Before the decision to build is determined there are several mitigating factors that must be considered first which are: creating customer surveys based on more defined community interest, doing market research to see the location to build the facility, taking time with the other specialist or constituent groups to listen to their input on building the facility given their past knowledge, taking time to focus on the other nonprofits within the city and the state to analyze their strategic positions, and any other knowledge source that can be utilized to make the best decision on building the medical office.
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The consideration to focus would be to meet the needs of our possible primary customers or patients, any supporting current customers, professional medical staff, board members of the hospital or medical group in order to meet the expectations of the five year strategic plan. Another decision could be to focus not on having patients come to us but building the office in neighborhood communities which is the new focus for building smaller medical office next to shopping which makes it more convenient for patients.
In reviewing the advantages of building the new facility there are slight amounts given location of the facility such as if the facility was built on campus it would cost an estimated amount of $600,000 versus the facility being build next to the campus which is a slight increase of $700,000 which is a difference of only 100,000. By building a secondary facility there would be additional cost for building an additional MRI which would be approximately $3,000,000 however, the off-set would be additional patients could utilize the MRI which would increase revenue.
By building the facility the physician group is able to use the concept of build-to-suit in order to design a facility that has the capability to focus on space efficiency and maximize productivity. When mapping out plans for building a facility one aspect is the cost of per square foot to focus on. So if our medical office is between 6,000-7,000 and $350.00 per square foot which includes the land purchase price which would equal maximum of $2,450,000. However, if we build an office that is 10,000 square foot the price drops by $200.00 per square foot which then equals $1,500,000 which would be less than the first amount the better decision would be to build the 10,000 square foot building so in essence there would be more building at less cost and room to expand.
When a medical institution is considering expanding it is highly essential to focus on the four areas listed below:
Quality and Safety
Growth and Profitability
By building a facility the focus will have a stronger success rate given the individualized location and being able to have a bigger impact based on being blended in with the hospital numbers. If the building were built the classes attendance might increase to >75% and the CMS orthopedic indicator set could also increase to >90th percentile which would specifically improve the quality and safety focus.
By being in a location that is accessible by patients the best marketing tool is by word of mouth of the patients and they might be likely to increase the score of this measure of >90th percentage as well as the physician satisfaction score which all in all would meet the service excellence measures of the facility given the location the building is built in. The other aspect would be having a close medical office that specializes in orthopedics might decrease consensus of the hospital by decreasing the surgeries which is at 14,800 and decreasing the number of ER visits which is currently 36,100 which in turns would increase revenue of the medical office.
By branching off from the hospital and building a facility the physician group would start from the beginning and higher the best orthopedic nursing staff to care for the patients and given the positive environment of the new office the retention rate of the staff would increase to >90% which would improve the staff achievement measures.
Lastly, the surgical cases could increase to over 2100, and the physical therapy visits could increase to over 6,500 given the size of the building and amount of physicians of therapists that were hired to care for patients. This would in-turn increase the margin of greater than $2,171,500 which would exceed the growth and profitability measures. Another measure to focus on is the tax factor because a business can deduct the taxes taken out on the structure on an annual basis which can be a great cost savings including deducting interest on the purchase loan, property taxes and other qualifying expenses.
Building this medical office it would implement a successful strategic plan outlined in the boards five year plan and increase not only in volume and improved financial performance for the hospital business. It will in-turn increase services offered to the community by using the most advanced approaches to prevent, or diagnose, including treating disease processes impacting thousands in the community.
b. BUYING SPACE FOR THE NEW ORTHOPEDIC SERVICE LINE.
Advantages of buying would include the tax benefits for example the interest on property taxes including mortgage could be tax-deductable and the investment property alone could possibly depreciate and the costs included with owning this type of space deemed as commercial could also be tax deductable. When buying a pre-existing building it gives more opportunity to convert the space to the business needs which can include building onto the existing property, or reconfiguring the property for a better business flow effect or even removal of certain parts of the property.
