one of the most prominent sites in the Santa Clarita Valley.

PMB performed a comprehensive study to determine the best site for the outpatient facility, and chose a corner parcel across from the town center in Newhall. Although PMB owns the land and the building, the hospital has a say on what goes in the building because it leases approximately 25 percent of the space.

The facility is home to a surgery center, imaging center, cancer center and the Facey Medical Group. A computerized system for results reporting links the off-campus building to the main hospital.

Outside Revenue

With the help of a developer, hospitals can participate in developments that include additional types of revenue-generating tenants and structures.

Non-medical tenants can be a beneficial addition for a MOB. By taking advantage of a very visible and accessible location, a hospital can consider establishing retail space in a building to generate new non-direct patient care revenue.

Hospitals across the country are including non-traditional tenants, such as bistros, coffee shops and fitness/lifestyle management centers, into their MOB and have even incorporated some of the same tenants within their hospitals.

There is also a trend to lease to non-traditional clinical tenants, such as alternative medicine practitioners. These can include homeopaths, naturopaths and acupuncturists.

The Roy and Patricia Disney Family Cancer Center in Burbank, Calif., houses an integrative mind/body/spirit program for cancer. In addition to traditional services associated with a cancer center, the facility includes medical office space, a personal-appearance office, and a rehabilitation and a wellness center.

Selecting the Right Developer

The current economy has made selecting the right developer more important than ever. The economy has changed and with it, the criteria that hospitals should use to choose a developer should change. By using a good set of criteria, hospitals can avoid making a very expensive mistake:

• Select a developer that has access to capital and strong relationships with investors and lenders, and that can provide construction and permanent financing. Many developers are having the same problems accessing capital as hospitals, which limits their ability to satisfy lender requirements.
• Select a developer with a successful track record. Find out who they use as lenders and ask about recent projects, including buildings under construction and in development.
• Select a developer who will not require the hospital to make an investment, assume debt or master lease space.
• Select a developer who encourages physician investment in your project.
• Select a developer who has a record of transparency in their transactions.
• Select a developer who can provide construction completion and loan guarantees and has adequate net worth to satisfy lender requirements. Verify the developer’s ability to raise equity and secure debt. Consider selecting a developer who has a relationship with a REIT.
• Select a developer who can provide a comprehensive range of services from project development to property management.
•Select a developer who is willing to perform a free and comprehensive project feasibility study.

Barry Weinbaum is director of business development for Pacific Medical Buildings. Contact him at (800) 472-1005 or bweinbaum@pmbllc.com.

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Oncologists Gain Independence With Adaptive Reuse Project

The conversion of a former office building into a new cancer center resulted from a disagreement between hospital officials and a group of St. Louis oncologists. The doctors and the officials had differing views on patient and physician needs within the cancer care environment, so the oncologists opened their own facility in a former Citicorp space.

The oncologist’s story dates back to 2002, when new cancer facilities were planned at several locations around St. Louis, but St. John’s Mercy Medical Center had no plans for such renovations or improvements. Doctors John Eckardt, Alfred Greco and Leonard White – all oncologists working at St. John’s – knew something had to be done to improve the facility’s cancer treatment or they faced losing patients.

"Our patients were having to wait a couple hours to get treatments and a couple hours to get blood work," White says. "If they needed a CAT scan it would be a week, and if they needed an MRI it would be two weeks. We just didn’t feel that was appropriate."

Despite the long patient waits, the hospital appeared to have no plans to improve the situation with renovations or new construction, so the doctors took action.

"We had become concerned that the hospital was not doing enough with respect to cancer care, and all of the other hospitals around us were putting up cancer centers," Says White. "We felt that we would have to hire our own person to (plan a cancer center), which we did."

Blueprints for renovations at St. John’s were created under the doctors’ guidance and submitted to hospital officials for approval. The plans initially got a warm response from administrators, but then negotiations cooled and hospital officials backed out of the plan, according to White. Soon after, the hospital revealed its own plans for a new cancer center.

"They were willing to put up a cancer center, but we weren’t going to have much input on how it was going to be run and we did not want to do it," White says.

With the belief that a cancer center planned by doctors would have a greater benefit for patients, the oncologists instead opted to look at other options and different locations.

"They said, ‘It’s our way or the highway,’ and I think they were a bit taken aback when we elected to not be a part of it," White says.

The doctors searched for a location to house a new cancer center, but none of the area’s medical facilities could accommodate their needs.

"We were looking to move outside of the hospital and the hospital office buildings," White says. "We looked at several other facilities and none of them were satisfactory."

