Trinity Community Hospital (TCH)

Trinity Community Hospital (TCH)

Introduction

TCH wants a new orthopedic development centre. The building will host a rehab/therapy Centre that will support the orthopedic program development. The hospital has three main options for the programs. First, it can construct it. The other two remaining options are either to but the building that is next to the hospital or to lease office building. Any or all of the three options is sufficient, depending on the company’s future strategic plans, requisite capital reserves, and diminishing on-campus space, among others.

Construction

The construction of a new 5,000 square-foot PT Centre is one of the three options from which the hospital must pick. At $120 per square foot, the eventual total cost of the construction is $600,000. The choice of construction of the hospital from scratch has its advantages and disadvantages. Emmitt (2018) argues that when deciding to construct a building, an institution can tailor-make it to suit its specific demands, tastes, and preferences. In this case, the hospital, through having many years of experience and a good learning curve, knows what is needed. Trinity Community Hospital will, therefore, construct the PT Centre to suit its personnel, machines, regulatory standards, and the needs of patients. Another importance of constructing a building and fully owning it is that it adds to the assets of the hospital (Bengui, & Phan, 2018). TCH, therefore, has a chance to improve its leverage position if it, later on, decides to go for loans. The newly constructed PT center can act as security for such a loan.

On the other hand, however, some disadvantages come with choosing construction rather than the alternatives. First, the time factor is a crucial liability. The time taken constructing a facility is significantly longer than the time taken to lease or purchase a readymade building. Within such a time, there are many lost opportunities. It is therefore fair to say that the TCH will lose many possibilities in terms of potential and existing patients who chose other health facilities that are ready for use. Since construction will happen within the campus, there will be many hazards and risks posed by the construction project on patients, staff, and visitors to the TCH.

Purchasing

Apart from construction, Trinity Community Hospital also has the option to purchase the building adjacent to the hospital for $700,000. One advantage is that buying a building, just as construction of a building, brings in an asset for a company (Wong, Wong, & Jeter, 2016). Therefore, purchasing the building will enable Trinity Community Hospital to assign it as security against a loan in case it runs into financial trouble in the future. Furfine (2016) argues that purchasing a building saves time, especially if it is a ready building. It ensures that an organization saves on time and takes advantage of opportunities that are there in the market. TCH would, therefore, be able to receive a treat and admits patients and offer them the requisite therapy and rehabilitation care. Fortunately, the hospital has the necessary financial ability to go through with the purchase. Community Hospital has capital reserves amounting to $25,000,000. At last count, the profit of the hospital stood at $1,495,000.

The purchase option is, however, not all positive. First, purchasing a building is disadvantageous in that no significant adjustments can happen to suit the needs of the buyer. The architectural design of the building may have been for another entirely different use (Furfine, 2016). If the building is purchased, it may not suit the specific needs of the TCH. Additionally, though next to the hospital, the building is outside the campus. It, therefore, brings about inconveniences, and the intended operations will neither be smooth nor seamless; hence there will be no complete integration.

Lease Option

The last option, leasing, is $20 per square foot. The leasing of the building will be outside of campus. According to Ginevičius, Skačkauskienė, Stasiukynas, & Jokšienė (2017), one of the main advantages of leasing is that a company can look for a building that suits its demands. When the building no longer satisfies the requirements of such a company, it can move to a new location when the lease expires. It, therefore, dies not to tie an organization to just one place. TCH will benefit from this arrangement. Additionally, leasing is also a cheap option in the long run since the company does not have to commit a considerable amount of financial resources immediately. Instead, the amount paid is constant and predictable, hence maintaining an adequate capital reserve for the hospital.

On the flip side, leasing comes with its own set of disadvantages. A triple net lease gives typically the lessor the responsibility of taxes and repair costs. Such costs, therefore, significantly increase the values of the lease agreement (Ginevičius et al., 2017). It is, therefore, prudent that the hospital tries to avoid the triple net lease option. Leasing does not add to the assets of a company. It, thus, decreases its leveraging capacity.

Conclusion

For TCH, having a new orthopedic service line is prudent. The hospital has three options: construct (on campus), purchase, or lease (both off-campus). All three options have their advantages and disadvantages. It is, therefore, necessary for the hospital to make a choice based on its capital reserves stability, the limited space within the campus, and any other specific and relevant reason.

References

Bengui, J., & Phan, T. (2018). Asset pledgeability and endogenously leveraged bubbles. Journal of Economic Theory, 177, 280-314.

Emmitt, S. (2018). Barry’s advanced construction of buildings. John Wiley & Sons.

Furfine, C. (2016). Office space, a company’s frontier: The corporate decision to buy or lease — Kellogg School of Management.

Ginevičius, T., Skačkauskienė, I., Stasiukynas, A., & Jokšienė, I. (2017). Formation of a system of multicriteria indicators for the assessment of office leasing options. International Journal of Strategic Property Management, 21(2), 159-169.

Wong, J., Wong, N., & Jeter, D. C. (2016). The economics of accounting for property leases. Accounting Horizons, 30(2), 239-254.