Bob Rosenthal of PMB retires – Sort Of: Founder Stayed Until He Was Sure Pacific Medical Was in Good Hands
(Reprinted from Healthcare Real Estate Insights, May 2007)
By John Mugford
Ask Bob Rosenthal a question and he gives you an answer. And his answer isn’t limited to clichés or providing a response that he thinks people want to hear – as plenty of politicians, business people and athletes do.
Take, for example, his answer to the recent question of why he waited to retire until now, at age 75, instead of earlier from the company that he started back in 1988. The firm is San Diego-based Pacific Medical Buildings (PMB), one of the most prolific and best-known medical office building (MOB) developers and property managers on the West Coast. Part of his answer includes anticipated phrases, such as “I loved the business too much to retire earlier,” and “It’s hard for me to pull away.” These statements certainly ring true when one learns that Mr. Rosenthal worked each of the seven days after he “officially” retired in early March. But Mr. Rosenthal also acknowledges – without prompting – that he delayed his retirement in large part because the property management group at his company, his baby, had drifted into something he was “not very proud of.” This occurred, in part, because of the firm’s success and growth over the years.
After Mr. Rosenthal started the company with three MOBs nearly 20 years ago, PMB today has ownership interests and provides management duties in 41 buildings with more than 2.5 million square feet. The company has another 292,000 square feet of MOBs currently under construction or in the pipeline. The most dramatic growth at PMB occurred during the past six years, highlighted by the $120 million acquisition of a 22-building portfolio from Catholic Healthcare West in 2003. And as the firm grew, of course, it needed more people, especially property managers. But Mr. Rosenthal says that finding the right people who know healthcare has not been easy. As a result, PMB found itself hiring managers from other commercial property types, such as general office.
“Many of these folks learned the business in the world of commercial property management, where their job is to make the property owner happy by collecting rents and making every tenant adhere exactly to the points of the lease with little regard to the needs of the tenants,” Mr. Rosenthal says. “We’ve had to tell them that that isn’t our goal at Pacific Medical Buildings. We want to be extremely tenant-friendly because our business depends on having good relationships with the doctors.” When the doctor-tenants in an MOB are not happy, Mr. Rosenthal notes, they “run” to the hospital with their complaints. “The next time an administrators meets with the leadership in the system to talk about building a medical office building and they ask about Pacific Medical Buildings and the administrator says that a lot of the doctors are complaining, what do you think they’re going to do?” Mr. Rosenthal asks. “They’re going to look for someone else – this hits our core business hard,” he says. “It’s been difficult for us to teach this tenant-friendly culture in recent years as we’ve grown and hired people from the commercial side of real estate. We had a lot of complaints and that was hard on the business, and hard on me.”
Back to basics
So instead of retiring in recent years, Mr. Rosenthal took over property management at PMB in August 2005. “I needed to teach people that if a company like ours spends a little bit more to keep our doctors and tenants happy, which could result in the investment return being a half-percent less or something close to that, that’s not a tragedy,” he says.
“Our investors are wealthy people, so they’re more interested in the long term. And half of the investment in our projects comes from our own employees and our own people, so we need to keep the doctors and tenants happy for our own returns. “That wasn’t easy to get some of our people to understand; I had to let some people go because of that.” When asked how bad things had gotten, Mr. Rosenthal answered quickly: “We had a lot of problems – beginning in 2001 through 2005. I started getting calls from hospital administrators that signaled to me that something was wrong. “So I basically changed our staff here … and then I took over and ran our property management area for over a year,” he says. “Now we have somebody that’s really good in charge of property management. His name is Claude Hooton, and he understands our philosophy.”
Eventually, after Mr. Rosenthal realized that the company was in good hands, his thoughts turned to retirement. He says he also feels strongly about the people in charge of the company now: the former executive vice president Mark Toothacre has taken over for Mr. Rosenthal as president and chief executive, and Jeffrey L. Rush, M.D., one of the original investors, remains the chairman. There are also plenty of other key leaders in whom Mr. Rosenthal says he has confidence. “I’m still going to work on certain projects and I’m on the executive committee,” he says. “And I have a few special projects, like working to make our buildings greener, perhaps at some point applying for LEED (Leadership in Energy and Environmental Design) status, which is something I’ve been interested in for quite some time. “I think it’s just a good thing to do, the right thing to do, and it will help reduce our operating expenses, which of course would help us with our marketing for those buildings, keep our rents lower and make us more competitive in the market.”