In early 2003, the doctors saw inspiration in an unexpected location – a 135,000-square-foot office building that formerly housed Citicorp Mortgage. The building provided an ideal location close to a major thoroughfare, Highway 40, but more importantly the building was located within a mile of St. John’s and was in close proximity to two other St. Louis hospitals.

Eckardt, Greco and White formed AMSI Properties LLC and purchased the building with the intention of converting former office spaces into a cancer center and medical offices that could be leased by other doctors. By May 2003, the doctors and their 50 employees opened The Center for Cancer Care and Research. However, the group found that the skills they learned in medical school couldn’t help them manage the building as efficiently as they would have liked, and outside reinforcements were brought in to help facilitate the office building’s medical center conversion.

A New Development

Enter Earl E. Walker and Alvin D. Vitt, two well-known St. Louis businessmen. Walker, CEO of Carr Lane Manufacturing Co., an international supplier of tooling components, purchased a significant portion of the building, becoming its majority owner. Vitt, a commercial property developer, agreed to manage the building.

After the two got involved with the project, $14 million was secured for renovations that would allow the entire structure to be inhabited by medical offices.

"Alvin Vitt had plenty of experience with the banks to show them that we had the wherewithal to get it done," White says.

The building was constructed in the early 1980s with the sole intention of housing business offices, therefore it required specific modifications for it to be successfully converted into a medical facility.

Parking issues provided the biggest challenge for those involved with the renovations. The city of Town and Country, Mo., an exclusive suburb just west of St. Louis, requires that medical offices have eight parking spaces for every 1,000 square feet of space, double the amount of spaces needed for business offices.

"We had to develop a plan for additional parking and since there was no more land available, the only option we had was to build a one-level precast parking deck over the existing parking lot," Vitt says.

Figuring out a plan for additional parking and constructing it was tough enough, but Vitt also had to finesse city officials who were reluctant to allow the construction of a parking structure within their jurisdiction.

"Alvin really led the charge to get the city of Town and Country to approve the project," says John Komlos, vice president of sales at Arco Construction, the company hired to execute the renovations. "They typically wouldn’t want to see a parking garage, but Al made a great case that the building wasn’t going to be usable without a parking garage. He had to really sell the city on the concept, so we’re past that hurdle."

The building also had to be renovated to accommodate ADA standards, so to meet compliance issues and for the benefit of patients visiting the building, the facility’s entry was modified.

"It was built several years ago before the Americans With Disabilities Act, so we’re literally putting a new front on the building that includes an elevator to get patients from the parking level to the floor level of the building," Komlos says.

Additionally, the inside of the building was gutted and corridors were added to separate medical offices. A new roof, bathroom upgrades, plumbing and electrical upgrades and HVAC systems were also be added. Construction on the project is scheduled to be complete by January 2006.

"When it’s all over we should have a brand new building," Vitt says.

Medical Partners

Although the building’s bones aren’t brand new, the renovation saved the doctors that formed AMSI Properties – and other parties that invested in the building – a significant amount of time and money.

"There is significant financial savings for being able to adapt and reuse a building such as this, and I think it is going to work very well for them," says the project architect Rick Clawson, of ACI/Boland.

The new facility will also benefit tenants who will have the option of participating in a partnership deal that allows them partial building ownership.

"They will have a choice, they can sign the lease and be a tenant, and if they want, in addition to being a tenant they can be a partner in the ownership of the building," Vitt says.

Vitt says the program is attractive to medical professionals because doctors prefer to stay at one location, and even if the rent is a bit higher due to the renovations, tenants will benefit from investing in the building.

"Even though you have a higher rent, if a doctor can be an owner and see that he is getting some equity, and when all is said in done, he can see that the mortgage is getting paid off with some of the rent that he is paying, it makes it a bit more palatable."

With the exception of the cancer center, The St. Louis Orthopedic Institute is the building’s first tenant. The facility has also caught the attention of several other medical practitioners – including dermatologists, urologists and surgeons – without the use of promotions or advertising. As space is leased, ARCO Construction will tailor each office to suit tenant needs.

"So far the response has been tremendous," Vitt says. "A lot of these doctors have been under the control of either hospitals or insurance companies, and in many cases sold their practices. I think medicine is making a full cycle to the point where doctors will be able to practice medicine and be free of both the hospital and insurance company."

Clawson, who has been involved in the design of at least four other adaptive reuse medical facilities, believes that reuse projects will continue to be an attractive option for physicians who want to avoid the costs of building new or the aggravation of looking for property.

"It makes a lot economic sense for the doctors groups," Clawson says.

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