H2C INDUSTRY INSIGHTS • REAL ESTATE
Rightsizing Your Lease Agreements: Options for Healthcare Leaders
March 28, 2021
About Hammond Hanlon Camp LLC ("H2C")
H2C is a strategic advisory and investment banking firm with a singular focus on health care. Our commitment to exceed our clients’ expectations begins with senior leadership on every engagement and continues with independent and objective strategic advice. Our belief in the markets and in the power of competition has resulted in loyal clients and long-term relationships.
The experienced professionals at H2C are well positioned to serve as your trusted advisors. We have the expertise to understand the unique complexities of the healthcare industry and an in-depth knowledge of the range of potential alternatives essential to designing and implementing highly successful business and financial strategies. We bring in-depth knowledge and experience across the full continuum of care and across a wide range of healthcare-related businesses.
Kelly T. Duong
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Even before the pandemic, many hospitals and health systems found themselves in unfavorable lease arrangements. These agreements, which often were structured several years ago, have exceeded market rental rates, prevented healthcare organizations from leaving undesirable space, and allowed competitors to move in nearby.
Now, as the impact of COVID-19 on hospital volumes and expenses strains healthcare organizations’ finances—and as medical office buildings continue to show remarkable resilience in pricing and cost of capital remains low—healthcare leaders must consider: “Should we renew or renegotiate our lease agreements? Or, is now the time to purchase the properties we lease?”
It’s also important to evaluate the impact of new lease accounting standards—which require hospitals to report leases longer than 12 months on their balance sheets—on the organization’s leverage position. Recently, we’ve seen instances where the operating lease liability reported by health systems is much higher than what the rating agencies’ projection of the debt equivalent of the health system’s leases had been. In one instance, a health system’s outlook was revised from “stable” to “negative” in part because the health system’s leverage metrics weakened when lease liability was added to the balance sheet.
One common—and expensive—issue for healthcare organizations: above-market rental rates, driven by pre-set annual lease payment increases that exceed the consumer price index.