For now, however, Mr. Rosenthal believes gaining certification is still too expensive for each and every project. That amount of expense, he says, has deterred many developers from applying.
In the beginning
Mr. Rosenthal’s road to becoming a pre-eminent West Coast healthcare real estate developer began in the Midwest, where he started his career as an architect – first in Chicago and then in Madison, WI. He’d earned his undergraduate degree in Madison, at the University of Wisconsin, and went to architecture school at the University of Illinois. While working as a general architect in Madison, Mr. Rosenthal met Marshall Erdman, who started the well-known healthcare architectural firm, Marshall Erdman & Associates, that’s still going strong today. “I got to know Marshall quite well, socially and professionally, and while they had in-house architects they had gotten so busy that he had me finish up overflow work on a project in Iowa – the technical part, the working drawings,” he says. “As they got busier and busier, Marshall had me doing more and more of the front-end work,” he says. “I got to learn all of this while my firm – Fritz & Rosenthal – grew at the same time. It got to the point where about 25 percent of my work was for Marshall Erdman and his company.”
At one point in the early 1960s, Mr. Rosenthal was sent to San Diego by a non-healthcare client to check on a piece of property. “I fell in love with San Diego and came home and told my wife, Sandra, we were moving there someday,” Mr. Rosenthal recalls. “It took me four years, but eventually we did. I sold the practice in Madison in 1967 and we moved out here.” Because of the profit he received from selling his business back in Wisconsin, Mr. Rosenthal wasn’t desperate to start working right away. After buying a mailing list of doctors and group practices and an IBM Selectric typewriter, he and Sandra started “grinding out” letters of introduction. Things went well, as he lined up several projects along the West Coast, from Southern and Northern California and into Oregon. Things were going smoothly for several years when Mr. Rosenthal was asked to run a new West Coast office for a former client, American Medical Buildings, a Milwaukee-based firm that designed and developed healthcare projects. The company was going national and the offer it made to Mr. Rosenthal was “too good to refuse.” “I started the West Coast office doing architecture – construction management still came out of Wisconsin,” he says. “We ended up having 32 architects and a few construction managers and it was a fairly successful deal – our office contributed 40 percent of the volume for American Medical Buildings.”
On his own
As he learned more and more about development, Mr. Rosenthal made a vow to himself. “It looked like I would eventually get into development and having been an architect I knew I would do things differently,” he says. “There were developers out there who weren’t very good clients. They always seemed to be running out of money and they would decide to squeeze your architectural fee. “I had a client in Milwaukee who was a group housing developer and he would get to the end of a job and he would say that he is 10 percent short of money on this job – and he was driving a Rolls Royce. When I questioned him about it and about the profits his company was making overall, he said that this was a separate project and we’d have to cut 10 percent off of our fee … an architect’s fee is such a small percentage of the total project and I decided never to squeeze an architect’s fee, or the fee of anyone else involved in a project. And I can honestly say that I never have.” If there’s one thing clients say about Mr. Rosenthal, it’s that he’s true to his word. “When Bob said he would do something, he would do it,” says Jim Terry, who has retired after 30 years in facilities management with San Diego based Sharp HealthCare. “The integrity was certainly there and Bob would make sure a project was done on time and on budget – not everyone can say that these days, Mr. Terry says. “And because of that, Pacific Medical Buildings did three significant projects for us and I always made sure we gave them a shot at all of our projects.”
