UO Magazine > Real Estate > Should You Own or Rent?

To Landlord or Not to Landlord? View PDF

Although it may not have the drama of Shakespeare, whether to rent or own your practice’s facility depends—at least in part—on the philosophical question of how you see yourself.

By Mark Terry

Unique Opportunities, May/June 2007

Tori Freeland, DDS, MS, an orthodontist in Lake Orion, Michigan, has a spacious lakefront office in a building designed to look like a lighthouse. Her own office and her patient chairs all face the lake, which is only a few yards from the floor-to-ceiling windows. Freeland, however, doesn’t own her office, but leases it from the owners of the building. “When I bought the practice,” she says, “they weren’t selling the building, which has four owners. I sort of inherited the lease space with the practice.”

Freeland notes that although she’s pleased with the office and the space, “in the long run, if you know the area you’re going to stay in, it’s much better to buy as an investment.”

Leasing: the fewest hassles

The biggest problem with leasing for most physicians is the perception that they are throwing money away. Although you’re acquiring a needed service for the money, it’s not an investment. Freeland says, “Rent is not an investment. It is set, but it increases every year.”

Freeland also notes that CAM costs-Common Area Maintenance charges like snow removal, restroom maintenance, and upkeep—typically are lumped into the rent, which can change every six months to a year.

Mike Crosby, CPA, MBA, the president of Provider Resources, a physician practice management company in Nashville, says, “The cons to leasing are that you can end up in a space that requires constant maintenance on a triple net lease. Triple net means essentially that the taxes, insurance, and minor repairs are all passed through to you. You pay the utilities; the taxes are all passed on to you as well as the association fees or general building fees; any general assessments are passed through to you, and then minor repairs are your responsibility as well.”

There are advantages, though. “Leasing gives you a chance to get in and have some options, depending on the length of the lease. You may be entering an area where you’re not sure you’re committed to being in permanently,” Crosby says.

Some of the advantages, of course, depend on timing. John Guiliana, DPM, a podiatrist in Hackettstown, New Jersey and a partner in SOS Healthcare Management Solutions, a practice management group, says, “Most of the people I give advice to I recommend that they lease for at least a year to be sure that this is the right marketplace for them, the right location for them. Then they can certainly restructure their lease so it’s available for repurchase.”

with maintenance issues, although many leases require you to take care of everything except external structural maintenance and repair problems. Shelly Klein, MD, a pediatrician in Prescott, Arizona, says, “I don’t have a problem with leasing, but when I found out that the local leasing situation involved paying everything, I figured I might as well own the property and be my own landlord rather than pay all the expenses and have to follow somebody else’s rules and not get any benefit from it.”

Guiliana has owned his own practice facility for almost 20 years. “Unless you’re absolutely averse to having the necessity or responsibility of being a landlord, I would say there’s no real downside to owning. Certainly it’s a capital issue; you do need the capital available for down payment, and that capital that’s tied up in real estate could be used for something else. I can’t really see any other downsides,” Guiliana says.

Owning: the big commitment

Although the consensus seems to be that owning your facility is preferable to renting it, it’s not a particularly simple decision. Many physicians acquire or build a building—either to host their practice or for multiple practices or multi-use with the intention of it being a good investment. Paul Angotti, who runs a practice management firm called Management Design in Monument, Colorado, says, “Fundamentally, I would ask, ‘If it wasn’t the building the physicians occupy, would they want to invest in it as a building anyway?’ If it’s not a good deal, but they want to buy it just because they occupy it and want to be able to exhibit some power or want to exhibit some influence over the owners, then they probably shouldn’t do it. If it were a shopping plaza or an office building downtown, would they want to invest in it? If the answer is no, then they shouldn’t do it, because then it’s going to be a bad deal.”

Shelly Klein says that when she built her facility, the deal was hard to pass up. “In my case, I actually purchased land and built. There was a lack of available space in the community and I got the land on a bankruptcy deal.” Klein’s facility is 4,000 square feet and she sublets several of the rooms.

If leasing is like dating, then buying a facility is like a marriage—and significantly harder to undo. According to Crosby, “The biggest issue is the commitment to the geographic area and location. The second is, once you’ve made the commitment, how long is it for? Most people will say, ‘I’m going there and I don’t plan on leaving.’ But doing the right studies to determine that that’s the right area for your practice is vital.”

