Discussing the possibilities and future of the intersection of healthcare and commercial real estate
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This week, we are switching it up! I am the guest, being interviewed by Dr. Kevin Christie (my guest on episode 65) for the Modern Chiropractic Marketing Podcast. Kevin educates other chiropractors on best marketing practices as well as business practices for owning and operating a chiropractic business. I come in on the real estate side, and we discuss owning versus leasing office space and the long-term benefits of both when it comes to running a practice.
[1:20] My company, Doc Properties
I help physician owners and investors in real estate solutions. For physician owners, I typically help them put together a corporate real estate strategy and help them manage that. As a part of that strategy, they may either lease or sell real estate to help them with their practice or healthcare company. In addition, I help physician owners clean up their properties to sell to investors. There is a whole asset class of investors who specialize in purchasing medical office buildings, surgery centers, urgent care centers, and standalone emergency departments.
I can package the properties, and then I have the physician owners clean them up – aesthetically on the outside as well as regarding the improvements that can be done to improve the value when I present the property to an investor.
[3:05] Physician investors and sale leasebacks
Kevin shared a message he received from a real estate company looking for medical practices to buy in his area of south Florida. They were willing to provide a free valuation of his practice, and he learned there was an amount he was likely to receive if he sold it to another chiropractor and walked off into the sunset, and then there was a leaseback option. If he sold it to an investment group and then did a 10-year leaseback to them, that would be worth more.
For physician owners, this is mission-critical, purpose-driven real estate. There is a reason the tenant needs to be there: they are operating a business. If you are an entrepreneurial physician, this is your bread and butter. If it is a larger healthcare company, they still need to be there in order to serve a patient base. Clinicians cannot practice out of their homes, so it is not a business that is significantly affected by every economic fluctuation. People always need healthcare, so there is just a strong staying power when it comes to the healthcare asset class.
One benefit of a sale leaseback is that you do not have to be a hands-on landlord nor do you have to deal with the property accounting and operation. It offers you an opportunity to become a tenant and write a check to the owner. With this kind of agreement they do often ask for a commitment of around 10 years, because they want to have some cash flow.
Within 10 years there could certainly be changes. You could get bought by another group, or a hospital group may buy the lease as well. If that happens, and you are the physician that owns the real estate, you have lost yourself as a tenant and you would have to backfill it.
So if you are a clinician and you’re noticing some uncertainty in the market, this may be a good plan. You know you are going to practice, but you don’t want to own the real estate. You don’t want to be left with a vacant piece of real estate that you have to return or continue to manage. With a sale leaseback, you get the benefits of unlocking the equity today, and then you also get relieved of the operation and management of the property.
Kevin points out that you could unlock the equity and put your lump sum into an investment in a retirement fund, and let that grow without the stress of managing the real estate. You could then practice for a few more years, and you could have an agreement with the investment company that if the practice exchanges hands, the lease would transfer over.
Some buying entities offer to have the clinicians invest in the property as more of a shareholder or a percentage owner of the property. That allows you to be more on the passive side of real estate investment, while allowing for opportunities to invest in other funds as well.
[10:35] Beginning the real estate investment process with the end in mind
When you are making the decision about whether it is a smart idea to buy real estate in the first place, you want to have the end in mind. It can be helpful to reverse engineer from the practice to make your decision about what to buy.
I get a lot of calls asking for the cheapest space or how to get the best deal. What is important to keep in mind, however, is that real estate has to function for your business, and the occupancy costs have to fit in your business model for your overhead costs.
Your office space is the doorway to your patients. You want ease of access, so location is incredibly important. A lot of physicians have the same criteria as a lot of retail owners do. They want visibility; people need to be able to see where they are. They need patients.
The big question is whether you want to own or lease, and then you need to figure out if those options are available in your target area. Then, you need to think about the quality of the real estate. Patients want spaces that are clean and well thought out. You should be cognizant of logistical things like how your waiting room is configured, as well as of more branding type questions like how you want your patients to feel when they walk into the space. In addition, consider what patient base you are trying to attract? Do you need to be near a hospital? What income and insurance reimbursements are you looking for? Are you looking to be around other physicians?
