Healthcare real estate transactions have evolved in recent years, as hospital systems increasingly see selling their real estate as a way to raise funds, and as the delivery model for healthcare shifts to a retail model.
Andy Dow, co-chair of the Real Estate Industry Group at Winstead PC, started advising on healthcare real estate transactions more than 20 years ago. Recently, Dow advised Toronto-based real estate firm MedCraft in its acquisition of a medical office building portfolio from Cleveland Clinic. Dow spoke to Law360 about the intersection of healthcare and real estate and how the landscape has shifted in recent years.
(This conversation has been edited for length and clarity.)
How did you come to specialize in healthcare real estate, and do you have a specific focus within it, or are you asset agnostic?
I’m pretty asset agnostic, although it kind of ebbs and flows. The way I got started in it was kind of by accident, actually, probably 20-plus years ago. It was about 2004, and this was back before healthcare real estate was really a thing. People didn’t really know what to do with hospital-owned real estate.
One of the first big monetizations, Baylor Health System here in Dallas, was going to sell 25 of their medical office buildings to a healthcare real estate investment trust. And this was really one of the first times that that had happened. I think maybe it was the second time. So there was really nobody who specialized in this type of thing.
But when you think about a hospital that has evolved over 100 years on the same campus, you’ve got old buildings, new buildings, old systems. You’ve got a central power plant that runs through all these buildings, and now all of a sudden, you’re selling off several of these buildings that have been developed over that 100-year period.
It creates all kinds of not only technical and physical issues, but also legal issues. For example, you have a chilled water loop that runs through all the buildings on the campus. Now, it works fine if the hospital owns all those buildings, but now, if the hospital is selling some of those buildings, you have a chilled water line that runs through those buildings and is now shared with buildings that the hospital owns. So it was kind of a case of first impression in a lot of ways. How do you separate the ownership of these buildings that have been developed over 100 years into different legal ownerships? So I got hired to do that for Baylor Health System.
The industry was in its infancy at that time, and I realized that there was a real opportunity. There were a lot of people who really understood real estate, and there were a lot of people who really understood healthcare, but not very many people who married the two together and understood both industries.
Hospitals had no idea what they had in terms of value there. In fact, most of them just viewed real estate as the cost of doing business, because they needed a place to house the physicians they wanted to give privileges to their hospitals. So it was right around that time that people started realizing that these real estate assets were undervalued. The leases were generally kind of way below market, and people started realizing that there was a lot of hidden value in the real estate that hospital systems owned that they weren’t realizing.
So I got right in at the front end of that whole process and understood that maybe a little bit before a lot of other people did. The great thing about being the first to a market is that you’re the only expert, and you make it up as you go.
And it’s been pretty remarkable that, 20 years later, we still see documents that come back to us that are based on documents we created back in 2004 for that first transaction.
In that transaction, you represented Baylor, but typically you represent the other side.
We have kind of shifted sides. I still do quite a bit of hospital representation, but probably 75% of what I do now is on the investor side. So we would be representing the people who are buying those buildings from hospital systems or whoever owns them at the time, rather than the actual providers themselves. We still do a lot of counseling on hospitals and the strategic use of their real estate, but a lot of our representation now is on the investor side.
Can you talk about some of the changes you’ve seen in healthcare real estate transactions in recent years?
Well, for one thing, if you go all the way back to the beginning, hospital systems were very unsophisticated when it came to real estate. I mean, they were very sophisticated people, but they didn’t understand real estate. They didn’t realize that a big part of their business was going to be real estate.
Over the course of those 20 years, and certainly even more recently, we’ve seen the level of sophistication of the hospital systems and the providers really ratcheted up, where they now hire full-time real estate professional executives to manage the real estate. That means that the sophistication of the transaction has risen as well.
The delivery of healthcare has begun to evolve over the last 10 years. We’ve all experienced the traditional model: You drive to your doctor’s office, which is either adjacent to or in the hospital building, and you have a really hard time finding a place to park because all the close parking spaces are reserved for physicians.