Guiliana agrees, saying that if you’re a new practitioner who is just coming into the market, it’s much safer to test the waters by renting. For new practices, Guiliana is a big proponent of spending the available capital and time on building the practice. “Obviously you’re investing capital up front, especially capital that can be used for other things. If you’re buying and it’s not the right location for you, or even if it’s the right location and you need to expand down the road, you’re locked in.”

Crosby says it’s a philosophical question as much as practical. “This gets into a personal philosophy on how you want to spend your investment dollars. From a planning perspective, however, owning is often a very good thing to do.”

Condos: Not just residential

There are a number of options when choosing to buy—or lease—a facility. Will it be a large facility where you can rent out rooms or suites to other businesses or other practices? Will it be a facility solely for your practice’s use? Will it be a multi-use facility for tenants other than medical practices?

One option that often appeals to physicians is a condominium-style facility, where you buy your unit, but the exterior and physical plant and common areas are maintained by the condo association. Guiliana’s office, for instance, is a condominium. Klein’s is a larger facility that was built for three medical providers and she sublets two of them, but it’s not a condo. A condominium would seem to have the benefit of appreciation and the added bonus of limiting the maintenance involved—seemingly the best of both worlds.

Thomas Tift III, the CEO and founder of HealthAmerica Realty Group in Atlanta, a real estate company that specializes in medical office buildings in the southeast, as well as Houston and southern California, isn’t as enthusiastic about condominiums. “There’s recently been big, big interest from physicians in owning condominiums for medical office space. It’s primarily driven by really low interest rates. From a real estate perspective, we don’t think it’s a good idea for physicians. It limits their expansion opportunities. Also, if they want to shrink their space size it limits that as well.”

Tift also says that condominiums for medical practices generally are overpriced. “It’s a very high per square foot price and when he goes to sell it at some point, it’s usually very difficult to make a profit on it. He is really kind of put in a position where it’s more like a forced savings, paying down on a mortgage.”

That said, Guiliana is very pleased with his condo situation. “I basically take care of the 3,500 square feet I own, but we have a management company as part of the association that does all of the exterior maintenance and common areas. For a single doctor to handle all that would be a lot, and I do think you’d need a management company for that,” he says.

A condominium will typically have a condo board of some sort that you, as an owner, will have to work with. Tift says, “You may or may not be involved with that board and you have limited control. If you’re in a multi-tenant situation and a partnership in that building, typically there will be a general partner who will be the developer, and his interests should be aligned with yours in order to maximize the profitability of that building.”

That, of course, could be a pretty nebulous issue. Angotti says, “Sometimes the management companies and condo organizations don’t know anything about running a facility.”

Multi-tenant buildings: Know thy neighbor

If you plan to own your own facility, should you invest in a facility solely for your own practice, or purchase a larger facility so you can lease out some of the space? There are some good reasons to want to have tenants, especially other medical practitioners, all in one building. Synergy is the predominant one—a healthy and convenient source of referrals all under one roof. This, of course, can become a very complicated issue and run afoul of the Stark amendments, federal laws that prohibit certain types of referrals for Medicare and Medicaid patients. They read:

The Stark I Amendment is a federal law that prohibits physicians from referring a Medicare patient to an entity for the furnishing of laboratory services if the physician or an immediate family member of the physician has a direct or indirect financial interest in the entity providing such services. The Stark II Amendment extends this prohibition by prohibiting physicians from referring Medicare and Medicaid patients for certain types of services known as ‘designated health services.’ A financial interest includes an ownership interest or a compensation arrangement (the latter includes both the giving and receiving of compensation).

Interpretation of the Stark amendments is well outside the scope of this article, so when in doubt, consult with an attorney familiar with these laws.

A second reason to have other tenants is to offset your own mortgage costs through rents. Tift says that the best way for a physician to own a facility is through some form of partnership on a multi-tenant building. “It’s a much broader market to sell those and typically in that situation you would be partnering with a developer. The developer comes in and puts together a partnership with the doctors to own a multi-tenant building. That way the physician gets the expertise of a real estate developer (hopefully one with experience in medical real estate) to set up that kind of partnership.”

Such a facility is typically much larger—perhaps a 50,000-square-foot building—so that when the physician decides to sell the building, there is a much larger potential market.

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