Medical Real Estate: Lease or Own?

Sunday 7/10/2011

Revenue for a healthcare practice can be uneven, pending results of billing vs collections.

% cash per visit

% private pay

% Insurance collections

% from medicare or medicaid collections; if applicable.

If space changes are planned for your practice, how will your revenue fit with space costs? Analyze to make the right choice. Occupancy alternatives are Lease, Buy, Like-Kind Exchange or Sale-Leaseback.

Lease

Leasing space affords relatively (predictable) fixed costs, includes outsourced management (from the landlord); most of the architectural services, fees and construction costs are borne by the landlord, yet amortized over the life of your lease. Rent (that often includes electricity) is a business expense, reducing income subject to tax. The business terms of lease (and renewal) should match the occupancy needs of your practice.

Buy

Pros: Owning has deductible tax advantages: i) mortgage interest, ii) depreciation, iii) property maintenance and grounds’ scapes expenses. Investment advantages: I) equity appreciation, ii) asset appreciation, iii) adds financial value to your practice.

Cons: I) office space is fixed unless you lease extra space until ready to use, ii) you pay/manage construction/rehab to ready the property for use, iii) unexpected repairs [needing funding and project management] lower profits, iv) months to sell vs move at lease expiration.

Other important space expenses are I.T., phones, furniture, fixtures & equipment (their financing rent, maintenance), gas, electric, water/sewer and trash.

If its cost-effective, property management duties can be outsourced to a fee-based vendor. The vendor typically explains the terms of their engagement in a Service Level Agreement (SLA). SLAs should be more specific about remediating disputes and what service are not included. Your business manager should manage the performance of that relationship.

Like-kind Exchange

If moving to sell / buy is preferred, you can defer the capital gains taxes by making a Like-kind exchange; I review the activities necessary to complete this type of transaction. In general, you must invest all proceeds of sale into the exchanged property within 180 days of closing on your existing one to defer capital gains taxes from sale. There are business rules, tax rules and procedures to comply with.

Sale Leaseback

Remaining in your location may be the best choice, yet you want to exit property management to focus on patient care (and practice operations). A sale-leaseback sells your property to an investor in exchange for a long term lease (7 years or more); business terms of the lease will be negotiated. You get a big check for your property and flip property management to the investor. Some doctors have chosen this route over others in 2011 because loans are available for properties supported by reliable rent from creditworthy tenants.

Real Estate Analysis from CDS

How would you know which choice is best for your medical practice? An aspect of CDS’ Green service is Real Estate Analysis. I offer an unbiased neutral perspective of your real estate costs, free from fees of a transaction. I review your space operating costs to produce a complete, cogent report to suggest tangible ways to operate lean and efficiently. I review market conditions, run draft analysis to present a rough idea of market conditions to consider. You get a financial picture of your options with strategic advice of which option to choose. (You decide how to apply the net proceeds of sale to your medical practice.)

Thanks for reading. Check your Facebook, Twitter or Linked-In account next Monday morning for a link to the next post or video we publish. ###

(I spent 15yrs as commercial realtor to small businesses with 5-100 employees, serving the NY metro and metro Atlanta areas Q21995-Q32007. I closed 260Ksf of leases and sales of land, office, industrial and retail properties worth $30M for users, sellers and investors. Analysis often helped me choose the right transaction; I interpreted those reports to clients to pick the deal that met their operating needs. Today, I leverage those skills to space users as Analyst. If I can be of help to you, please click “Request A Consultation” at the upper right of the screen, write “Real Estate Analysis” in the subject line; add your comments, name, email address and direct dial number to reach you; I reply within 24 hours.)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s