“The fees charged by third-party real estate service providers for the talent and services they contribute can provide real value where the client leverages and integrates them into their team.”
Mary Beth Kuzmanovich, a former health system executive who has been the national director of healthcare services for Colliers International since January 2015, has learned some insights from “the other side of the table.”
Prior to joining Colliers four years ago, Ms. Kuzmanovich spent 25 years on the provider/client side in healthcare real estate strategy and operations at Carolinas HealthCare System (CHS), now Atrium Health. In her role as vice president in the Facilities Management Group, she led a real estate services division responsible for leasing, property management, development and acquisitions.
In a recent interview, Ms. Kuzmanovich discussed “things I know now that I wish I had known then”—three pieces of insider wisdom that illustrate just how valuable third-party real estate service providers can be.
A broker that is properly managed and focused can deliver great value.
A real estate broker is an intermediary between sellers and buyers of commercial real estate, who helps clients sell, lease or purchase property. A commercial real estate broker has the freedom to work as an independent agent, an employer of commercial real estate agents or as a member of a commercial real estate brokerage firm.
Anyone in healthcare real estate knows by now that brokerage services are compensated in the form of fees. Back when Ms. Kuzmanovich was a healthcare executive, she says she never wanted to pay those fees because of the focus on saving money for the health system. But, since then, she’s learned that really good brokers work hard to earn their fees—and they deliver significant value to the client.
“You wouldn’t want to go to court without a lawyer to represent you,” Ms. Kuzmanovich contends. “The premise is the same for real estate. You wouldn’t want to negotiate a real estate transaction without a qualified broker. Be sure that his or her incentives are aligned with yours to get the best possible deal for you, which can mean that the client pays their commission fee.”
“The broker is not greedy or evil. Like any partner, they simply need to be managed and focused. If you can do that, brokers can bring immeasurable value, well worth the fee.”
A third-party property manager can bring significant value in terms of both performing the work as well as creating a buffer between the health system and its facility users-tenants.
A property manager (or ownership representative) is responsible for the care and maintenance of premises. They may also coordinate leasing activities either with the designated leasing agent or directly.
“The value of property management can be easily overlooked,” Ms. Kuzmanovich opines. “But third-party property management gives the health system an ability to have some arm’s length from its tenants—a buffer—which brings value by taking work off the plate of hospital staff, who can then focus on inpatient facility management.”
However, Ms. Kuzmanovich notes that results are most favorable when the scope of work is strictly performed according to the lease agreement, particularly when it comes to building maintenance and engineering.
Lease administration is vitally important, and a good lease administrator can bring discipline to the process and deliver real strategic value.
Lease administration covers a wide variety of tasks associated with the management of space held under lease. These tasks commonly include: lease abstracting, lease documentation administration, portfolio analysis and performance reporting.
“Lease administration is probably the least ‘sexy’ area of real estate services, but your lease is the ultimate ruling document that drives your cost, risk and more,” Ms. Kuzmanovich says. “So, if you have a great lease administrator, they can provide some strategic value, regulatory compliance and discipline to the process that could add value.”
She continues, “As a former healthcare executive, I know firsthand that healthcare people are dedicated and driven to do everything better—and there are some things they can do better, such as system strategy and operations. But with the constant drive to reduce staff, real estate departments can leverage what a third party can bring to augment their internal teams, while demanding excellent service.”
Trends of today: The influence of third-party real estate services on health systems
Ms. Kuzmanovich is seeing the influence of third-party real estate services actively play out in today’s healthcare real estate world via three different trends.
“With all the mergers and consolidations across the healthcare systems, we are seeing a downstream ripple effect in the consolidation of their corporate real estate departments,” she says. “We’re seeing it with Ascension and Presence. We’re seeing it with Providence St. Joseph, Dignity and CHI, and others across the country.”
In many cases, according to Ms. Kuzmanovich, that ups the level of sophistication. Health systems are focused on ways to operate in a more efficient, strategic way as they grow larger through these mergers and acquisitions.
“What that’s doing is just really solidifying the trend of a more streamlined and centralized real estate department,” she says. “They’re building on existing talent, plus bringing in great outside, very experienced talent. In most cases, that’s very welcome because it’s bringing a more corporate approach to their real estate management processes.”
Secondly, health systems are looking very closely at their real estate services and engaging third-party services, largely in a drive to keep costs down.
“They are striving hard to reduce their operating expenses,” Ms. Kuzmanovich says. “Their expectation is that a third-party real estate company can help them do that more efficiently by bringing industry best practices.”
Along with this, health systems closely monitor Full Time Equivalents, or FTEs per bed.
“You can shift the hospital maintenance staff from outpatient medical office buildings to inpatient facilities as an option to avoid that budget request to add FTEs. So, as we saw last year and we expect to continue to see in 2019, there are more opportunities where health systems are looking at outsourced services from property management, lease administration and project management.”
This is being demonstrated in the form of an increase of Requests for Proposals (RFPs) from health systems for real estate services, Ms. Kuzmanovich says.
“I know there are a lot of portfolio sales out there that healthcare real estate professionals have heard about from the investment side, but the RFPs for services are really becoming much more prevalent as well as interesting,” she says. “I am happy to see these trends develop, and the future is bright. I believe we’ll see a continuation of them in 2019.”