While he was still with American Medical Buildings, however, that company started having problems back at the home office – the president and other key officers were fired. Mr. Rosenthal decided it was time to start his own healthcare development firm. He went to the management of American Medical Buildings with an offer to buy out the West Coast office. At the time, in 1988, Mr. Rosenthal was working on three developments. He borrowed $500,000 and mortgaged everything he had to buy out the office, changing the name to Pacific Medical Buildings. “We had had those three projects that we had sold as developer projects and that was our start,” he recalls. “We’ve focused on developer projects ever since. No design-build, no architects – we became basically developers and hired outside architects and contractors. I sold half interest in a portion of those first three projects and got my money back that way. I owned the other half free and clear, and that was the financial basis for the new company.” To get things moving more quickly, Mr. Rosenthal looked for investors. His first investor was a Utah developer that Mr. Rosenthal had known for a few years. “I sold him and his partner 50 percent of a building in Tacoma (Wash.), which was one of our three original buildings, and 50 percent of a project in Orange County, both for $500,000,” Mr. Rosenthal says. “That’s how I got my money back and I still owned the third project. That led to another era because when that project was finished, I sold it to a local radiologist named Jeffrey Rush at Alvarado Hospital in San Diego. The radiologist’s father was a developer (Rush Development) and he grew up learning about real estate development at home.”
Finding a niche
Mr. Rosenthal’s partnership with Dr. Rush was instigated, in large part, because of a real estate crisis that hit the country shortly after PMB was born. By 1990 and ’91, interest rates had soared. Loans were failing everywhere and the U.S. government had started the Resolution Trust Corp. (RTC) to help bail out the savings & loan associations. “It was a mess and I realized at that point it was very difficult to get mortgage funds. Three prospective S&Ls that were going to fund a project of ours either went under or backed out. It was chaos,” Mr. Rosenthal says. “I decided we really needed someone with a lot of net worth,” he continues. “I didn’t have a lot of net worth at the time. We had just started our company three years earlier and so I went to Dr. Rush, who built the first non-hospital related free-standing MRI – they had just been invented and Dr. Rush eventually had 25 centers. He had a high net worth and he knew our business. “He was still practicing when he joined our company and we would talk real estate in his office while he was reading X-rays. He retired a few years later and joined us full time. He funded the third building of the three I started with and he’s still our chairman.”
At the same time, hospitals were having a hard time financially because of changes in reimbursements – they were no longer being compensated on a cost-plus basis. “In 1983, Prospective Payment came out and hospitals were paid a fixed fee for a particular diagnosis,” he says. “They didn’t know how to react and by the mid- to late ’80s they were reeling. Now they had to act like a business and make a profit. They were now receiving fixed fees and hospitals were failing all over the country.” As a result, approaching a hospital with a fee-for-development proposal was a difficult prospect. At the same time, Mr. Rosenthal noticed that some local builders were teaming with architects and approaching hospitals about developing buildings for them – at no cost to the hospital. “All the hospital had to do was sign a ground lease – that was hard for anyone to compete against,” Mr. Rosenthal says. PMB adopted the practice. “Through the ground lease, the hospital could still control a building just as if they owned it,” Mr. Rosenthal says. “We had no organized competition when we first started this.”
For years, PMB basically developed two or three projects per year, lining up high-net worth individuals – it eventually accumulated a pool of about 70 investors – and physicians as investors. And after each project was complete, the company would manage the property as a way to stay in touch with the hospital system and to impress the system’s board. “I always felt like one of our goals was not only to do a good job on the development, but to work with the tenants and be great landlords after the building was up in order to overcome that long-standing tradition of dichotomy between landlords and tenants,” Mr. Rosenthal says.
Over the years, PMB has not only grown volume-wise, but in its development capabilities. Today, it’s building larger and more sophisticated MOBs to keep up with the needs of its clients and their patients. Instead of developing MOBs that average about 75,000 square feet – as was once the norm for PMB – the firm now builds projects that average about 125,000 square feet, with tenants offering services once reserved for hospitals. And PMB typically has its buildings about 85 percent leased before construction is complete. “We’ve built a good reputation – one that I’m still proud of,” Mr. Rosenthal says. So, as Mr. Rosenthal looks toward his retirement years, he’ll continue to work on some select projects and be involved in Pacific Medical Buildings for the next three years or so. But even as he pulls away, he vows to not let boredom creep into his life.
“I have a lot of interests – I am a long-time SCUBA diver and I make underwater videos – all this takes a lot of time,” says Mr. Rosenthal, who with Sandra has three children and six grandchildren. “I love the water, so San Diego is where I want to be. I also do interactive sculpture with computer parts. I’m looking to build a studio for this – I have land right on the coast. And, I love to play the piano.” So far, he’s played quite a tune in medical real estate.
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