11-22: Retail centers, Office building, Burger King, Dennys, Tire Works

Certificate of Need for Medical Office Buildings

36 states and District of Columbia require a Certificate of Need (CON) before medical facility is allowed to open or expanded. The intent is to prevent excess capacity.  The supporters of CON claim excess capacity will increase the costs of medical services.  Medical facilities need to charge more to make a profit if the facilities are under-utilized. This is evidenced by a study conducted by “big-three” automakers which shows lower health care costs in CON states than non-CON states.  The Leapfrog Group for Patient Safety maintains that the push for more medical center may have negative impact of quality.  For many complex medical treatments, there is scientific evidence of superior results in hospital with higher volumes. For referrals, this group tends to favor hospitals with a certain volume threshold, e.g. at least 500 cases/year for Coronary artery bypass surgery.  The opponents of CON argue CON is against free market system and leads to higher healthcare costs due less competition. In 2004, the Federal Trade Commission and Department of Justice urged “States with Certificate of Need programs should reconsider whether these programs best serve their citizens' health care needs.”

The scope of Certificate of Need laws varies from state to state covering up to 30 major medical services from Air Ambulance to Ultra Sound services.  24 states and DC require CON for Open Heart Surgical Centers while only VT and DC require CON for general medical office buildings.  Over all, Connecticut has the highest and Louisiana has the lowest regulatory burdens in obtaining the CON among the 36 states.  Besides CON, state and local governments can use zoning and various restrictions to limit the number of medical facilities. For example, a 2-story professional office building won’t be able to lease to medical tenants on the 2^nd story if it does not have an elevator.

Conclusion: If you are the owner of a medical office building, CON limits the supplies and it’s a big plus for your investment.

© Transmercial 2011

1. Retail Center in Salt lake City, UT: 6949 SF retail center built in 2003 on .57 ac lot with easy access to I-215. 100% NNN leased to 5 national tenants: Subway, Jack Hewitt Tax, Cricket Wireless, Papa John Pizza, and Check N Go.  NOI $130K/yr. $1.3M. 10% cap.  
2. Shopping Center in Glenville, IL: 36,597 SF 6-yrs old shopping center on 3.28 acres lot in affluent Chicago suburbs (AHI $136K/yr in 1 mile).  Anchored by 20,213 SF Staples. 87% NNN leased.  Pro forma NOI $739K/yr. $8M. 9.25% cap. 
3. Single-tenant Office Building in Springfield, IL: 20,706 SF class-A office building in affluent area (AHI $111K/yr in 1 mile).  100% NNN- lease till 2021 to Gtech Corp (S&P BBB-).  NOI $248K/yr. $2.68M. 8.5% cap. 
4. Shopping Center in San Jose, CA: 19,066 SF 3-building 14-unit shopping center built in 1990 on 1.63 ac corner lot in high income area (AHI $104K/yr in 1 mile). 96% NNN lease with 1 small vacant unit.  NOI $401K/yr. $6.5M. 6.16% cap. 
5. Shopping Center in Noblesville, IN: 74,414 SF shopping center on 13 ac lot in Indianapolis suburbs.  Anchored by 49,857 SF Kroger Food & Drugs. 98% leased.  NOI $446K/yr. $5.265M. 8.5% cap. 
6. Burger King in Bartow, CA: 3072 SF Burger King built in 2001 on 1.4 ac lot near I-10 exit.  20 yrs NNN lease with 12 yrs remaining to an operator with 20 locations.  NOI $116K/yr. with 10% rent bumps every 5 yrs.  Price reduced to $1.685M. 6.9% cap. 
7. Dennys in Melbourne, FL: 4675 SF Dennys on .9 ac lot close to I-95 exit.  100% absolute NNN lease till 2027 to an operator with 30 units.  NOI $99K/yr with 4% rent bump in 2013 and 10% every 5 yrs thereafter.  $1.327M. 7.5% cap. 
8. Tire Works in Las Vegas, NV: 7600 SF auto service center built in 2003 on .88 ac lot in high income area (AHI $86K/yr).  20 yrs absolute NNN corp lease.  NOI $108K/yr. with 10% rent bumps every 5 yrs. $1.5M. 7.2% cap.

© Transmercial 2011.