Building a new hospital

By James E. Schutte

You?ve outgrown your facility and want to build something bigger and better. You?ve found a couple of possible locations, and you?re starting to look at interest rates. Now what?

1. Explore new services

Building a new hospital provides a special chance to refocus your practice for growth. For example, Dr. Tia Greenberg, owner of the Westminster Veterinary Group in Westminster, Calif., the Veterinary Economics 2002 Hospital of the Year, wanted to expand services for exotics and birds. Her new hospital incorporated heated cages, natural lighting, and an outdoor flight cage. Her design also keeps exotic species separated from the sound of barking dogs, eliminating the stress to rabbits and cats.

What medical or ancillary services would you like to offer? Would you like to expand your boarding, grooming, or retail areas? Would you like to develop a specialty that will require dedicated space? Before you build is the best time to think about these issues.

2. Gather expert advice

Knowledge is power, quotes Mark Opperman, CVPM, Hospital Management Editor and owner of VMC Inc. in Evergreen, Colo., and Indianapolis. And he thinks it?s critical to be informed about the building process before you start. He says that he won?t work with a client who tries to build a hospital before the client attends continuing education sessions that focus on veterinary design. "Architects who specialize in veterinary design speak at many of the major conferences and cover everything from analyzing traffic flow to selecting flooring materials," says Opperman. "Until you?ve attended such sessions, you don?t know enough to make intelligent decisions about your building options." (For information on the comprehensive 2003 Veterinary Economics Hospital Design Conference, to be held Aug. 21 to 23 in Kansas City, Mo., call [800] 255-6864, ext. 6.)

3. Decide whether to buy or lease

In most cases, it?s best to buy a site, says Veterinary Economics Editorial Advisory Board member Dan Chapel, AIA, owner of Chapel Associates Architects in Little Rock, Ark. That way, he says, you?re building equity in your practice and you don?t need to worry about renegotiating a lease later. Chapel also suggests buying the hospital site five or six years before you?re ready to build, especially if you?re located in a rapidly developing area. Planning ahead gives you a better chance of securing a prime site at a reasonable price.

When is it better to build out space in a strip mall or other leased facility? "If you have an unusual practice profile, such as dentistry or feline only, your space needs may be so small that building a freestanding facility isn?t cost-effective," says Chapel. "Or you may be located in a dense urban area where vacant land is either not available or prohibitively expensive." If you?re planning a start-up, a strip-mall site is cheaper, Chapel says. "Just remember, paying rent its just like shredding money," he says.

You?ll also need to consider construction expenses when you?re deciding between a leasehold and a freestanding facility, says board member Mark Hafen, AIA, co-owner of Gates Hafen Cochrane in Boulder, Colo. "Building a state-of-the-art freestanding facility costs about $135 to $175 per square foot, compared with about $75 to $100 per square foot for leasehold space," Hafen says.

But you may lose the construction savings over the long run, Hafen says. "Suppose five years from now you need more space," he says. "If you?re in a strip mall, there?s a chance the bay next door won?t be available. So you?ll either have to pass up the business or pay for a new facility."

Regardless of whether you buy or lease, you?ll want to stay in your present market area, says Practice Management Editor Dr. Ross Clark, co-founder of Woodland PetCare Centers in Tulsa, Okla., and National PetCare Centers in Fort Collins, Colo. He advises locating your new facility no more than five miles from your present location to avoid eroding your client base.

4. Research hospital design ideas

Chapel suggests reviewing back copies of Veterinary Economics and books on veterinary hospital design to choose floor plans you like, then making notes about what you like about each design. Create a file of these plans and notes to show your architect.

Dr. Greenberg also suggests visiting recently built veterinary hospitals, especially those designed by the architect you?re considering. "Blueprints are nice, but you don?t really get a feel for how functional the plans are until you walk through the finished product," says Dr. Greenberg. "Ask owners and employees how they like the layout and whether there?s anything they would change."

Finally, don?t forget to think about the exterior of your new hospital. Curb appeal not only attracts new clients, it could enhance your practice resale value. To refine your ideas about exteriors, Chapel suggests taking pictures of buildings, making notes about features you like, and adding them to your file.

"You can fit just about any floor plan into any exterior design," says Chapel. "And reviewing your file gives the architect a feeling for both your professional needs and your personal tastes. When you do this type of groundwork, the resulting design is more likely to work for you in terms of function and aesthetics."

5. Decide how much to spend

This is probably the trickiest step of all, because you must balance your current income with your projected income and your practice needs. The first step: Determine how much debt you can manage."Too many veterinarians expect 100 percent financing," says Opperman. "Even if you could find it, the payments would be prohibitive. So plan on putting 20 percent to 30 percent down and financing the remainder with a 15- to 20-year mortgage at a favorable fixed or variable interest rate."

