ASC development has slowed in recent months due to the recession, and many industry leaders are still wary to pursue development in a still-shaky economic climate. John Marasco, architect with Marasco & Associates, discusses six factors affecting ASC development.
1. Low construction volume means low prices. According to Mr. Marasco, the negative impact of the recession means construction volume is down, lowering construction prices in most parts of the country. "Values of raw land, [new] property or even existing property to develop into have reduced significantly as well," he says. "There's definitely an opportunity to take advantage of this climate, where you're going to get a pretty good bang for your buck as it relates to development costs."
2. Interest rates remain low. Mr. Marasco says that when construction and development costs are low, inflation usually causes a spike in interest rates, balancing out the savings achieved on the construction end. But in the current climate, the government has kept interest rates relatively low in an attempt to stabilize and save the economy. "Interest rates are in fact very good historically," he says. "You have this odd confluence, where you have low development costs and low interest rates for project financing."
3. Financing is still more difficult than several years ago. Three or four years ago, a flush of money in the healthcare industry meant ASC developers could borrow 100 or 110 percent of the value of the facility. "Those days are gone," Mr. Marasco says. "Financing is a different environment, and physicians or developers — whoever it may be that's putting up the dollars to develop a project today — will be looking at 25-35 percent down to get a financing deal done." He says physicians or developers should expect to borrow 65-85 percent of the project and come up with the equity for the rest.
4. Nonrecourse financing is not a current option. Nonrecourse debts or loans, or loans secured by collateral but for which the borrower is not personally liable, will likely be unavailable to physicians or developers in the current climate, Mr. Marasco says. "We haven't seen any nonrecourse financing deals, meaning each physician will be on the hook for their share of the project, plus 20-35 percent," he says. "Crazy financing is what got us into this mess to begin with, so it makes sense that the banks revert back to a customary environment." He says the current lending environment is similar to 10 years ago when financing constraints were commonplace.
5. National banks are reopening healthcare lines. Until the last six months, Mr. Marasco's clients have generally found financing through local or regional banks, but that may be changing. "Both Bank of America and Wells Fargo recently announced they will reopen healthcare wings that closed when the financial fiasco came about," he says. "Both have announced they are re-opening those up and looking to lend, so in addition to local and regional options, we're now seeing more national banking options." He says this national trend demonstrates a level of comfort in the market and allows physicians and developers to pursue financing from multiple sources, including large chains.
6. Development projects necessitate committed physicians. According to Mr. Marasco, those who chose to develop ASCs in the current economic climate need true commitment from their physicians. "I continually see projects that don't do well because they haven't done their homework," he says. "It's the 'if we build it, they will come' mindset, and that doesn't always work out." He says associates who "promise" to do 300 cases at the surgery center have the option of reneging, whereas physicians with financial commitment will find it more difficult. He adds that a physician's financial investment should be substantial to ensure he or she has a vested interest in the success of the facility. "If you sell a share for $5,000, it's fairly easy to walk away from that," he says. "If it's $50,000, the surgeon is not going to commit to the project unless he's [really serious]."
Learn more about Marasco & Associates.
1. Low construction volume means low prices. According to Mr. Marasco, the negative impact of the recession means construction volume is down, lowering construction prices in most parts of the country. "Values of raw land, [new] property or even existing property to develop into have reduced significantly as well," he says. "There's definitely an opportunity to take advantage of this climate, where you're going to get a pretty good bang for your buck as it relates to development costs."
2. Interest rates remain low. Mr. Marasco says that when construction and development costs are low, inflation usually causes a spike in interest rates, balancing out the savings achieved on the construction end. But in the current climate, the government has kept interest rates relatively low in an attempt to stabilize and save the economy. "Interest rates are in fact very good historically," he says. "You have this odd confluence, where you have low development costs and low interest rates for project financing."
3. Financing is still more difficult than several years ago. Three or four years ago, a flush of money in the healthcare industry meant ASC developers could borrow 100 or 110 percent of the value of the facility. "Those days are gone," Mr. Marasco says. "Financing is a different environment, and physicians or developers — whoever it may be that's putting up the dollars to develop a project today — will be looking at 25-35 percent down to get a financing deal done." He says physicians or developers should expect to borrow 65-85 percent of the project and come up with the equity for the rest.
4. Nonrecourse financing is not a current option. Nonrecourse debts or loans, or loans secured by collateral but for which the borrower is not personally liable, will likely be unavailable to physicians or developers in the current climate, Mr. Marasco says. "We haven't seen any nonrecourse financing deals, meaning each physician will be on the hook for their share of the project, plus 20-35 percent," he says. "Crazy financing is what got us into this mess to begin with, so it makes sense that the banks revert back to a customary environment." He says the current lending environment is similar to 10 years ago when financing constraints were commonplace.
5. National banks are reopening healthcare lines. Until the last six months, Mr. Marasco's clients have generally found financing through local or regional banks, but that may be changing. "Both Bank of America and Wells Fargo recently announced they will reopen healthcare wings that closed when the financial fiasco came about," he says. "Both have announced they are re-opening those up and looking to lend, so in addition to local and regional options, we're now seeing more national banking options." He says this national trend demonstrates a level of comfort in the market and allows physicians and developers to pursue financing from multiple sources, including large chains.
6. Development projects necessitate committed physicians. According to Mr. Marasco, those who chose to develop ASCs in the current economic climate need true commitment from their physicians. "I continually see projects that don't do well because they haven't done their homework," he says. "It's the 'if we build it, they will come' mindset, and that doesn't always work out." He says associates who "promise" to do 300 cases at the surgery center have the option of reneging, whereas physicians with financial commitment will find it more difficult. He adds that a physician's financial investment should be substantial to ensure he or she has a vested interest in the success of the facility. "If you sell a share for $5,000, it's fairly easy to walk away from that," he says. "If it's $50,000, the surgeon is not going to commit to the project unless he's [really serious]."
Learn more about Marasco & Associates.