The tax factor would also include any type of improvements that are made to a commercial real estate investment could be deducted for up to 39 years. A depreciation of a building could be taken into account for 39 years as well which is another advantage. If the building is purchased for $251,000 and say the land it stands on is valued at $61,000 then the company could write off a bit less than $5,500 annually. The annual interest can also be deducted on the purchase loan, any type of property taxes and additional expenses that qualify under tax codes.
When borrowing money for a commercial investment from any lender the percentage could be between 60%-80% or even higher given the increase for being medical users which could be up to 90% for a acquisition cost or project cost which can require a type of investment of the left over cash and stipulate that the difference in cash be reinvested in the business anywhere between 10%-40%. A bank lender could require a higher down payment but in exchange include a reasonable borrowing term would be negotiated in the contracts. The advantage to buying a commercial building is that a bank lender looks at owner-occupied type businesses in a medical capacity more favorably and would grant the request for lending.
In buying a commercial building there would be no rent adjustments and the mortgage would be a set amount each month so that there is a clear idea of any costs in the future. The fixed/variable cost factor is costs that would be set especially if the fixed-rate type of loan was issued for the property. As a selling point to owning commercial property if the value of the property has increased that is another advantage for making increased profit. The appreciation factor is considered a second business for example it could be considered real estate investing by the company. If there is additional unused space the decision could be made to rent out parts of the building to outside opportunities to create additional income from the rent of those parties.
c. LEASING SPACE FOR THE NEW ORTHOPEDIC SERVICE LINE.
Leasing advantages to physicians could be a great opportunity for using the finances to invest in the latest and greatest medical technology of equipment or computerized electronic medical record systems instead of using cash for building or buying a medical office and having cash tied up in investment properties. Leasing is better on a business cash flow because when purchasing occurs there is a large amount of finance tied up in the equity of the building itself. By leasing advantage it really won’t require a large amount of capital to start. By having this money available which is known as working capital it opens the door to new opportunities that can arise in the future.
When leasing a building it makes it simpler to be able to move into prime locations in the future such as a neighborhood medical office mixed in with shopping malls and this in-turn will eliminate the task of hiring a real estate agent and all that is involved with selling the property before vacating. By leasing the medical office building the money paid in the lease could possibly be used as a tax deduction.
Using the cash outlay factor effect the company would not have to put forth much money as it would if building or buying a medical office. The growth factor would focus on if the space is outgrown given the amount of patients seen by the physicians in the medical office within the five year plan then the decision could be made to purchase or buy a larger building. If part of the building was leased to several different businesses and the owner was occupying part of the building than it is money in the bank by vacating that particular space and moving to a larger one but still having other businesses resume the open space. In some instances if more space was needed to expand and the office space was available by the owner then leasing more of that medical office space could be an opportunity to expand without the cost of purchasing a building which would eliminate the cost of moving.
2. DISCUSS THE DISADVANTAGES (LIABILITIES AND RISKS) FOR EACH OF THE FOLLOWING OPTIONS:
a. BUILDING SPACE FOR THE NEW ORTHOPEDIC SERVICE LINE.
Part of building the facility takes into account the site selection either on the hospital campus or off campus and analysis, any land development and regulatory approvals that must be followed, management of the design professionals and consultants specific to technology. The most important piece would be the knowledge of medical office building designs and the appropriate licensing and permit requirements by city and state required could be costly by having to hire the professional that has up to date knowledge and experience.
Another important aspect is the regulatory approvals based on healthcare facilities and any start-up requirements mandated specifically to specialized practices such as orthopedics to include day surgery or procedures and radiation MRI buildings that could be a costly disadvantage. All of these specialized areas could be a building disadvantage if the wrong person is making the decisions because fines and penalties could be imposed if there are mistakes.
Another piece to consider is the cost of construction companies to build the office which could be decided by requesting competitive bids from the construction companies and then choosing the best bid for the job given the specifications of the project. The bids themselves could be a disadvantage because of the time it takes to get the bids needed in order to make the decision. The other price to focus goes with construction such as the producer price index of materials.
As the economy improves in society the price of the finished product could increase based on increased cost of materials. Building a facility is really the deployment of capital that is being considered on all aspects of this project and is seen as a very large disadvantage because the capital is tied up.
