Strictly Pediatrics Subspecialty Center is a 127,000 square foot medical office building in Austin, Texas that opened in March 2007. The office building is the home to pediatric physicians specializing in general surgery, orthopedics, pulmonology, gastroenterology, infectious disease, genetics, neurology, nephrology, allergy, rheumatology, urology, oncology and cardiology.  This is the story behind the center.

 

The new hospital promised to be a tremendous advancement for children’s health care in central Texas and would effectively replace the existing Children’s Hospital, located miles away in Austin’s downtown area. But the new children’s medical center forced pediatric specialists with practices near Children’s Hospital to make career-changing choices. It also presented opportunities with equally important consequences.

Part of the Seton Family of Hospitals, a network of hospitals serving central Texas, the Children’s Hospital of Austin was opened in 1988. Over time the hospital’s urban location created logistical problems with far-reaching impact. Expansion was impossible, and nearby office space was scarce. Pediatricians and specialists who treated patients in the hospital, or wanted to establish practices near it, were forced to outlying areas of town. The lack of multiple services in a single, accessible location was even harder on the children who needed care. Sick and often frightened, the children had no choice but to make multiple trips to different locations–far from optimal health care. For the many requiring ongoing attention, it was especially trying.

Background:  Bob Bonar, president and CEO of Children’s Hospital of Austin (a member of the Seton Family of Hospitals), recognized the hospital’s facility shortcomings and knew the new medical center offered everyone–children, parents, physicians and staff–a better location with easier access. But the new facility wasn’t designed to offer space for subspecialties, and from a business perspective, Bonar knew few physicians wanted to lease from the center even if it did. And Seton wasn’t interested in becoming a property manager either.

But “solidifying a long-lasting, collegial” relationship with the physicians was a must, says Bonar. “Physicians are the main channel through which we serve the kids. And the easier we made it for them to use the hospital, the easier it was for them to do their rounds and care for the children,” Bonar says. However, the hospital was willing to sell a piece of land to the physicians upon which they could construct a subspecialty building. This land was formerly known as the Mueller Airport location.

The move to the Mueller location wasn’t a surprise to the pediatric specialists, says Dr. Mark Smith, a member of Austin Pediatric Surgery. By 2003, the plans were well known. And Smith, who had invested in commercial real estate before, was organizing a venture that would allow interested physicians to buy the land near the medical center and develop their own building. For many physicians, the project made perfect sense. To Dr. Phillip Lee Berry of ‘Specially for Children, the largest multi-specialty group of pediatricians in the area, a physician-owned building adjacent to the new center provided a great opportunity. The group’s treasurer, Berry says it gave the physicians the chance to invest in something they could be sure of–themselves. “We knew we were a sure thing,” he says.

Consisting of physicians and surgeons, the partnering entity was met with enthusiasm. The group’s size–nearly 40 physicians–helped minimize individual risk. But forming a new business for the purposes of securing millions of dollars in financing wasn’t easy. Nor was finding the right developer. Though the group had established an elected governing board, by 2004 it was stuck.

Part of the problem was the Mueller master plan, which dictated aesthetics, environmental considerations and much, much more. Known for its politically active citizenry, neighborhoods and advocacy groups, building in Austin requires patient, ongoing negotiations to secure consensus from many parties. The intricacies of the project were simply beyond the group’s capabilities.

Smith says inexperience played a major role in keeping the project from moving forward. “We really didn’t know what we were doing,” he says. Few of the physicians had extensive business backgrounds, and none had experience managing such a complex project. “I understood a lot about real estate,” says Smith. “But I had never been involved with anything like this from start to finish.”

Finding the Right Resource--Somerset's Health Care Team:  “We needed someone who could tell us what we didn’t know and help us get this building done the way we wanted it,” says Smith.

Besides meeting Mueller’s stringent building requirements, the group’s initial goals included:

• An equity position in the building.
• Leasing to capacity at market rates. “Some groups charge a lower rate,” Smith says, “but that lowers the value of the building.”
• The very best facility possible–for the least amount of money.

In 2004, Joe Zasa, of Woodrum Ambulatory Systems Development, was hired by the surgery center and recommended the group contact Steve Dobias from Somerset CPAs. Until then, the group had focused on design-builders and had reviewed bids from several contractors. But the bids weren’t created using comparable parameters, confusing the investment group even more.

The lone accounting-based consulting group in the review process, Somerset was chosen to serve as an owners’ representative, managing the financing of the project while acting as a liaison between the builder, Bonar/Seton Healthcare, Mueller’s master developer, city/civic entities and ultimately, physicians within the group itself. Named Strictly Pediatrics Subspecialty Center, construction of the group’s 127,000 square-foot facility began in the second quarter of 2006.

As an accounting firm, Somerset’s financial management skills were an obvious asset:

• The energy-efficient building had an estimated cost of $28.5 million. Somerset structured the construction loan so investors paid only 25 percent of the estimate.
• At the project’s completion in February, 2007, Somerset negotiated permanent financing for the amount of $28.5 million that allowed investors to recoup 135 percent of their original investment in less than four years.
• The building’s final cost was $2.5 million below estimate.
• It immediately appraised nearly 30 percent higher than its estimated cost ($36.25 million).
• At completion the building was leased to nearly 100 percent capacity.

More than Financial Management:  Sound financial structuring and planning by Somerset’s Health Care Team saved the physicians millions of dollars–savings that far exceeded Somerset’s fees. But Smith, Berry, Bonar and others say as the project progressed, the team’s abilities exceeded something even more important–their expectations.

Dr. Robert Schlechter, Austin Pediatric Surgery, became president of the merging groups for purposes of the investment. Somerset’s background serving clients with many business interests, along with the Health Care Team’s experience with other medical office buildings, made the process remarkably easy, he says. “They are very good at identifying what it takes for everyone to win,” says Schlechter. “I think their broad background makes it possible for them to get to ‘Yes’ very quickly.”

Not to be overlooked was Somerset’s ability to manage physicians, says Smith. “Doctors are used to being independent,” he says. “It’s like herding cats.” Cats with determined egos Smith says–and little business experience. “Steve and his people are extremely intelligent and very patient. We asked them a million questions, over and over which they answered repeatedly. They’re very nice, very cordial–and incredibly patient.”

As president, Schlechter says his role was to keep the physicians on the same page, a role that required little effort. Led by Steve Dobias, Andy Hamaker and Cathy Weaver, Somerset’s Health Care Team did an “extremely effective” job communicating new developments and challenges, along with recommended solutions. “The success of the project was proportional to how much we trusted them,” says Schlechter. “I learned to doubt their advice at my own peril.”

The Results:  Completed in less than one year from ground breaking to move-in, and for millions less than estimated, the Strictly Pediatrics Subspecialty Center met the physicians’ goals and more. “Kids are different than adults and it’s more effective–and efficient–to treat them in one place,” Smith says. “Our dream was to have a place where all pediatric specialists could
be housed and children could get everything they needed at one site. Somerset took our dream and then worked incredibly hard to do whatever had to be done to make it a reality. And it is.”

Find out how Somerset CPAs can help you look at your practice or business venture in a whole new way.  Call us at 317-472-2200 or 800-469-7206 today.

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