Even if you can borrow all the money you want at a good rate, Opperman warns against it. "Veterinarians have a very low default rate, so lending institutions tend to loan them more money than they can comfortably repay," he says. "Loans of 100 percent of the mortgage aren?t uncommon, but the monthly payments may put a real crimp in your disposable income. I?ve seen many veterinarians suffer financial difficulties because they overspent on their hospitals."

That?s why Opperman recommends a pro forma analysis of costs vs. income. A pro forma analysis forecasts your income and your expenses. "I know a veterinarian who discovered through this analysis that she?d need to see 16 patients a day just to make the mortgage payment," he says. "She promptly scaled back her plans."

Dr. Clark uses this rule of thumb: At the end of the first year, your debt shouldn?t exceed 10 percent of practice gross revenue. And within four to six years, your debt should level out at around 5 percent to 6 percent.

6. Plan for growth

Before you halve your budget, keep in mind that if you economize too much, you?ll quickly outgrow your new hospital. Dr. Clark says most practices grow at a rate of about 5 percent a year, plus most see a one-time increase in practice revenue of 14 percent to 75 percent in the first year, depending on the number of new services offered. (For more, see "Building Your Dream May Improve Your Profits," March 2002.)

"The most common mistake I see is not allowing for that growth," says Hafen. "Five or 10 years down the line, you?re boxed in again. While remodeling is possible, it?s expensive and disruptive to alter the original floor plan at that point."

How do you allow growing room without busting your budget? "The best approach is to plan for an expansion wing that doesn?t disrupt your original floor plan or the hospital?s exterior appearance when you design the base facility," says Chapel. "This makes the expansion process considerably less expensive, and the only disruption you?ll experience is when they knock out a passage connecting the new wing to the old."

If you can afford it, Opperman suggests you build the shell of the expansion wing, then finish it out when you need it. This makes the second phase of construction less expensive because you?ve already made the initial investment, and it keeps the final plan somewhat flexible. For example, you might be planning to add a state-of-the-art dental suite. With this approach you can make sure your expansion plans accommodate the new technology.

7. Select an architect who understands your needs

A bad floor plan not only wastes space and money, it will leave you frustrated and footsore, Chapel says. Opperman agrees, and he advocates hiring an architect who specializes in veterinary facilities. "I review three or four floor plans a week," says Opperman. "I can tell at a glance whether the architect understands the traffic patterns, access needs, and other day-to-day aspects of a busy practice."

The drawbacks to hiring an architect who specializes in veterinary facilities: He or she may cost more, and the architect you choose might not live in your state. While many will travel or design a floor plan you can take to a local architect, he or she won?t be at your site day-to-day. "A good contractor is paramount, and your architect can help you interview a few," says Hafen. "If you choose an architect who specializes in veterinary design, he or she will probably visit the site at key milestones in the building process, such as before the contractor pours the slab?a point when you can still see the plumbing lines. Some veterinarians also hire a local architect to monitor the site."

Once you?ve chosen an architect, be ready to discuss what you want and need. "The architect will want to know how many associates and staff members you employ, and you?ll discuss any special features you need to meet your practice goals and make the facility match your vision," says Hafen. "Together, you and the architect will tailor the project to meet your practice and budgetary needs."

This is the time to break out your file of floor plans and exterior shots, Chapel says. "An understanding of your personal preferences is integral to the architect?s design process," he says.

8. Review the plans with your team members

After the architect presents a preliminary design, Chapel recommends reviewing the floor plan with your staff members. After all, they?ll be the ones who actually walk the building every day.

In particular, look for potential bottlenecks. Points at which people must step around each other may produce traffic jams, accidents, and even dogfights. Chapel suggests asking everyone to mark their typical work paths on the plan. Next, draw in the paths you expect clients to take. Show your architect spots where the lines cross frequently so you can discuss the potential for traffic flow problems and brainstorm solutions.

9. Prepare for delays

Zoning regulations, permits, inspections, soil tests, and other governmental requirements invariably complicate the building process. "Expect the entire project to take about 18 months," says Chapel. "Delays by contractors can push your opening back even farther. Even if the completion deadline is in sight, make contingency plans." Building a hospital can be the most rewarding and the most frustrating experience of your career. In the long run, however, Dr. Clark says he?s never met a veterinarian who regretted taking this step. So consider these nine points?then jump in with both feet.

James E. Schutte is a freelance writer and a former editor at Medical Economics magazine, Veterinary Economics? sister publication. Please send your questions or comments to ve@vetmedpub.com.

October 2002 Veterinary Economics