- The document summarizes valuation work conducted on over 70 healthcare facilities across 6 states from 2013-2014. - Key issues in healthcare facility valuation include determining highest and best use given special-purpose nature, complex market trends, and regulatory compliance requirements. - Determining if facilities are more valuable as going concerns or if the sum of individual assets is greater requires in-depth analysis of financial feasibility and potential alternative uses.

1. Valuation of
Healthcare Facilities
Tony D. Kamath, MAI, MRICS
International Valuation & Advisory LLC
www.InternationalValuation.com
Tony.kamath@InternationalValuation.com

2. Summary
● Presented to the New York Chapter of American Society
of Appraisers (ASA) on Nov. 17, 2015
● First section is a bird’s eye-view of the commercial
property valuation work done over a period of 18 months
● Midsection (Part II) focuses on broad market context and
issues; Highest & Best Use being the central one
● Last section, with latest data on this unsettled sector,
identifies some professional valuation opportunities

3. Outline of Presentation
● An Overview of Healthcare Facilities Assignments
● Firm & Market Context of Assignments
● Issues & Challenges – A Recapitulation
● Viewing the Assignments in a Broader Context
● Highest & Best Use – Examples Closer Home (e.g., LIU)
● Current Trends Shaping the Future of Healthcare Sector
● Appraisal Prospects – Concluding Viewpoint

4. 14
Facilities
and
70+
Properties
in
Six States
Healthcare Facilities Locations

5. An Overview
● Valuation Assignments – April 2013 thru September 2014*
! Maine – One facility; total 28 properties
! Pennsylvania – Thee facilities; ten properties
! West Virginia – One facility; three properties
! Kentucky – Five facilities; 15 properties
! Alabama – Two facilities; seven properties
! Florida – Two facilities; eight properties
* Does not include one-off medical property appraisals in NY and ME

6. Firm-Wide Context
● Portfolios of Properties under Mergers & Acquisitions
● Two Portfolios (Example: 72 & 35 facilities)
● A Few One-off Facility Acquisitions with Asset Portfolio
● Firm-wide Team of Appraisers Covered the Entire Portfolio
● Valuation Disciplines: Business, Personal and Real Property
● Senior Leaders - Oversight of Respective Appraisal Disciplines

7. Property Types (Sub-sector)
● Main Hospital Facilities –Outpatient, ER & Post-Surgery Sections
● Multi-story Medical Office Buildings (MoBs)
● Stand-alone Satellite Offices with Outpatient & Emergency Rooms
● Doctors’ Condo Offices in Commercial Condo Buildings
● Leased Doctors Offices/Physical Therapy Centers in Retail Centers
● Nurse / Student Quarters
● Patient Family/Guest Houses
● Free-standing Mechanical/Engineering Buildings & Parking
Garages
● Parking Lots
● Vacant Land for Future Development

8. Property Rights Appraised
● Fee Simple
! Fully Owned Properties
● Leasehold Interests
! Leased Offices and Buildings (Satellite Facilities)
● Leased Fee Interests
! Leased Sites to REITS for MOB Development
! Independent Offices Leased to Doctors

9. Purpose & Use of Valuation –
Transactional Circumstances
● Mergers & Acquisitions
● Valuation for Purchase Price Allocation (PPA)
● Cost Segregation
● Accelerated Depreciation Charge Analysis

10. Valuation Yardsticks /
Premise of Value
1. Value-in-(Continued) Use – Going Concern Value
! Cash Flow Is Important; Could Be Challenging
2. Value-In-Exchange – Orderly Disposition / Forced Liquidation;
Negative/No Cash Flow
! Value of Intangibles
! Standards Rule 9-3 of USPAP: “This Standards Rule
requires the appraiser to recognize that the continued
operation of a business is not always the best premise of
value because liquidation of all or part of the enterprise may
result in a higher value.”