What other business is that the case in? Then you kind of walk through the NICU while you’re on your way to your doctor. Historically, it has been a pretty depressing experience.
Recently, the concept of population health has become very much the buzzword in the industry, and it’s really taking the healthcare delivery model from treating sick people to keeping people healthy. Instead of waiting until people get sick and then treating them. The focus within the healthcare industry is now on how to keep people healthy so that we minimize the time that we see them when they’re sick. And from a real estate standpoint, that means putting the healthcare closer to the population that might need it and making visiting doctors a more pleasant experience, so they’ll do so more often.
What that means is nicer buildings, nicer waiting rooms, and going to where the people are located.
The way that impacts real estate is it changes the whole paradigm of what healthcare real estate was, which is just building medical office buildings to support that central hospital campus, to really going out to where the people are, with more of a hub-and-spoke model.
Only for the most acute cases do you actually have to go into the hospital. The other thing that’s really changed quite a bit is the technology. A knee replacement surgery that used to keep you in the hospital for a week or two is now a day surgery, so there’s much less of a need for hospital beds than there used to be because so much has been transitioned to outpatient. So there are more micro-hospitals that have maybe seven to 10 beds, and a lot more space for outpatient services.
What that means for real estate is that hospitals don’t necessarily need to own everything anymore, like they used to, on big downtown campuses where they felt like they wanted to control the real estate and own everything. If they’re going out into the suburbs now, they may be fine leasing that space as opposed to owning it, especially if it’s a new market that they’re not quite sure how successful they’ll be in it. They may not want to make a huge investment in real estate in a market until they’re sure that it’s going to be a market that’s profitable for them.
Health systems are more likely to use third-party capital, meaning they become tenants rather than owners of buildings and let the investors, my type of clients, own those buildings.
How do you see these transactions typically structured? Does it run the gamut? Are there different kinds of structures that you’re seeing more recently?
It’s all across the board, and there are always new structures being created as well.
Let me go back, and this will be kind of a precursor to your question. Another way that things have changed quite a bit over the last 10 to 20 years is that before, in healthcare real estate, you would own a medical office building, and you would have a lot of different physician practices as tenants. You might have 50 different physician practices as tenants, each with two or three physicians, or maybe a big one with 10 physicians in one practice. They would lease, and then have privileges at the hospital, but they would be their own practice. What we’re seeing now is that the hospital systems, as a way to control costs, are now employing those physicians, rather than having them as independent contractors who just have privileges at their hospitals.
That means the tenants have become very different in the sense that now there is only one tenant, and that tenant is the hospital system that employs all of those physicians. Hospitals are acquiring all these physician practices through mergers and acquisitions.
It’s great for the real estate owner because you have a much larger, more stable, and better-credit tenant. Now, your tenant is the hospital system with a bond rating and physicians.
And you have just one lease, instead of many.
I’d say that’s still happening, but that’s been a major shift over the last 15 or 20 years. It’s only going to continue because not only are hospitals competing against each other for physicians, but they’re also competing with insurers, and insurance companies are also employing physicians to control costs.
They’re kind of fighting for who’s going to control the physician now. That’s all happening in real time.
In terms of sales, how do you see those typically structured?
It depends on who the seller is. Sometimes it’s a monetization, like I described my deal back in 2004, and one that we just worked on here recently, where it’s the hospital that’s deciding, “You know what, we don’t need to own this real estate anymore, so we’re going to sell this real estate and then we’ll lease it back.”
So in that context, it’s pretty much structured as like a sale leaseback. The ownership of the building has changed, but nothing else has changed. Tenants are the same. The people in it are the same. They’re operating the same way. They’re just operating as a tenant under a lease, rather than as the owner of the building.
Does that typically result in them losing their property tax exemption?