The growth factor cold be a disadvantage given today buying a building is the current need and maybe attractive to the business at this time. However, this disadvantage can’t predict 100% what the business will need in space or the growth in the next 5-10 year span.
Time is money and the disadvantage of building would mean that there would need to be made contracts of negotiation created and signed for not only the construction company that will build the facility but also the companies in which the materials to be used would need contracts specific to price and the negotiation that would need to occur for pricing. These contracts would need to be negotiated so that both parties come to agreements on the terms and this could take up to 90 days to complete in some cases.
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b. BUYING SPACE FOR THE NEW ORTHOPEDIC SERVICE LINE.
Buying disadvantages would be there would be more upfront costs than expected. The initial capital would include a down payment, and the possibility of improvements to property which increases cost and this would include any type of property appraisals and maintenance costs. There should also be an analysis of the cost of this opportunity of the money being spent and what other options are available if the buying of the medical office wasn’t an option which if an analysis wasn’t completed then this could be seen as a buying disadvantage because all options weren’t considered.
There could be a possibility on the property balance sheet that could result in restrictions of future borrowing which can be the result of this real estate debt owed. This in-turn complicates things by making things difficult to change the business based on any type of market trends in the future because of the capital being tied up in real estate.
By buying this could take the physician group time to purchase the exact property needed based on business purposed and this would restrict practices until the building was found and purchased. In medical offices today the location is essential and by owning the building a large disadvantage would be making things difficult to follow market trends and move to locations that are more convenient for the community and for the business. By owning the building this creates unforeseen operational costs and time and energy in maintaining the building and the existing property surrounding the building.
This can be very costly and deter from business with time and money. If the decision was to lease out part of the building then that is adding a whole other amount of expenses that is unforeseen into the process. There would be additional expenses in being a landlord as well owner of the building. The cash outlay factor would be another disadvantage given more money would be needed in order to purchase a building instead of leasing.
c. LEASING SPACE FOR THE NEW ORTHOPEDIC SERVICE LINE.
Leasing disadvantages would include costs that are unexpected such as possible rent increases especially during the time in which the lease expires. Sometimes in the leasing contracts there could be an allowance of annual increases includes based on the consumer price index that if not pointed out could be extensive. By leasing there is a restriction based on the space and it adapting to the needs of the business there might not be room for expansion. When the business needs expansion and the space is limited there is only one choice which is to vacate which means if the lease or contract is for a period of time and the need of the business is under that amount of time then by the terms of the contract there would be fines and penalties involved if vacating before the expiration date of the contract of the lease.
The fixed/variable cost factor is a large disadvantage based on the market trends especially when the lease expires. The huge disadvantage to leasing is that the business will be dependent on the landlord and what they are willing to change or modify for business needs. One piece a landlord owner can do is to terminate the contract lease if they have other plans for the property such as selling.
Leasing a building is not an easy one given the market trends, the tax involved, and the financial analysis that would need to be completed before this decision to lease a business building was complete which takes time and money. An owner of a medical office can be forced to increase rent of the leased property to meet fair market value in adherence of Medicare regulations. Another disadvantage is regarding the fact of it being a medical office and the negotiated contract of a long term lease which varies between 5-15 years to estimate the improvements that can be costly to the building which are known as “all-inclusive contract leases” and “triple net contract leases” which means that the cost of the operating expenses in be changed to impact the physician group that leases the building which can be very much a huge costly disadvantage.
3. RECOMMEND WHAT YOU CONSIDER TO BE THE BEST OPTION FOR THE FACILITY.
The recommendation regarding building, buying, or leasing a medical office would be to focus on clear objectives in the first step of the analysis. The impact of the decision will affect the finances of the business and any relationships with vendors and customers. The list of objectives needs to be compiled to identify all aspects needed for ownership versus leasing. By analyzing this information it could bring forth aspects that weren’t previously considered at the onset of the beginning which can change the overall decision. Some of the facts to consider in the recommendation are:
Cost Control: When needing office space this is considered due to the change in market trends and business strategies as far as where the business needs to change or improve or expand. Businesses when making these type of decisions usually have capital to invest over long terms. However, if buying a building the structure itself, may need updates or improvements which would decrease the amount of capital for the improvements to occur.