11. Mergers & Acquisitions
● Booking Fair Value of Real Estate Assets on Balance Sheet
! Purchase Price Allocation (PPA) of Land and Buildings
! Cost Segregation (= Tax Savings!) – Acc. to Fed. Tax
Depreciation Life Categories Schedules (Personal
Property Depreciation - in some cases, as much as 40%
of property’s cost can be classified as personal property
and depreciated in fewer years – an incentive to investors)
" Accelerated Depreciation for Tax Benefits – Wiring;
Cables; Gases; Lighting; ER Fittings; Commercial
Kitchen; Drapes; Nurse Stations; Land Improvements;
Landscaping; Asphalt Paving; Site Lighting, etc.

12. Valuation Approaches
● Income Approach (Business Value Premise)
● Sales Approach – Selective Use (- Not the Best!)
! Private Equity and Mergers & Acquisitions Drive Value
● Cost Approach *
! Depreciated Asset – Physical Wear and Tear
! Functional Obsolescence – Design and Technology
" Cost to retrofit; change use/repurpose; demolish and redevelop
! Economic Obsolescence – Changing Demographics; Regulations;
Economic Model. (- Lots of moving parts in the healthcare industry)
* Marshall and Swift Valuation Manual; and other similar data sources

13. Valuation Issues & Challenges
● Mission, Mandate & History; Record-keeping Practices and Costs
● Due Diligence – “…individually identifiable tangible assets”
● CFOs & Property Managers
● Property Rights: Fee Simple; Leasehold; Leased Fee
● Meeting Audit Requirements & Deal Closing Deadlines
● Consideration of Market & Competition: Assignment Scope –
Dictated by M&A Considerations; Timelines/Rush to Closure…!
● Is the “Sum of the Parts” Greater than the Value-in-Use?

14. Hospital - “Special-Use Property”*
● “Special-use property is one that is designed, equipped,
and used for a particular type of business or operation,”
● “…[it] is not easily adaptable to some other use because
of the peculiar nature of the improvements.”
● “It includes so-called “special purpose,” “service” and
“single purpose” property.”
● “Conversion of such properties to some other use is
costly, and the market for them is generally limited.”
*Encyclopedia of Real Estate Appraising, 3rd Edition,
(Prentice Hall,1978), page 765.

15. PART II
Market Context
● Valuation under Broader Market Forces
● Considering Current Trends
● Regulatory Compliance Requirements

16. Healthcare Facilities Market
● Healthcare is $2.5 trillion plus economy
● 188 healthcare buyouts occurred in 2014, down
10 percent from 2013 (Bain & Co.'s 2015 Global
Healthcare Private Equity Report)
● Strategic M&A deal value in healthcare industry
nearly doubled from 2013 to $406 billion
● 10 hospital bankruptcies (includes St. Michael’s
Medical Center, Newark, N.J.) and 9 hospital
closures so far in 2015 *
* Source: Becker’s Hospital CFO, Nov. 12, 2015

17. Hospital Closures*
● 57 rural hospitals have closed (2010 onwards)
● Many more may be headed down the same path *
● More than 1/3 of rural hospitals were operating at a deficit,
(National Rural Health Association, 2013)
● Non-expansion States - that have not expanded Medicaid are
feeling the most financial pressure
● Estimated 8.5% of rural hospitals are vulnerable to closure
● 16.5% of rural hospitals in non-expansion states are
vulnerable to closure
*Report from iVantage Health Analytics

18. Active Players
● Consolidation Continues at a Fairly Rapid Pace
● Most Are Public Companies with Wall Street $$
● Some Are Aspiring Public Companies Aiming at
IPOs in the Near Future
● Major National Players Include: HCA (Hospital
Corporation of America); CHS (Community
Health Systems); UHS (Universal Health
Services); LifePoint; etc.

