With medical reimbursements decreasing while practice costs increase, there is more pressure on physicians to decrease fixed costs in their practices. Because occupancy costs generally make up about 12 percent or more of fixed expenses in a medical practice, physicians must be prepared to make the best real estate decision when the need arises.
Tim Blair, CCIM, a principal at Shannon Waltchack Real Estate in Birmingham, and Richard A. Campbell III, CCIM, of Veritas Medical Real Estate handle these types of transactions regularly and often work together to finalize agreements with Blair representing the property owner and Campbell representing the medical practice.
“Every physician, at some point in his or her career, will have to deal with leasing or buying space,” Campbell says. “The first decision is whether or not your practice needs to be on a hospital campus.”
If the practice will be on a hospital campus, the physician will be leasing space provided by the hospital or another property owner. If the facility will be off campus, the physician must decide whether to lease space or to buy or build a new facility. In a leasing scenario, Blair recommends casting a wide net for properties in the general location of interest. “I suggest that they make a long list of available properties, then go look at them and narrow the list to their favorites,” Blair says. “Next, get proposals from a couple of different spaces, and then pick the one they like best. Remember that a proposal is a non-binding agreement with the owner.”
Blair, who represents the landlords, will work to negotiate a deal. “The most important thing in lease negotiations is to find what the other party wants and needs to be successful,” he says. “It has to be a win-win. When we reach an agreement, we will execute the lease and then deliver the space.”
In negotiating the lease, terms and rates are discussed initially to determine if a deal can be reached. “As a landlord, I want the leasing party to commit to longer terms so we can do more to accommodate them,” Blair says. “With longer terms come more incentives such as higher tenant improvement dollars and possibly rent abatements.”
Rental rates are also a major part of the lease, and he urges physicians to compare apples to apples when comparing prices. “When shopping for rates, remember that there are a lot of different ways to charge rent, like double net, triple net and full service, for example. Not all $16-$20 rates are the same,” Blair says. “Remember, too, that in real estate it’s all about location, location, location. If the space is next to the hospital, it typically will cost more than a space a few blocks away.”
Once the practice gets into its new space, janitorial services can sometimes become problematic. Communication is the key to success here, Blair says. “Be sure to communicate with your landlord about your desires and needs regarding the upkeep and cleanliness of the space. A high level of communication will go a long way to creating a happy partnership between the two parties,” he adds. Because of all of the critical points involved in such deals, Blair encourages the use of a broker to help facilitate the process.
Some physicians decide to purchase property for their practices instead of leasing. “Buying is not necessarily better than leasing. It’s just a different investment opportunity,” Campbell says. Before making the decision to buy, the physician needs to look at the state of the practice. Is it a one-physician practice that needs to become a four-physician practice? Is it a seven-physician practice that will stay a seven-physician practice? Are all physicians in the practice the same age? If not, the practice will be in constant change. “I tell doctors to figure out where you are in the growth life cycle before making the decision to buy property,” Campbell says.
If the decision is made to purchase, the physician should start the buying process by understanding the demographics and geography and how they match with specific types of practices to arrive at a good location. “Keep in mind that there usually are fewer options for properties when buying,” Campbell says “For instance, you may find only one piece of land for sale and/or only one building to renovate that matches your budget and size. You need to get your arms around the total development cost for the property or the total cost of any necessary renovations to an existing building to determine how much equity will be needed.”
The purchase timeline will depend on what type of property is purchased. “If the only property found is raw land, it will take at least 18 months to negotiate the deal and then design, plan and build a clinic. In that case, the practice may need to extend a current lease to buy time for the construction,” Campbell says. “It is important to know what the entire process will entail before beginning negotiations.”
Because there are fewer properties to consider in a purchase deal, the tour of available options takes less time. Once a decision is made, the physician submits a letter of intent to purchase with the owner. This is a non-binding agreement, Campbell says. “From there we move to a contract, which is a legal document and a binding agreement. That begins due diligence which ends with the closing process,” he adds.
The period of due diligence gives the physician time to assess the property for problems like a leaky roof or air conditioning issues and to gather the cash needed for the purchase. “This process usually takes 60 to 120 days and culminates with the closing,” Campbell says.
At the end of the day, Campbell says the physician should remember that purchasing property for a practice is an unemotional investment. “You are buying the property with the end goal of eventually selling it in order to realize your full return on the investment,” he says. “It’s about the performance you will get out of it compared to other alternatives of putting your cash into play.”