Location of the building: Business successful is highly dependent on the location of services it offices to the community. One of the critical factors in physician practice today is the accessibility and proximity for the patients which can justify paying a larger lease of office space based on this factor. If the building is bought or built and the areas that surround it is less desirable for patients then, the decision to resist any long term agreements might be considered. In this type of situation a lease would be more desirable based on the open door of being able to relocate to another facility when the business needs change.
Expansion is another factor to consider based on the needs of the community and the business needs. If a lease was signed then the permission to expand or alter the building would need to be made by the owner and the costs of those changes would be based on the negotiated contract terms that were signed at the start. By owning the structure the difference is it makes it easier to change the space of the building without going through a landlord.
Tax advantage focus would be to consider the current tax laws of the state and have the ability to shelter any type of taxable income. The write offs are increased over the last 20+ years including annual operating losses to be claimed that can no longer be used to off-set other taxable income as it was in the previous years. The losses that occur can possibly be used against real estate ventures and brought forward in order to still save on the taxes. The advantage could be that any revenue of the real estate itself could be taxed at the capital gains rate of return and this could be in fact lower than normal tax rates. In all there is tax advantages of real estate property that is owned versus leased but the entire decision should not be solely based on the tax factors. When leasing a property the related occupancy cost including rent, could be tax deductable for some sort of a tax reduction.
The ROI (Return On Investment) has shown that physician groups have been disappointed at the retirement age because of lack of equity in the business. Several factors include property overpayment, property that has been leveraged over, lack of maintenance on the property, and unknown market conditions based on the economy. If an appraisal is done properly before the building is purchased it would show the current fair market value, financing that is lending favorable to a bank institution, and ways for equity build up on the property in question. If owning the building there is a way to make debt service payments each month, which in-turn increases the equity of the property by reducing the principal debt. By leasing the property instead of buying there is no concern regarding equity that is lacking or principle debt needing to be paid off base don’t eh negotiated contract terms of the loan. By leasing the up keep of the building is the responsibility of the owner not the tenant that leases the building.
Finance numbers should be evaluate by a CPA (Certified Public Account) to prepare a type of financial projection that can show costs associated with leasing the building versus purchasing the building or building the structure. This estimation will be needed in the event the decision to purchase a building is decided. This report can show income that is taxable or at a loss and can also show the cash flow analysis of what payment is needed is bought, built or leased.
Negotiated contract terms are considered in all three aspects of building, buying, and leasing. These contract terms show financial lender rates and terms for financing or they can show terms based on leasing from the owner of the building structure.
Recommendation would be to lease the building structure in order to have capital in reserve. By engaging a design architect and estimate costs of any renovations needed in advance gives a better picture of what is needed in finances to start. Given the opportunity to change based on market trends and location is appealing and an option based on leasing the space of an office building. In reviewing the fact that an OB/GYN specialty group was not successful in a previous attempt allows for a trial period to show if the needs of the community will be met with the orthopedic office.
If the market trend in times shows that the need is not as anticipated as expected then it is easier to terminate a lease then selling an office building. Any costs associated with leasing is not always the tenants responsibility this can be an advantage based on the negotiated contract terms of the lease and maybe the costs could be shared or possibly a negotiation of several months of rent would not need paid while the physician group paid for the necessary changes to the building based on the business.
By giving the orthopedic practice time to access any long-term goals, and focus on cash requirements needed weighed against the risk of long term building ownership the decision to else would increase revenue to invest in new technology equipment and computer electronic medical record systems. The lease option would in-turn free up some of the capital for other type of business investments to increase revenue. Given the unpredictability of the current economy, loss of jobs for people in the community which amounts to loss of healthcare coverage which in-turn is loss of business for the orthopedic practice. It is better to make a temporary decision to lease a facility and see what the community need will be in 5 years from now.
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