19. Healthcare Facility Challenges
● Decreasing Inpatient Volume – Vision & Long-term Growth Plans
● Patient Out-migration to Larger Population Centers
! “Build them…and they will come” Attitude; Acute Treatment
Needs
● Significant Capital Expenditures
! Compliance; Technology (HER); Sophistication; Doctors’
Salaries; Maintenance; High Clinical Investments
● Understanding the Cost of Care – Revenue Enhancement Strategy
! MIS: Tracking All Costs…; Cost Analysis; Efficiency = Reduced
Cost; Economies of Scale
● High Levels of Bad Debt – Collection; Shortage of Primary Care
Physicians Causing Surge of ER Visits

20. Accountable Care Organizations
(ACOs)
● Four Pillars of Value *
! Regulatory
! Reimbursement
! Competition
! Technology
● Goals of ACOs *
! Capital Formation
! Financial Feasibility
! Economic Returns
* “Healthcare Valuation”, Robert J. Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA

21. Large Health
Systems"
Large Insurance Companies"
• Anthem, Aetna, United,
Cigna and Humana
becoming three. "
• Low Payouts – 9/23 Co-ops
Closing"
Large Phama
Companies"
Large Health IT
Companies"
Investment
Companies"
Winners of PPACA*

22. Losers of PPACA*
● Losers of Patient Protection & Affordable Care Act (PPACA)
! Smaller Community Hospitals
! Rural hospitals are particularly vulnerable to closure due to
financial challenges (June report from iVantage Health
Analytics)
! Smaller Practices
! Smaller Companies that Sell into Health Systems
● Neutral Sectors (Neither Winners or Losers) of PPACA
! Safety-net Hospitals
! Innovative New Companies
* Source: Becker’s Hospital CFO, Nov. 12, 2015

23. Highest & Best Use (HBU)!
● Challenging to Determine Alternative Use (“Special-Use”)
● HBU defined as: “…that use among possible alternatives which is
legally permissible, socially acceptable, physically possible, and
financially feasible, resulting in the highest economic return.” *
● Is the subject business worth more to the buyer and the seller as a
going concern that will continue to operate as such, or as a collection
of individual assets to be put to separate uses?
● HBU - Important When the Facility is in Red
● Is the Business Worth More as “Dead” than Alive!
● Complicated When County/Govt. Steps in Reluctantly (to Subsidize)!
* “Valuing a Business: The Analysis and Appraisal of Closely Held Companies” By
Shannon Pratt, Fifth Edition, New York, NY: McGraw-Hill, 2008, p. 48.

24. Highest & Best Use
- Case Studies
● Mercy Hospital – Portland, ME
● LIUH – Brooklyn, NY
● St. Vincent’s – New York, NY

25. Value-in-Use, Interim Use, or HBU?

26. Mercy, Me!
● 127,895 SF, 1941 building, on 2.29 acre site
● Value: Assessed $23.0 million; Cost App.:$8.65
million; Sales Comp. App.: $4.5 million
● “As Is”, the highest and best use of the property
was to continue operating as a hospital…!
● “As if vacant” and available, and as improved, the
highest and best use was concluded to be a senior
housing or a residential multi-family

27. Long Island University
Hospital
(1858-2013)
● Protracted disposal
process due to multiple
law suits
● Once the dust settled,
the potential developers
bids were reviewed
● Fortis Property Group
emerged as a winner

28. LIUH Residential
Conversion
● Fortis Property Group revealed
two plans for the site after a series
of community meetings:
1. An "as-of-right" plan –
820,000 SF space; would not
require community approval
moving forward, and
2. An ULURP plan – 1,000,000
SF space; calls for rezoning of
neighborhood; would require a
community approval
It wouldn't have affordable
housing and might have a dorm

29. LIUH – Post ULURP
Rendering
● The 2nd plan involves a
development that includes
30-story and 40-story towers
● Fortis wants to proceed with
their "preferred" plan; and a
ULURP review of the site
might play out
● The second plan would have
affordable housing, a school,
and a tall tower closer to the
Brooklyn-Queens Expressway

