Located on the campus of Summerlin Hospital in Las Vegas, Nevada, this building represents the second phase of a project previously acquired by Ensemble. This second phase structure is attached at all levels to the first phase building. Prior to Ensemble’s involvement, the programming of this project was developed and completed by the hospital as part of their master planning. While the hospital contracted for the building shell construction, Ensemble coordinated all of the leasing activity, capital structure, and tenant improvement work. The building is a six-story, 100,000 square foot structure that was completed in September 2000. The project was financed as a pre-sale to Ensemble, with the hospital delivering a completed shell. This eliminated the need for a construction loan and allowed the acquisition to be financed with conventional financing. In order to maintain normal leverage on the project, Ensemble negotiated with the lender to finance the shell at nearly 90% of cost with the developer’s equity provided in the form of future tenant improvements secured by a letter of credit.
Challenges
The main area of cost control employed by Ensemble was in the form of deal structure. The pre-sale arrangement saved the hospital financing costs, although they accepted certain risk with this. The transaction was initially presented to Ensemble as a pre-sale with a master lease, wherein the hospital would pay full rent on 100% of the space regardless of occupancy.
Solutions
Ensemble restructured the lease so that the hospital paid much lower rent on vacant space (prior to the investment in tenant improvements) and kept this rent flat for the master lease term. Thus, Ensemble had the responsibility to lease the space because of the financial incentive to do so. This negotiation saved the hospital as much as $400,000 per year in rent expenses.