Built-to-Suit: Constructing a New Building? Transaction Structuring, FMV, and Compliance Considerations – Part 4: Conclusion and Additional Resources

June 28, 2021

By: Victor McConnell, MAI, ASA, CRE, Frank Fehribach, MAI, MRICS, and Grace McWatters

*This is Part 4 in VMG’s series on transaction structuring considerations for new developments.  The other parts in this series can be found here: Part 1, Part 2, Part 3.

This four-part series has provided an overview of the unique considerations that investors, JV partners, developers, hospitals, physicians, and other parties to a new development should evaluate in pursuing a new project.  For instance, if a hospital and/or a physician partner are developing a building and then leasing it to a JV entity, the associated lease rate and overall development terms will likely need to be documented as being commercially reasonable[1] and within fair market value (“FMV”) parameters.  For investors constructing build-to-suits, primary concerns may revolve around analyzing the risk associated with a particular tenant.  For hospitals and physician partners who are joint venturing on a development, the key analyses may involve appropriate allocation of risk, responsibility, and capital vs. non-capital contributions that each party is making to the development.  If parties are sharing in development responsibility and risk, then a careful analysis should be undertaken to ensure that parties receive appropriate return given their risk, as well as their various capital and non-capital contributions.

If you are evaluating a new project and require outside assistance, VMG Health is well-equipped to assist with the following:

  1. FMV lease rate analysis
  2. Transaction advisory regarding capital and non-capital contributions
  3. Initial yield on cost analysis
  4. Construction cost benchmarking
  5. Residual value projections
  6. Replacement cost / insurable value estimates
  7. Purchase option, right of first offer/first refusal analysis
  8. Commercial reasonableness analysis
  9. Transaction advisory regarding lease structure
  10. Ground lease rent analysis

Finally, as is evidenced by the overview presented within this series, transaction and valuation considerations associated with new construction are complex.  VMG has previously published thought leadership focused on a number of areas which are pertinent when evaluating new construction.  These include: a) insurable value/replacement cost; b) on- v. off-campus locations; c) ground leases on hospital campuses; d) MOB financial feasibility; e) specialty assets; and f) premium sites (i.e. healthcare projects with high land values).  The final section of this series will include more specific examination of each of these individual topics. For further guidance on these topics, please refer to the following resources.

Other Guidance and Considerations Pertinent to New Construction

Insurable Value / Replacement Cost – Another item to evaluate prior to (and subsequent to) a new development is insurable value and replacement cost.  For more on this topic, please refer to VMG’s published guidance here:

Are You Under (or Over) Insured? Analyzing Replacement Cost for Hospital Systems, Investors & other Healthcare Providers

On v. Off-Campus Location – Whether the new project is situated on or off a hospital campus can have a significant impact.  Use restrictions, different reimbursement status, ground lease issues, and other factors could all affect the project’s success (and associated development risk).  Furthermore, certain real estate fundamentals (related to rent rates, cap rates, and sale prices) also are affected by on- vs. off-campus locations.  For more on this topic, please refer to VMG’s published guidance here*:

On-campus Medical Office Buildings: Is a Premium Warranted? If So, When and Why?

*Please note that this article was published in December 2016.  Stark Law FMV definition and market conditions have changed in the intervening years; please contact VMG with questions related to how these changes may affect the commentary and analysis in this article.

Ground Lease Considerations – If the proposed development is to be situated on a ground-leased site, a variety of transaction structuring issues must be navigated, along with variance in risk profile and associated market-based return.  For further guidance on ground lease considerations associated with hospital campuses, please refer to the following:

Under All is the Land: Ground Leases and Hospital Campuses

Financial Feasibility – In some cases, a building may not be 100% master leased.  A hospital or a developer may construct a building with the intent to go “at risk” for a certain amount of space.  Risk considerations associated with that development could then include evaluating various real estate market fundamentals, including lease-up period, area payor mix, patient drive-times, demand for various physician specialties, and so forth.  For more on this topic, please refer to VMG’s published guidance here:

Financial Feasibility & Speculative Medical Office Building Construction

Specialty Assets – Some build-to-suit projects involve highly specialized real estate assets.  Further diligence related to the particular health vertical (ASC, imaging, radiation oncology, specialty hospital, etc.) may be required in this case.  Examples of highly specialized sectors on which VMG has published real estate related guidance include life sciences and micro-hospitals.  For more, see the below:

Micro-Hospital Real Estate: Six Key Considerations

Spotlight on Life Sciences – Healthcare Real Estate

Premium Sites – Site value affects the “all-in” development cost, and accordingly can affect rental rates in a built-to-suit scenario (or feasibility in a speculative development).  Sites located in dense, urban environments have unique considerations which drive pricing.  See the following article for VMG’s commentary on considerations related to premium site locations:

Location, Location, Location: Premium Sites and Healthcare Real Estate

For any questions concerning a new or proposed development, please contact VMG Health’s real estate department.


[1] In the December 2, 2020 Final Rule, CMS provided updated and detailed guidance on commercial reasonableness (“CR”).  CR is a complex topic, and a detailed CR discussion is beyond the scope of this article.  For questions regarding commercial reasonableness in the context of a new real estate development, please contact VMG Health.

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