30. LIUH
● The initial Fortis proposal offered SUNY about half of the
estimated $500 million value—for the 200,000-square-
foot complex, of which 15,000-square-feet would be
made into a facility with an urgent care center, physical
therapy center, dental and other surgery space, but no
emergency room and no full-use hospital
● The internal decision process involved a third party
valuation of fair market value, based on a Highest and
Best Use analysis, for the benefit of the Board and the
NY State Attorney General

31. St. Vincent’s Hospital
(1849-2010)
● In April 2010 (at time of closure), St.
Vincent's occupied a large real-estate
footprint in Greenwich Village
● Consisted of several hospital buildings
and number of outpatient facilities
● Had more than 1,000 affiliated
physicians, including 70 full-time and
300 voluntary attending physicians
● Trained more than 300 residents and
fellows annually
● Building was completely demolished
by early 2013

32. Part III
Prospects for Valuation

33. Healthcare Sector - Current
Trends
A Mixed Bag…as the ACA Is still Being Challenged!
! Decentralize Model –People-centered; Not
Facility-centered
! Shifting Responsibilities to Patients and
Consumers from Doctors and Employers
! Fee for Value, Not Service
! Provider & Payer Convergence
! Novel Consolidation – Rehab Acquiring Home
Health Agencies

34. Healthcare Sector - Current
Trends
A Mixed Bag….!
! Emergency Care to Urgent Care
" A resurgence of interest in urgent care
" New and interesting models: freestanding ERs,
surgical care and joint-ventured urgent care
! Changing Business Model – Doctors as Employees (Is
this a Win-Win for Both Parties?)
! Increasing Role of Distance Medicine/Telemedicine
! PE Capital Play Seeking Exit Strategy
! For Profits Growing; Not-for-Profits Declining!

35. Current Trends – Asset Market
● Healthcare Is the Most Active Sector in Real Estate
Transaction Market
! Record-breaking Consolidation: Cost Reduction;
Efficiency; Cost of Compliance; Push for Market Share
to Negotiate with Payers; Larger M&As; Acquisition of
Physicians’ Practice by Large Facilities
! Cheaper to Buy than Build!
! CON (Certificate of Need) State Opportunities!
! MOBs Attractive to PE’s (Cash Flow from Doctors)

36. Current Trends - Operational
● Hospital Surgical Procedures Taken Care by Ambulatory
Surgery Centers (ASC)
● Locations: Malls or Day Surgery Centers
● No 1-/ 2-day Recovery Period or Need for Hospital Beds
● Hospitals with Excess Beds Leasing to Others Skilled
Nursing Homes and Rehab Operations
● Urgent Care Facilities – Stand-alone Places for Retail
Locations Cost Lower by 72-83%
● OIG Recovery of $3.3 Billions in 2014 from Healthcare
Fraud and Abuse

37. Accountability Goals
● Regulatory Edicts Contained Within:
● Internal Revenue Code (IRC)
● Stark Law
● Anti-Kickback Statute
● False Claims Act
● Most Types of Healthcare Transactions Required to
Adhere to Standard of Fair Market Value.
● “Private inurement” -when a 501(c)(3) nonprofit's money
is devoted to private uses instead of charitable purposes

38. Fair Market Value
● Stark Law*
● “Fair market value means the value in arm’s-length transactions,
consistent with the general market value. ‘General market value’
means the price that an asset would bring as the result of bona
fide bargaining between well-informed buyers and sellers who are
not otherwise in a position to generate business for the other party, or
the compensation that would be included in a service agreement
as the result of bona fide bargaining between well-informed
parties to the agreement who are not otherwise in a position to
generate business for the other party, on the date of acquisition
of the asset or at the time of the service agreement.” [emphasis
added]
* Medicare and Medicaid Programs, Physicians’ Referrals to Health Care Entities with Which They Have
Financial Relationships (Phase III), Final Rule, Fed. Reg. 72, 171 (September 5, 2007), 51081. The Stark Law
(as stated in the U.S. code) also equates the terms fair market value and general market value, to wit: “The term
‘fair market value’ means the value in arm’s length transactions, consistent with the general market value.”
From Limitation on Certain Physician Referrals, 42 U.S.C. § 1395nn (April 4, 2012).

