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EP90 - Financial Strategies of Physician Ownership with Grant Bledsoe

Trisha’s guest this week is Grant Bledsoe, Certified Financial Planner with Three Oaks Wealth. His company works with a lot of physicians and business owners. He advocates for physician ownership in the properties where they practice for long-term financial benefits, increased equity, and tax advantages.

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In this episode, we talk about…

[3:10] Grant’s background and the history of Three Oaks Wealth

Grant has been in the financial planning industry for around 15 years. He went to business school, and then he worked in institutional trading and portfolio management for Charles Schwab for a number of years. As he was working his way up the corporate ladder, he realized there were so many people out there looking for help and for objective, sound advice from somebody they can trust, who has a fiduciary responsibility to operate in their best interest, and who operates in a way that minimizes conflicts of interest. The vast majority of the financial industry was not set up in that manner, so Grant resigned and started Three Oaks Wealth.

Three Oaks Wealth is a financial planning firm that helps people get to the best place for them financially, based on their lives, career, families, values, and whatever else makes them tick. They try to help people arrange their resources in a way that aligns with the intentions they have for their lives. If you think of the spectrum of factors that touch your finances, you have income from work, investments, taxes, estate planning, risk management, insurance, and more. There are so many decisions that need to be made, and they are all connected in some way, shape, or form.

Grant and his firm help people make thoughtful decisions across the financial spectrum so everything is aligned and propelling them closer to their long-term goals. They predominantly work with business owners, helping them align what is going on inside their business with their personal financials. A lot of their clients are in the medical community, and several are interested in purchasing and owning the building in which they operate their business. It is a convenient wealth-building tool for a lot of business owners.

[5:44] Financial planning for physician ownership

Grant’s firm walks people through their financial planning process. They have their clients gather all of their data, including account statements, task returns, business documents, and risk tolerance questionnaires. In a series of interviews at the beginning of an engagement, they get to know their clients so they can understand their values and long-term goals. People often reach out to a financial planner because they have something specific going on in their lives that requires some urgency. Maybe they just received an inheritance, or they have a big business decision to make. Maybe they have been doing things on their own for a while but they feel like they need more oversight from someone with experience. Along that same vein, sometimes people will reach out with questions about buying a business and how that would impact the rest of their financial landscape.  

Typically, those answers are uncovered a little later in the process of getting to know clients. They get to know where their clients are at in their careers, what they want to do long-term, and what their practice looks like (solo practice versus a group).  If it’s a good fit, which it is for many people who have an ownership stake in the practice, then they bring it up as a possibility. If they are maxing out their 401k and doing all the other typical wealth accumulation strategies, they might consider buying a building the business can occupy. At the end of the day, you have to rent space somewhere. It might as well be to yourself so you can build some equity.


[9:08] The tax benefits of physician ownership

Let’s say your business occupies a space and you are paying $10,000 a month in rent. Maybe it’s a triple net lease where you’re responsible for the maintenance, the taxes, and the other stuff that comes up.  If you have the opportunity to put some cash toward a purchase, and finance a commercial building where your payment is $10,000 a month, then the net cash flow to the business is exactly the same. On top of that, typically the way this is structured, you would put the building in an LLC that you create for some asset protection benefits. That LLC is going to have revenues and expenses just like your business does, so that $10,000 of monthly rental expenses would be the exact same on the business’ P and L – it would just go toward this LLC that you own.

So now you have this new LLC, you have revenue of $10,000 a month coming in at the top of your profit and loss statement that your business is supplying, and you have expenses that include maintenance and insurance. One of the expenses that you get to claim when you own a building like this is a depreciation expense that you get to claim as a deduction every year. So if you buy the building, you get all the ordinary tax deductions on top of depreciation, which means that if you have $10,000 going out of the business, you have the same $10,000 going into the new LLC. Your net profit from the LLC is less than $10,000, which is an immediate tax savings.


[11:34] The benefits of physician ownership for business operation

Grant points out a lot of qualitative reasons that physician ownership is beneficial. Every time you negotiate a new lease, you have to go through negotiations with the landlord. It may or may not be the right space, and your neighbors can be either a positive or a negative for the business. When you don’t own, you don’t have as much control. From the business’ perspective, it’s nice to be able to call the shots on all the terms of the lease and not have to go through that process of dealing with the landlord.

In addition to the tax benefits he already mentioned, Grant shares that some of the $10,000/month mortgage payment on the building is interest. Some of it is principal, but you get to write off the interest. So, the benefits to physician ownership stack on top of one another. You have tax benefits, you have control over your visibility and signage, and you are your own landlord.

The financing is also really beneficial in an owner-occupied purchase. If you are going to cobble together some cash and invest in a commercial building, you can get a mortgage for that. If you go through a private lender these days, you’re probably putting around 25% down. As Grant understands it, if your business occupies at least 51% of the building that you’re purchasing, you can put down as little as 10%. Since it is backed by the government, the terms are a little bit better. If you think of the trajectory, or if you are someone who is trying to grow your practice, it is pretty convenient to occupy 51% of the building and lease out the other 49%. You can potentially move into the rest of the space over time as leases expire and you want more square footage.

We haven’t even gotten into the long-term wealth benefits, but in terms of business operations it is nice to be able to control all of those things. It is beneficial to have a little bit of room to move into down the road, you get some tax benefits, and the financing is beneficial.


