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EP83 - Helping Practices Structure Flexible Ownership in Real Estate with James Winchester

Trisha’s guest this week is James Winchester, Principal and Lead Financial Strategist with CMAC Partners. CMAC exclusively works with physicians that want to own the real estate where they practice. The company began with sourcing financing for physician owners, and they now also develop ownership structures that allow clinicians to own different amounts in different sites and that allow for change in ownership throughout the life cycle of clinicians’ careers.

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In this episode, we talk about…

[2:41] The background of CMAC Partners

CMAC Partners supports independent physician groups with their real estate financing transactions. When they started around 20 years ago, they would go out and get variable rate bonds. They went to banks and were able to get them back by letters of credits from banks, and in doing so they were able to get physician groups some superior financing options. Around 2007-2008, CMAC as an organization had to really pivot.  

The name itself stands for Capital Market Access Company, which originated because of their activities in the bond market. They realized, however, that independent physician groups were and are an extremely sought-after asset class. Banks enjoy having relationships with those kinds of groups. When the bonds that they would secure for these groups became liquid, those banks came back to CMAC and told them that they liked the groups they were bringing and committed to offering super competitive commercial real estate financing rates. CMAC made that transition and continued offering that kind of support to independent physicians.

They now have over 300 clients that they have worked with, and they have found that independent physician groups often have different issues than other types of real estate owners. That has allowed CMAC to create some solutions around how physician groups can sustainably own their real estate assets, making something that is fair and equitable for all. Discord between the real estate and the practice can be a real turn off to groups, making them question whether or not they should pull the trigger and invest in owning the properties that they operate out of.


[5:38] Ownership structures in real estate

Although they are focused on real estate, everything CMAC has done as an organization is geared toward strengthening the practice. If they can create alignment between the objectives of the practice and the real estate entity, they can provide a superior investment to those physician owners. They can transition the investment from a pure real estate investment where they are carrying the types of risks that are common in those investments to more of an investment in their practice. Ultimately, their risk is defined by the practice’s ability to continue to make its lease payments.


[7:01] Partnerships in real estate 

James thinks that most physician groups don’t treat their real estate investments in the way he just described. Most of the time it will be based on a practical perspective, or the need to expand space. A subset of the physicians may go out and decide on a good investment opportunity as they select a building to own. Over time they grow and evolve, and another subset may decide they want to do their own deal somewhere else. Then suddenly one group may merge with another group, and they have legacy real estate ownership. Everybody then sits around in a boardroom and talks about what to do with all of the components. Decisions will disproportionately affect one subset of the physician group relative to the other.

CMAC has experience with these situations, and over the years they have focused on aligning the owners of the real estate with the practice. When you’re making decisions that affect the real estate, they also affect the practice. Often when groups get into a real estate investment, it isn’t carried out with the foresight that it could be directly related to improving the practice. It tends to be seen as a separate investment. That might be fine at the beginning, but groups often hold onto these assets for a long period of time. By the time new partners start coming into the practice and some of the physicians are retiring, it’s suddenly very difficult to navigate.


[9:36] Flexible ownership structures that can change over the course of a career

One of the things they try to point out early to groups is that for these kinds of properties, the value is driven by the lease. Most of these buildings without a lease in place are worth a small fraction of what they are worth with a lease in place. For most groups CMAC works with, it is important to align the individuals that are driving the value of that investment (the partners who are paying rent and in the practice) and those who are receiving the benefits of the real estate ownership.

This means that they are looking to create an ownership structure that allows for fluidity. As the underlying practice evolves, the real estate ownership needs to evolve along with it. That carries some challenges, because it is generally a situation where value is increasing over time through the repayment of debt and hopefully the appreciation of the buildings. There are certain tools and options to revitalize or reinvigorate the investment such that you can get physicians into real estate ownership that have perhaps been prohibited from that investment because the equity in the building has increased drastically.

There are also situations where physician groups “break up”, or go their separate ways. Maybe someone wants to retire, but then they get stuck because they own part of this real estate and they don’t know how to divide that from the practice and the group doesn’t necessarily want somebody who is no longer in the practice to own the real estate. This should all be set out in the initial operating agreement, and James points out that some of the best times to address these issues is when they are going out and sourcing financing. This allows for structural change. When an operating agreement is antiquated and does not provide these kinds of guidelines for the group, it is difficult to navigate and expensive to fix retroactively.


[13:52] The legal side of flexible real estate ownership

Physician groups generally come with attorneys. CMAC provides models and information on the decision points that they think are important from a partnership standpoint. For example, they need to consider, on an ongoing basis, how they are going to value shares and what the implications are for that valuation methodology. How will they support new shareholders entering into the practice and into the real estate? Will they provide internal financing or should they seek external financing? In both cases, what would that look like as the investors?  