It comes down to what type of real estate you want, the price point, and then the mechanics of the transaction. It is crucial to think about how you want your real estate to work for you as part of your practice, in a strategic way.
For most physician owners, I would say the best thing to do is buy more property than you need. You can always lease it out. I recommend a minimum of 800-1,000 square feet over what you plan to use. Even if it’s a general office, you need a waiting room, a couple offices, a break room, and maybe a conference room or meeting space. That’s about the least amount of space that you can lease out. Then if you need to expand once the lease expires, you can take that space back and absorb it. If you don’t need it, you can continue to lease it out.
More often that not, I’ve found that practices tend to outgrow their space. Then you’re stuck because there is no way to expand, unless you go to your neighbor and ask to buy their space. Once you run out of space, it’s like living in a home where you’re planning to move. You have boxes in all the hallways, there isn’t enough storage space, and it feels really cluttered and cramped. Buying more space than you need avoids this problem to an extent, and you can reduce your own occupancy costs by leasing space out.
I also think that clinicians don’t really understand the opportunity to enter into a joint venture with someone. While JVs do involve taking ona partner, you can certainly structure your offer in different ways. You could build a building and occupy some of it, and then lease out to other physician groups that would refer patients to you. There are also partners that will JV with you to bring the capital or hire a general contractor to develop the property for you. It provides options for you to not have to outlay all the cash yourself. You don’t have to take on all the capital risk, and you can increase the value of the deal.
[21:17] Managing and maintaining medical real estate to retain value
I wouldn’t recommend buying real estate just to buy real estate. There is a lot of work that goes into upkeep. If you own a unit inside of a medical building, you could be in a dilapidated, old building. That would impact the value of your suite.
If you are going to purchase any piece of real estate, you have to really understand how it is going to be managed and maintained. In order to sell commercial real estate, you have to get it appraised and refinanced. While it doesn’t have to look like the most modern building out there, it should always look as though it is being taken care of. You don’t want dead plants outside, the parking areas need to be well-maintained, and the paint and flooring need to look good. You have to continue to ask yourself, if I were a patient coming to see me, would I be happy walking into this building? Would I feel comfortable? You shouldn’t buy real estate unless you know how you’re going to run it and operate it (and how much it costs to do so) from the get-go.
[26:32] Benefits of purchasing medical real estate
As Kevin points out, a benefit to leasing is that if something goes wrong, it’s not on you. If you sign a lease, however, your rent is likely going to be much higher after a 10 or 20 year term. On the other hand, Kevin purchased his real estate in 2013. Barring any refinancing, his mortgage will be the same amount in 2033 as it was in 2013.
There is also the benefit of appreciation. Kevin paid $450,000 to buy his medical real estate in 2013; it is now worth $825,000 in 2021. That appreciation is a huge chunk of his retirement, and it also provides a lot of stability for his chiropractic practice.
You can also discuss tax benefits with your accountant or whoever prepares your taxes. You may be able to write certain things off as a physician owner that would impact your tax liability. If you do buy it and lease back to your company, you need to make sure you are asking your tax expert about that as well.
I think people sometimes get afraid to purchase real estate because it seems so final. It is, however, such a good financial and strategic tool – especially if you go in with an exit strategy in mind as well as with contingency plans. There are leasing companies out there that would market and lease the space for you. You can use it to expand your practice. You can lease it out to somebody else. You can sell it as an investment. There are sale leasebacks, and you can also refinance and recapitalize the property.
There are so many options for you if you own real estate, and at the end of the day, you can always sell it. Typically over the long term, if you buy it right and don’t fire sale it, it typically benefits you.
Real estate is wonderful, and I love it. I love being able to help physicians with whatever they want to do with their real estate. I find physicians to be a lot of fun to work with, and they are very smart and sophisticated investors. I’m also, however, very honest and very real with them. I try to outline all of the costs and performance for all of their decisions, and then provide them with as much information as possible to be comfortable with the decisions that they make.
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