Healthcare Real Estate: Understanding the Risks

Intro (00:00):
Welcome to the Risk Perspective Podcast by Harbor Group Consulting, where we break down risk and leveraged finance. From acquisitions to restructurings, we help you protect your deals with smart, strategic insights. Now, let's get into it.

Roger Barbieri (00:18):
Alright, welcome back everybody to another episode of the Harbor Group Risk Perspective podcast, a part of the Alliant Specialty Podcast series. With me today, Jonathan Gilbert from Harbor Group Consulting. We're going to talk a little bit about healthcare today because I have recently been to a couple of conferences here in the fall. One of them most recently, the NIC conference that was down in Austin, Texas, and this was focused on senior living, on healthcare establishments. I got to say, I don't think that the folks down there really knew what was coming when I stepped in and started these conversations, because they didn't know a lot about the insurance review process because I don't think they had really been introduced to it. So, I want to kick it off with this. What do you believe are the most common risks that the lenders are facing when financing healthcare real estate compared to the traditional commercial real estate assets like office or multifamily?

Jonathan Gilbert (01:24):
Yes, it's a great question, Roger, and certainly all the same risks exist with a traditional multifamily property or otherwise. What the added complexity is, is this is a healthcare facility, whether it's a nursing home, whether it's a hospital, whether it's a physician practice, that adds additional risk, being the medical professional liability exposure. When a lender goes to review the insurance coverage, secondary step needs to be your review of the medical malpractice coverage, how it protects everyone, what type of form. That industry, from an insurance market standpoint, can get very complex very quick. Whether it's the involvement of risk retention groups, whether it's involvement of wholly owned or group captive arrangements, it can get very complicated fast. The other one is that there's always a debate on how much liability coverage to buy. There's a notion that if I buy lower insurance limits, then I can only be sued for that amount, or only will be sued for that amount, which is an awesome strategy until it does not work. Then, you're out of luck. Having a lender or advisor to a lender that can give that perspective on what's customary of the industry, what do other healthcare owners do, healthcare property owners do and require from a lender standpoint. But really, how do we get to the right answer from that standpoint? The other point to note is that oftentimes, unlike sometimes a building owner, the healthcare property owners may have more employees on staff. So, looking at things like workers' compensation and auto liability, particularly if there's patient transport, also becomes a critical part of the review as well.

Roger Barbieri (02:55):
One of the individuals that I was talking to at the conference the other day, he mentioned to me that in the past, they had put the insurance in place, it had gone through the annual servicing, but apparently the company that they were working with didn't catch that because of COVID, regulations had changed. Then there was a claim that came back for COVID where this operator ended up having to pay all of this finance out of pocket for the issue that had arisen. Is there something that we do now that can be on the forefront of making sure that those types of situations are preventable? What does that look like post-COVID?

Jonathan Gilbert (03:28):
Yes, that's a great question, Roger, and certainly an issue for a lot of people in the industry. What it really entails is more safety precautions that are imposed on healthcare facilities that weren't there before. Think about the hand sanitizer at the front of the door. Beyond that, there needs to be notices, there's protocols when you wear a mask and other things that from an insurance reviewer standpoint, we don't necessarily always get involved in, but if a lender ever needs help, auditing what's done from a safety risk control compliance standpoint, certainly we have access to the experts that can provide feedback there.

Roger Barbieri (04:02):
Alright, perfect. What about the environmental and liability risks that are involved with running a healthcare facility? Obviously it's different than running, I don't know, let's say a bowling alley. It's a totally different type of business. You're going to have the infection and control, you're going to have medical waste, patient safety. How significant are environmental and liability risks in healthcare real estate financing?

Jonathan Gilbert (04:24):
When you think about environmental risks, you really have to put it in two buckets. One is, what's in the ground or maybe in the ground from legacy activities, whether it's from the current owner or prior owners. And then two, what are the operational risks that generate hazardous waste that may generate contaminants that could end up in the ground, or things like medical waste that need to be transported appropriately. It’s critical to ensure review of the environmental insurance that's there to protect the borrower from any potential environmental pollution type of claim, certainly.

Roger Barbieri (04:58):
I know that we currently work, the Harbor Group itself, works with a lot of clients that are in this healthcare field for commercial real estate. Do you find that this is possibly one of the more overlooked aspects of the pre-close risk assessment on their side prior to getting to us? Or are there other overlooked aspects that we can really drill down on for them?

Jonathan Gilbert (05:16):
For sure. I do think that all of our clients have a particular focus on environmental risk. I think that's been well ingrained in them over the years. Certainly, they take an approach where attorneys are reviewing, there may be a phase one report done on the facility and certainly some view from an operational risk standpoint, but oftentimes the insurance reviewer is left out of that mix. It's critical for the insurance advisor and reviewer, particularly for larger healthcare organizations, whether it's hospitals or otherwise, to be involved in that part of the review. It doesn't mean we replace what the attorneys do or others, but it's helpful to have the information that they do. Mainly starts with the phase one or phase two report, if there are contaminants identified in the ground, or phase two report requested. But nonetheless, we want to look at it from a risk insurance standpoint to ensure that the borrower's insurance program for environmental insurance covers what it needs to from both a legacy and operational risk standpoint.

Roger Barbieri (06:11):
Perfect. Well, I'll tell you what, I think we're going to go ahead and wrap it up there for today's episode on healthcare lending and commercial real estate. However, I think that I definitely want to follow up to talk more for a part two. Because I think that when it comes down to healthcare lending and commercial real estate, there's so much more that we could do a deep dive into.

Jonathan Gilbert (06:39):
Absolutely.

Roger Barbieri (06:41):
Alright, with that, we will let everybody go. Thanks again for tuning into another episode of the Harbor Group Risk Perspective podcast, a part of the Alliant Specialty Podcast series. I'm Roger Barbieri here today with Jonathan Gilbert on behalf of Harbor Group Consulting. Thank you so much everybody, and we'll see you back again here next time.

Outro (06:59):
Thank you for listening, and for more information, visit us at HarborGroupConsulting.com.