39. Fair Market Rent
● Anti-Kickback Statute*
● “…fair market value in arms-length transactions…
not determined in a manner that takes into account
the volume or value of any referrals or business
otherwise generated between the parties for which
payment may be made in whole or in part under
Medicare or a State health care program.”
*Program Integrity, Medicare and State Health Care Programs, Permissive
Exclusions, 42 CFR 1001.952(b)(5), (2009), 735.

40. What’s Coming – More Change!
● Financial Trouble Towards Closure – 13% (or
283/2,224) of Assessed Rural Hospitals Across 39
States (iVantage Health Analytics)
● Retail Clinics - 47% Surge by 2017
● Medical Retail to Be Faster Growing RE Sub-sector
● More than 2,800 Nationwide Clinics - Retail Stores,
Supermarkets and Pharmacies
● Lower Costs; Shorter Wait Time
* Becker’s CFO, Ayla Ellison, Sept. 15 2015 & Sept. 24, 2015; June 15, 2015

41. What’s Coming – The Budget Bill
● Republican congressional leaders and the Obama
administration recently reached a tentative budget deal that
would raise spending $80 billion over the next two years and
includes cuts in spending on Medicare
● The budget bill will "unquestionably" reduce the incentive for
hospitals to buy more outpatient facilities
● Under the tentative deal, off-campus outpatient facilities that
are bought or set up by hospitals after the date of enactment
of the bill will not be eligible for reimbursements under the
outpatient prospective payment system
● Instead, these departments would be eligible for
reimbursements from either the physician payment or
ambulatory surgical center payment systems

42. Conclusion – Greater Consolidation
We All Have a Stake in This!
● Cost Reduction Is Good
● We Can Help Bring Greater Efficiency to the System
● Help Compliance – Fair Rental Value Appraisals
● Sector Needs Appraisers and Could Use More of Us!

43. Potential Business for Appraisers!
What’s in It for Valuation Experts?
● Business Valuation
● Real Property Valuation
● Intangible Asset Valuation

44. Broad Market Scenario
● Patient Protection and Affordable Care Act (PPACA)
– Expected to Add Coverage for 32 Million People
● Already Added 10+ Million
● It Will Need 64 Million SF of Additional Space (1.9
SF per Patient)
● Technological Changes Driving Values
● Digital Tsunami – Electronic Health Records (HER)
● Accountability Awareness

45. Valuation Opportunities
● Advisory - Property Value; Value of Air Rights
● Mergers & Acquisition Transactions; PE’s Exit Plans
● Sale & Lease-back Negotiations
● Highest & Best Use Analysis / Property Repurpose Studies
● Tax Assessment Challenges – Not-Profit to For-Profit Status
● Market Rent Analysis – Increased Govt. Scrutiny of
Hospital-Physician Relationships
● Market Rent Analysis – Meeting Annual Updates
● Cost Segregation – Accelerated Depreciation Studies

46. Thank You!
● Thanks to Kathleen Ha, ASA, President of ASA, New York Chapter for the opportunity to speak at the ASA NY
Chapter meeting on November 17, 2016
● Thanks also to my former colleagues at American Appraisal Associates for their cooperation and contribution
of information and ideas:
• Jeff Briggs, ASA, MAI, MRICS (Dallas)
• Shelita Crompton, MAI, ASA (Atlanta)
• Dan Platten, CPA, ABV (Chicago)
• Dan Salcedo, CCIM, MAI, MRICS (Miami)
• James Zwald, ASA (Atlanta)
Tony D. Kamath, MAI, MRICS
Phone: 917-558-1945
Tony.Kamath@InternationalValuation.com
International Valuation & Advisory LLC
www.InternationalValuation.com
Note: The opinions expressed in this presentation are solely of the author.