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Building to meet ongoing demand for medical office buildings in Southern California

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As part of a continuing trend in Southern California -- particularly San Diego and Southwest Riverside counties -- medical practices are looking to purchase their own buildings as investment opportunities, as opposed to traditional office leasing. And savvy builders have been responding to the demand.

Medical office projects currently under construction include the new $4.2 million, 50,809-square-foot Hope Medical Center in Menifee, Calif.; phase two of Golden Triangle Medical, a 35,027-square-foot medical office building in Murrieta, Calif.; and the new $3.8 million, 46,255-square-foot Corona Medical Center in Corona, Calif. A new medical office project set to begin construction the fourth quarter of 2004 is EastLake Medical, a 42,042-square-foot, three-story complex located in the EastLake community of Chula Vista, Calif.

Ed Anderson, a well-known developer based in Temecula, is recognized for coining and perfecting the "medical condo" concept. Andersen's company, Medical Real Estate Development Co., was one of the first to focus heavily on this product type in Southwest Riverside County, and has built more than a dozen medical condo facilities over the last five years.

Fueling the trend toward medical office ownership are several factors: 1) the high expense and low inventory of available real estate for new development; 2) low interest rates for permanent financing; and 3) a growing number of competing lenders looking to do business with financially solid medical and dental professionals.

In particular, interest rates for commercial property have remained relatively low. Medical building lessees can become owners for as little as 10 percent to 20 percent down. In many cases, the monthly mortgage payment is less expensive than paying a monthly rent or renewing your lease at an inflated rate. Plus, owners also can avoid having to renegotiate leases as they would for rented spaces, and would no longer be subject to rent increases; while the interest on the mortgage can be written off as a business expense.

In addition, owners of medical office buildings are likely to accrue some appreciation for building ownership. Smaller businesses also can benefit from ownership incentives and loan opportunities through local lenders.

One interesting component of this trend is that the number of parties under the "buyer" status is usually indicative of the size of a particular medical office property that likely will be purchased. Some medical practices are buying smaller, one- or two-tenant buildings, ranging in size from 3,000 to 10,000 square feet, to become sole owners.

For larger, multi-tenant properties, buyers are coming together to purchase in a collective manner, generally referred to as medical condominium ownership. With a typical medical condo scenario, 10 or 20 doctors whose practices complement, rather than compete with, one another come together to purchase a medical center. Each owns 1/10th or 1/20th of the property. Under this arrangement, a doctor can sell or lease his or her office without approval from the building's other owners.

Keep in mind that both single-owner buildings and medical condos are highly specialized properties that must be designed and tailored to accommodate each medical professional's practice.

For example, phase II of Golden Triangle Medical encompasses construction of a two-story building and improvements to existing surgery and imaging centers. Technology and infrastructure upgrades include state-of-the-art CT scan machines, with GE Lightspeed; as well as advanced MRI equipment, which will occupy a luxurious, 400-square-foot patient care room.

The facility's surgery center will include four operating rooms and one procedure room. Also, because of the facility's outpatient setup, special care is being given to providing comfortable patient and visitor waiting areas, as well as patient entrances/exits.

Corona Medical will house several different specialities, including orthopedic, a family practice, neurology, OB/GYN, gastrointestinal, internal medicine, and ear, nose & throat.

Practices at Hope Medical will include MRI/radiology, three dental offices, internal medicine, family practice, medical billing, and a pharmacy.

Requirements for other medical office buildings, depending upon the type of practice, can range from clean rooms, special air filtering systems, to indoor swimming pools used for therapy; not to mention infrastructure necessary to support highly advanced medical equipment and other technologies. As each building and/or individual office has its own set of uses, prospective buyers should look for a building that will best meet their needs.

Due to the highly specialized nature of this market and growing demand, developers should look for the most effective means of building and marketing these medical office properties in hopes that they will appeal to specific end users, while yielding high returns on investment. This requires choosing a project team that is experienced in this product type. A well-reputed general contractor, if brought on board early, can help walk the developer through the early planning stages, perform value engineering if necessary, and maximize efficiency.

The bottom line for developers is that investing in medical office properties can continue to be profitable, especially as low vacancy and high demands for these types of properties continues to be status quo throughout Southwest Riverside and San Diego counties.

Moreover, as more suitable properties become available for sale, this trend likely will continue to be prevalent over the course of the next few years. The key is to strategically plan and develop a medical office building that offers the right mix of amenities to attract targeted prospective buyers.

Keeton is president of Keeton Construction Company, Inc. More information can be found at www.keetonconstruction.com.>

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