These guidelines can evolve from inception and then exactly the same questions should be asked on the buyout side. If we’re looking to create a structure where we’re buying out physician owners at retirement, what are the manageable variables that will improve group outcomes and solidify a sustainable plan.

When groups are going through this process, James sees CMAC’s role as demonstrating what options are available and then fueling the group in understanding the roadmap so they can go back and share it with their attorneys. 


[15:46] How physician groups get connected with CMAC Partners

Most first-time business comes to CMAC through referrals. They have been long-time members of a number of different conferences, and about 40% of their business is in orthopedics. When they get into a particular market, their involvement often spreads like wildfire from a referral standpoint.  


[16:40] Where CMAC Partners works geographically

James is located in Florida, and the company is there as well. They work nationwide, recently doing three transactions in Alaska – so they really are coast to coast.


[17:02] Working with large physician groups

CMAC has worked with several large groups, the largest being an orthopedic group of around 300 physician providers. They have also worked with a few different multi-specialty groups as well, but orthopedics probably wins out in terms of overall size.

Different groups have different structures, and James observes that as the group gets larger the audience James has to present to actually gets smaller. For those really large groups, they may put together an executive committee that is given the authority to make the decisions for the group. What CMAC tries to do is create something that is palatable to as many of the physician owners as possible. They end up in some scenarios that get complicated with different properties owned by subsets and within those subsets the ownership is disparate between members. It is very important to bring everything together collectively as a group, because of course everyone wants to be treated fairly and equitably. They want to make sure that the value they have built over time is being appropriately allocated to this new investment vehicle.


[20:38] Allowing physicians to own property and continue to practice medicine

James sees a lot of what they do as being educational for many physician groups. At some point they may sit around a board table and say they have had enough of paying rent and they want to own the property from which they’re operating. They don’t, however, tend to really think about it much more than that in terms of the investment that they are getting themselves into. It’s usually dictated by a couple of physicians within a wider group, and it’s not necessarily something that everybody is on board with straight away.

At CMAC, they believe in the importance of getting the group together to make that kind of decision. It can be nearly impossible to get everybody involved in the larger groups, but you want the majority of the physicians to be on board with the investment. Because of that, CMAC often puts together an educational program to ensure everyone in the group knows what they are investing in. For owner-occupied properties, the risk profile is completely different than it is for a pure real estate investment. CMAC makes the physicians more aware and knowledgeable, and they find that it is generally a positive experience.

James points out that being physician owners gives the clinicians control of their own destinies. They are the tenants that are paying rent, which is driving that real estate investment. CMAC sees this as an opportunity  for physicians to earn passive income alongside their ordinary income, which is terrific.

For 99% of independent physician groups, they earn their income through a year and then they distribute all of it at the end of the year. They should do this if there are no financial covenants, because it allows them to pay the least amount of taxes on their income. In doing it from an entity standpoint, however, there is no wealth generation component. Real estate offers those independent physician groups another ancillary revenue stream.

We often see that high-earning physicians within a group don’t necessarily make the best decisions with their income. Fortunately, real estate being liquid can sometimes be one of those investment opportunities that will be fruitful at the time of retirement, or that can drive wealth for them over the course of their career. James sees a lot of potential benefits associated with bringing in passive and ordinary income streams as a physician owner.


[26:50] James’s first job as a mechanical engineer

James trained as a mechanical engineer in college, and then he worked for a year at General Motors. He worked in the manufacturing line in Europe as a quality and reliability engineer. They would have to implement changes in response to known defects so they were not perpetuated in subsequent vehicles. It was a challenging process, because it usually involved adding time to a line worker’s job. The workers often weren’t interested in doing that, especially when they were being told by a young man carrying a clipboard and explaining exactly what needed to be done in order to provide the best possible vehicles to the customers. That experience put him off engineering, at least in that capacity. James came to the states a couple years later to do his MBA, and that is when he stumbled upon CMAC.


[28:20] What James would be doing for a living if he was not in real estate

James sees himself doing some kind of consulting. He really enjoys the educational aspect and providing analysis to the groups that they work with. Bringing that analysis to their attention and creating tangible solutions is appealing for him.


[29:01] What James is reading and listening to for news, information, and inspiration

Recently, James has been listening to a podcast by Sam Harris. He also started reading a book called Tribes, because it was recommended to him due to some of the things going on within CMAC and some of the ways they are trying to cultivate different groups within their niche.


[30:04] What James does for daily self care

James played soccer for years, and he played a couple of years collegiately. He still enjoys playing soccer every now and again, and he tries to do some form of physical exercise a number of different times a week – otherwise he drives his colleagues crazy.


[31:42] Whether leaders are born or trained

In James’s experience, leaders come in all shapes and sizes. Some people lead by example, while others lead by motivating others. James thinks it’s probably a little bit of both, but that leadership can certainly be learned.

Links to resources:

James Winchester, Principal and Lead Financial Strategist
CMAC Partners

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