[14:40] Reduction in ordinary income 

Let’s say that the business revenue for the year is one million dollars, and your total rental expense as a tenant in the building the business occupies is $100,000. You have no other expenses, and you have $900,000 leftover at the end of the year that you have to pay taxes on. This is a really simplistic example, but the analogy is sufficient.

If you save some cash and buy the commercial building inside an LLC, your million dollars of revenue coming in is going to be reduced by the same amount of rental expense. So you have $100,000 of rental expense and $900,000 of business revenue left over to pay taxes on. In the LLC, however, you have that $100,000 of revenue coming in but you don’t pay tax on all of that. You get to reduce it by depreciation, interest, and other operating expenses. 

So it’s not the case that you’re going to reduce your aggregate ordinary income by purchasing the property. It’s more that you are going to create another asset base with its own income stream that has its own tax benefits. If you take your net marginal tax rate, or effective tax rate, if you are leasing the space and then compare it to what your effective tax rate would be if you owned the space and leased it to yourself, the effective tax rate is probably going to go down by a little bit because of the tax benefits in the LLC. Everyone’s situation is different, of course, but that is a reasonable representation.

Three Oaks Wealth primarily works with individual physicians. With physician groups, decisions are not made as quickly. The same idea might have to be presented to a board, and their firm is set up to be more family business oriented.


[17:41] Long-term benefits of physician ownership

For a W2 employee, your traditional path toward retirement is to pay taxes on every paycheck, spend a bit less than your net paycheck, and put the rest of it away somehow.  If you’re trying to put yourself on a trajectory toward retirement, you probably want to utilize some kind of tax advantaged retirement plan, like a 401k.  You keep doing that over and over again, and the amount of money inside the 401k grows and grows. At some point down the road you reach the point where your nest egg is big enough and you have enough saved to live off for the rest of your life. You stop working, and somehow you have to convert that big pile of cash into income to pay your living expenses.

With business owners, it’s a little bit different because you may have equity in the practice. One of the huge benefits here is that if you own the practice and then you exit from the practice but still own the building, you are now leasing the space that the business you know intimately continues to operate in. You have created an income stream. So the way this typically plays out is that when you are ready to retire, you sell the practice but hang on to the building.

Rather than having to pull $10,000 a month from your savings to pay living expenses, that $10,000 might be offset by $5,000-$8,000 a month of lease payments. Often, if you have been doing this long enough, maybe the mortgage is gone or almost gone. You can refinance it to reduce the payments, and have some net cash flow coming out of the property. It’s really helpful to know the buyer of your business, so you want to do your due diligence when selling your practice. You have to be pretty comfortable with who the buyer is and with their ability to take care of your patients and your clients. If you’re going to go through that process, and lease the building out, it may be the person or the entity that you know most intimately. It takes some of that commercial real estate risk off the table and it creates an income stream. 

The cap rates are one way to evaluate the return that you’re getting long-term on one of these properties.  The other component of return is the return on the equity that you have in the property. Cap rates do not include the equity, leverage, or loan that you have against the property. If you put 10% down on a million dollar building, that means you have $100,000 in equity on day one. Over time, you pay off that mortgage, it amortizes, and your equity in the property grows. Maybe the value of the property itself appreciates, which also grows the equity. As the mortgage balance goes down, the return on the equity that you have goes down too, because the return is income coming off the property plus appreciation divided by your equity.  So if the denominator is going up, your return goes down. 

If you’re someone who has owned a property for a long time and you have a bunch of equity in it, your net return may not be that great. That might be okay. That might be congruent with your objectives and your personal financial plan, but it’s also really convenient to be able to sell that property and swap it into a new property that is potentially bigger with more income that you can leverage again. Most people stepping into retirement don’t want to add leverage and take more risks, but it’s a convenient tax opportunity.

[23:14] Grant’s first job

Grant’s first job was mowing lawns around the neighborhood. He grew up in Anchorage, Alaska, and so the period of time where snow is not on the ground fits into the time when you’re off school in the summertime. So Grant would go around the neighborhood, knock on doors, and mow lawns for $10 or $15.


[23:38] What Grant would do for a living if he was not a financial planner

Grant has always been interested in the law, and his father was a lawyer. He thinks he could have gone to law school, but he isn’t sure what kind of law he would practice.

[24:08] What Grant is reading for news, information, and inspiration

In the investing and financial planning field, you have to synthesize a lot of new information and you have to be really careful of how that information is filtered and brought to you. Grant believes that if you are not paying for your news overtly, you are the product. So he doesn’t watch much local news or televised news. He gets news from Wall Street Journal, Bloomberg, and other sources that he pays for.

He is currently reading a good book on the history of capitalism in America. Grant says it is a bit dry, but he likes economic history. Another book he recently liked was by Ray Dalio, who has been in the news a bit recently. He did a study on how countries, their economics, and their currencies rise and fall over time. Right now we have a big debt load in America, and China wants to take over as the reserve currency from the U.S. dollar.  They’re very aggressive in what they are doing in geopolitics, and Grant finds it really interesting. The book is called The Changing World Order, and he would highly recommend it.


[26:22] What Grant does for daily self-care

Grant gets up at 6:00 and exercises immediately, and he tries to bring his lunch to work every day. He also tries to have vegetable-based smoothies throughout the week, and he tries to get enough sleep.


[27:11] Whether leaders are born or trained

Grant believes it is a blend more than a binary. There are definitely some innate characteristics that probably help people in leadership roles, but there is much that can be learned when it comes to sound leadership. 

Links to resources:

Grant Bledsoe
Certified Financial Planner

Three Oaks Wealth
Podcast: Grow Money Business

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