Building Rx: Just what the doctor ordered

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Dr. Kevin Weary and his business partner, Mike Heritage, are building a $15 million medical office building that will connect to the St. Francis Medical Center.

Colorado doctors are following a national trend and branching out into a new line of business – commercial real estate.
One example is Dr. Kevin Weary, who has teamed with Mike Heritage of London Real Estate Group to build a $15 million, 80,000-square-foot medical office building that will connect to the St. Francis Medical Center.
It’s a lead that more physicians are following.
“You’ve always had doctors who owned a small building that they practice in,” Weary said. “What I see developing in Colorado Springs goes way beyond that. Doctors are becoming more involved with joint ventures in hospitals and other practices, involved in doing business with their colleagues.”
Doctors are becoming active participants in medical office buildings around the country, creating what Weary calls a “win-win-win” situation for them, their colleagues and hospitals in the area.
“Among other things, it allowed them to develop and control practice space that was efficient and productive,” according to a white paper about physician ownership participation written by the investment banking group Cain Brothers. “The autonomy provided by these choices was attractive, but so too were the expectations that the equity in the property could grow in value, and they could benefit from tax advantages of real estate ownership.”
Construction started in July on Weary’s medical complex, which will be known as NorthCare at St. Francis. It will be a four-story building on 5.1 acres.
Investing in the medical office building near Woodmen Road and Powers Boulevard is not Weary’s first foray into real estate. He and some fellow physicians own their current office space on Academy Boulevard. He views the move to St. Francis as a positive step for doctors to become more active colleagues.
“We have seven different specialties scheduled for the office building now,” Weary said. “And we plan to have 10 by the time it opens. It’s an opportunity to collaborate, to have all the doctors and specialties in one building. For instance, if an expectant mother needs a pediatrician, I can refer her to the one whose office is right down the hall. If a patient falls and breaks a leg, I can refer her to the orthopedist in the same building.”
Cain Brothers notes that until the 1990s, hospitals owned medical office buildings. The trend recently has been toward third-party partnership models. That was the plan at St. Francis.
“They wanted to have the classic real estate brokerage own the building and lease it out,” Weary said. “I decided to have them outsource it to us, so I contacted Mike Heritage to work out the details. It makes sense — doctors are now personally invested in the campus.”
Weary and Heritage set up NorthCare LLC, an investment group that includes several other medical professionals who plan to set up office in the building and have ownership stakes.
“This kind of medical investment group is becoming more common,” said Heritage, who specializes in putting together investment groups to develop commercial properties. “We’ve done a few in the past, and I expect we’ll do more as lease rates rise to higher levels.”
The trend is repeating across the nation. Cain Brothers reports that owner-physicians are “a much more powerful force. Physician tenants are now in a unique position to increase the value of the project when they sign up for long-term rentals of 10 years or more.”
Heritage said that more doctors are seeing the benefit of paying themselves to lease the building, and have a share in its ownership.
“It’s a great investment, particularly if it’s a well-positioned medical office building, like NorthCare,” he said. “It’s connected by a skybridge to a hospital filled with surgeons. You can’t find a better avenue. It’s a great way to invest, especially for retirement purposes.”
London Real Estate Group also is working with a group of doctors on another project, just down the road from the NorthCare site: the Powers Professional Campus.
“That project is similar in nature, the tenants will be owners in the building as well. But the NorthCare project is our large project,” Heritage said. “We’re seeing a lot of activity there — more than 500 construction workers are on site.”
Cain Brothers says that decline in practice income is one reason doctors are becoming commercial real estate owners.
“Ownership interest by physician tenants in medical real estate represents a somewhat unique class of commercial real estate investment,” the report said. “In most commercial real estate developments, whether shopping center or office buildings, the tenants are not usually offered ownership. Developers … prefer to work with equity investors who are willing to commit large amounts of money, rather than managing the legal and practical challenges of aggregating large numbers of small investors.”
Weary said he believes that more doctors will become medical office building owners. The idea benefits individual practices — owners rent to themselves — and helps create new partnerships.
“It’s a natural referral source,” he said. “It’s easy to build these partnerships and helps with competitions from other doctors. We’re all about providing a service to our patients, so if we can make things more convenient for them — just one place to go for many different specialties — we like to do that.”