One of the hot topics right now is how we can solve that issue. There are different ways to do that, but it’s very hard. It depends on which state you’re in as to how successful you can be. That is the big downside to hospital systems selling properties: they lose their tax-exempt status. Now, why would they do it? Well, they may cut a deal that’s good enough that the numbers just work out. They may be struggling as a system and need to raise capital, and they’d rather pay it out through rent over time and get the cash today, even if it’s a little more.
It’s almost like the cost of borrowing money. It’d be the equivalent of them just going to a lender and borrowing the money and paying interest on it. It’s kind of the same concept.
But that’s one of the big issues and why some systems don’t like to sell their real estate. But there are ways you can mitigate that. For example, if a hospital owns a building and is only a 50% tenant, and the other 50% is leased out to other physicians, then a lot of times, what we can do is put a condominium on the building.
The hospital could still own its condominium unit, and still get the tax exemption for the portion of the building that it occupies.
In recent years, states have advanced some policies that require different levels of review for some healthcare transactions. Some of them are aimed at REITs. A number of states have enacted those healthcare transaction review laws, including Massachusetts, and some states have also recently changed their corporate practice of medicine laws. Has that impacted your work, and in general, how can attorneys advising on these kinds of transactions be proactive?
Yeah, it’s one of those things where you have to be careful what you wish for.
It has caused a lot of investors to shy away from some of those states where those policies have been enacted. To be honest, we haven’t seen a huge impact just yet, and I think maybe that’s why—people are maybe just avoiding them.
What’s the most challenging deal you’ve worked on? And what was challenging about it?
A lot of deals are challenging for a lot of different reasons. Going back to your structure question, a lot of what we are asked to do is help structure transactions. For the hospitals and for the providers, it’s all about, what can we do to bind these physicians?
Because there’s so much competition out there for the physicians, whether the hospital is going to employ them, whether the insurer is going to employ them, or whether they’re going to remain independent. A lot of what we’re asked to do is come up with some structures that create incentives and create alignment between the hospital systems and the physicians. In a lot of cases, that’s providing physician investment opportunities. For example, if you do one of these monetizations or sale-leasebacks, you now have a pool of 25 medical office buildings.
Physicians, because they’re getting squeezed on their reimbursements and everything, are looking for alternative and passive sources of income. So the hospital systems, and even the REITs and the investors, are saying, “OK, physicians, you can buy into this partnership or LLC that’s going to own the real estate, and you can share in the profits of the real estate of the building you’re occupying.”
From a hospital standpoint, that creates physician alignment. If the physician owns a piece of the real estate that they’re occupying, it makes it less likely that they will get wooed away by another health system or by an insurance company.
Even the REITs and investors that we represent like to create physician investment programs as well, just to stand apart from the others who are competing with them to try to acquire the building. They’ll say, “We’ll buy this building from you, and we’ll give you an opportunity to invest in it.”
Sometimes that investment may not even include them writing a check; it may just be to extend the lease for another five years and give them a certain percentage ownership in the building, because when you extend your lease, it increases the value of the building.
So we can be really creative. Now, you run into some regulatory issues on those structures, and for that, we need healthcare lawyers to help, but they’re certainly doable.
CONTACT:
Andy Dow I 214.745.5387 I adow@winstead.com
Over the past 30+ years, Andy Dow has developed a reputation as one of the preeminent healthcare real estate attorneys in the United States. Clients from across the country seek his counsel and advice on a variety of transactions and strategies related to the healthcare real estate sector. Whether representing a health system in a monetization transaction or a healthcare investor in a portfolio acquisition, he brings a distinctive blend of real estate excellence and healthcare industry acumen to each engagement. As the Co-Chair of Winstead’s Real Estate Industry Group and its Healthcare & Life Sciences Real Estate Practice Group, Andy leads a team of seasoned healthcare real estate professionals with an impressive stable of clients, including industry-leading healthcare REITs, private equity investors, developers, operators, hospital systems, physician groups, and lenders
Posted with permission from LAW360, October 22, 2025
By Georgia Kromrei I Edited by Haylee Pearl
