• Construction management. You hire someone to act on your behalf either as a consultant on the entire
project or as a development/design adviser and later, general contractor. In
either case, he/she solicits bids for your approval.
Design-bid-build gives the physician/group the most control but also demands the
most time and attention. By comparison, the construction management option
requires the least time on the doctor’s part but requires faith in your developer/contractor.
With the right team, any of these approaches can work. A consultant can explain
the ins and outs of competitive bidding and RFPs. Whatever you choose, consider
the common caveat: To get an estimate that comes close to your final construction cost, you must
plan up front. There’s usually some contingency built into the project (nothing goes exactly as
planned) but if your plan is ill-conceived or lacks proper definition, you can
be sure of pricy change-orders down the line.
In fact, while rule-of-thumb estimates will guide you initially, you’ll eventually undergo a functional and space assessment to nail down your
configuration needs. Your design/construction team will translate that analysis—along with their experience and other information—into a design and price.
“It really comes down to the up-front work that we do with physicians,” says Stephen Dobias, a CPA with Somerset CPAs in Indianapolis. “We think it’s critical to detail what they’re going to get for a certain price, and what they’re not going to get. The better job we do in defining those expectations, the
less likely they are to have changes.”
Since your structure’s size will bear directly on your investment, you don’t want to build too big for the market. But then again, you don’t want to build too small for your own growth. In fact, many experts say you
should shy away from 2,000- to 4,000-square-foot buildings because they’re so single purpose that you’ll be looking at more construction soon.
Within two years after moving into their current 8,000-square-foot Stewart,
Florida, facility in the late 1990s, Dayton and his partners were bursting at
the proverbial practice seams. When a zip code analysis revealed that many
patients were already coming from nearby St. Lucie West, locating a second
building in one of the country’s fastest growing communities just seemed like a smart move. The doctors would
have 4,000 square feet for their own practice, with 12,000 square feet reserved
for outside tenants.
“What I learned from my first building experience,” Dayton says, “is that the best way to finance a project like this is to build as big a
facility as you can carry and then lease out any additional space.”
Indeed, tenants can affect the long-term valuation and marketability of your
building. If you don’t mind being a landlord, having other practices and services—especially those that support your specialty—can create an income stream that helps secure your financing initially and
boosts your return on investment later. (See “To Landlord or Not to Landlord,” page 15.)
“Anytime you can do an ancillary income stream, whether it’s for your business or not, it can help your practice,” says Richard Haines, Jr., the president of Medical Design International in
Atlanta. “If we can get patients to come to our client’s building for reasons other than seeing our client, it just improves that
practice’s visibility and marketability. That’s a strong asset.”
Another important asset is your own formal rental agreement with the corporation
that owns your building to pay at least the market rate per square foot. Such
an arrangement may sound a bit like robbing Peter to pay Paul, but you’re really contributing to the appreciation of your property by helping cover the
mortgage, taxes, and expenses.
Since Mark Smith, MD, an Austin, Texas, general pediatric surgeon and his 39
owner-colleagues moved into their 127,000 square foot office building earlier
this year, they’ve become more than landlords—they’re paying tenants.
The physicians—from six pediatric specialty groups—had already invested their personal capital, matched by favorable bank
financing, to guarantee the biggest share, $26.5 million, of this $31 million
venture.
So it was just good business to charge everyone the $24-per-square-foot market
rate. Before the building even opened, it was nearly 100 percent occupied, not
just with the owner groups but other practices and ancillary services that
signed on for 10 years.
“Doctors make the mistake of trying to charge themselves a low rent,” says Smith. “But they should charge whatever the market will bear for a couple of reasons: One, all you’re doing is taking money out of your left pocket and putting it in your right
pocket. Two, the value of your building is contingent on its income or rental
stream. So if you charge low, you’re hurting yourself in both the financing and the return.”
You also may hurt yourself if you involve private, nonprofessional investors.
Experts encourage practices to own 100 percent of their real estate ventures,
rather than tapping friends and family since these individuals often see such
projects as tradeable assets rather than long-term deals.
As to real estate developers, they’re often brought in on larger, complicated projects with multiple players and
heavy-duty risk. The advantage is that they put up most of the capital by
tapping a wide range of investors. The disadvantage is that the developer
typically expects to be the managing partner since he has contributed the lion’s share of equity and assumes the fiduciary responsibility and risk.
You may be able to strike a different relationship; developers sometimes serve
as advisers or even lesser investment partners. You may also want to employ an
owner’s representative, someone who knows his way around medical office building
projects and can guide you from A to Z.
Just keep in mind that anytime you work with a third party, you can expect to
pay a fee or percentage of the action in return for that backing and/or
expertise. On the other hand, the money might be worth the investment,
especially if you’re skittish about the risk.
“What a lot of doctors have to realize is that people are in business to make
money,” says Dayton. “Doctors like to think that every time they pay somebody to do something, they’re getting hosed. But it’s not a sin for someone to want to make a profit.”
Dobias, the accountant, adds that “Too often, physicians are scared into believing that they can’t afford the project. They can’t live with the risk, meaning the debt guarantees or the fact that the building
could go dark. But it’s our belief that if they have the right advisers, they can own 100 percent of
their project and should do so in every situation.”
But when?
Truth is, there’s not one best time to put your toe into the real estate water. You probably don’t want to wait until you’re near retirement unless you have a succession plan firmly in place. Then
again, borrowing more money while you’re carrying school loans and start-up expenses is tenuous at best.
“Ownership presents great opportunities,” says Haines. “It can produce many rewards down the line. But you need to consider whether this
is a good thing to do now or whether you should just wait until later. You may
end up saying, ‘Owning a building is step two in the evolution of my practice—not step one.’”
Whatever the moment, you want to strut your best stuff. By showing bankers that
you’re a good financial citizen and that you have a project worth their money, you
also take control.
While Dayton didn’t organize one giant document, he and his partners delivered the kind of
detailed financial and project information that prompted their long-time
lender, Gulf Stream Business Bank, to extend the loans. Although the doctors
bid the project to two other financial institutions, Dayton liked the idea of
collaborating with “forward, progressive-thinking guys” who had serviced their accounts well in the past. “I really wanted to work with them.”
Similarly, he put construction in the hands of a trusted collaborator from past
projects. In fact, Dayton suggests that due diligence—finding the right people and costing out the venture as carefully as possible—has to come before everything else. Then expect some delays and overruns. It’s the nature of human commerce, not to mention a product of natural events.
Even when the weather played havoc with the schedule, his builder was upfront
about skyrocketing material costs, offering new estimates to make sure that it
worked. Dayton admits a dedicated project manager and a tighter construction
schedule would have saved the practice money. (Overruns came in 10 percent
higher than budgeted.)
Since taking possession in May 2006, however, the physicians are confident in
the decision to build. Dayton is also convinced that they’ll eventually have 100 percent occupancy, even though the storms delayed tenant
leasing and they’re still filling the bays. In fact, he and his partners expect a handsome return
on their investment in the future, given the area’s explosive growth.
In the meantime, Dayton is looking ahead to the next potential market. “Once we get St. Lucie West up and running, we’re probably going to Okeechobee. We have patients there too.”
Chris Hinz, a free-lance writer and a regular contributor to Unique
Opportunities, lives in Milwaukee, Wisconsin.
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