Hartford Hospital is the major tertiary hospital among the five acute care hospitals that make up Hartford HealthCare. Hartford system leadership reached out to Health Realty Advisors to evaluate the current market value of the 170,000-square-foot Medical Office Building that connected to Hartford Hospital.
Health Realty Advisors discovered that the Medical Office Building housed 22 private physician practice leases as well as numerous other third-party tenants. A number of the building leases had expired and the rest were due to expire within the year. Our initial report was that the building, which should have significant value, did not have much value because a building with expired or expiring leases does not represent true value.
We evaluated the building operating expenses and found them to be extremely high by industry standards. The historical leases were structured with separate payments for base rent and operating expenses that, when combined, were somewhat under the market rental rates. We needed to reposition this asset to reflect the true market value, which would require negotiating new (higher) rental rates for all tenants. Although the new rental rates reflected current market values, the Hospital anticipated pushback from physicians about their new lease agreements.
HRA started by performing a market-based medical office rental rate analysis within the region. The result was to structure several new lease rate alternatives around either a five-year or ten-year term. To address the Hospital’s concern about the reaction to the new increased rental rates, we worked with legal counsel to develop a new lease rate structure using a modified gross lease approach. This approach would reward an owner if operating expenses could be reduced. We brought in a third-party property manager to evaluate the historical operating expenses and designate areas for potential improvements.
HRA also managed the process of putting new leases in place for every tenant. We used our experience with leasing space to physicians to help achieve a 100% success rate in getting all the tenants to renew their leases. Within three to four months, all the private physician leases were renewed.
The opportunity we uncovered to reduce operating expenses has added $5.5 million in additional value to the property. We have repositioned this asset to yield a value that could approach $40 million for Hartford HealthCare.