Developing your own clinical premises requires grasping the nettle and putting on a hard hat! For those bold enough to do it there are plenty of rewards. Dr Ian Drever, a consultant psychiatrist, has successfully risen to the challenge and is the entrepreneurial spirit beyond Esher Groves, a new psychiatric day clinic located in Surrey.
Using Esher Groves as a case study, over four articles we will sketch out some of the important issues and processes you will need to consider if you decide to acquire, develop and trade from your own clinical property.
Esher Groves acquired 17 Church Street in May 2014. The property is located in a secondary retail position off the main High Street in the affluent Surrey market town of Esher. The location of the property is interesting in that it is a good example of how healthcare practices are able to take advantage of the uncertainty evident across many retail locations up and down the country.
Online retail shopping as well as the effects of the 2007 downturn has put a strain on the high street. Commercial rents and investment valuations have either dropped or remained stagnant because of falling demand on the occupier side as well as the investor side. This has given alternative use occupiers, such as private healthcare practices, an opportunity to competitively set up shop on or just beside the high street.
Chartered surveyors classify retail units as primary, secondary or tertiary. The classification essentially differentiates locations by the amount of footfall they receive. Since private healthcare is a planned event, not an impulsive buy, it suits practices to have secondary locations, which offer good value of money.
Transport connectivity and parking require careful consideration. Parking can potentially be the most problematic part of a clients booking decision-making process. Local and accessible private healthcare is an attractive proposition as long as the anxiety of finding parking doesn’t negatively impact the client’s experience. Esher Groves is a 15-minute walk from the local train station. There is a large council car park within a five-minute walk and full day permits are available at relatively competitive prices.
Land rights & restrictions
In legal terms, when a property is purchased an interest in the land is acquired and this is usually a freehold or leasehold. A freehold interest provides for the exclusive right to possess the land forever without any superior interest. In the case of a leasehold interest the exclusive possession will be defined by a number of years and the land is held by agreement with a superior landlord.
A freehold interest affords the greatest freedom on the land but there may still be restrictions on the land and these can come in a variety of forms. It is important to seek legal advice on the interest you are considering purchasing and what restrictions, if any, exist particularly if you intend to develop the land or extend the property. A simple example would be in the case where a property is located in a conservation area.
The property in Esher was subject to an issue of acquired rights or easement. An easement is a right to use or restrict the use of the land of another person in some way or other.
A neighbour had used the rear of the property to park their cars for several years. Although the freehold was subject to an existing pedestrian right of way on the land established in 1920, the neighbours claimed a right to park their car because of the length of time they had done so. In law, the principle is called Prescription and relies on a continuous use for at least 20 years.
Esher Groves successfully defended the claim by referencing an email the previous landlord sent to the neighbours. In it the landlord advised them the use of his land to park their car would end after he had sold his interest. This is a good example of how interests in land can be complex, historical and contentious. Care should be taken to ensure you are buying a property, which will allow you achieve the clinical premises you want.
There are plenty of commercial real estate lenders keen to support private healthcare practices for the simple reason that the healthcare sector has a good track record.
What will lenders look for? Lenders will consider the debt requirements in relation to the value of the property but since the purchaser will invariably occupy the property, lenders will want to see that the trading business can generate enough earnings to service the debt required. Servicing includes interest payments and capital repayments with a certain amount of additional capacity to protect against interest rate volatility.
EBITDA (Earnings before interest tax depreciation and amortisation) is the performance measurement used to appraise the financial strength of the business. An application will have a good chance of success, if the clinical business can present a resilient and predictable earnings track record over the last 3 years.
Bear in mind that lenders are amenable to include other assets and income streams in support of an application. This strategy was successfully used by Esher Groves, who were able to support debt servicing from other clinical incomes. This was particularly useful since Esher Groves intended to conduct major extensions to the property before trading started. Other clients have also been able to provide additional security using their buy to let investment properties and on their principle place of residence.
In the next article…
In the second article, we will look at the planning process and development preliminaries. Following successful acquisition, Esher Groves set out to secure planning consent to extend and completely refurbish the property. An act of god will illustrate why it is very important to ensure due attention is given to getting your buildings insurance right.