Whether you lease or own real estate, there are lucrative strategic options you can leverage if you want to be smart about healthcare real estate plays. We will be exploring various scenarios and examples that provide creative insights into how to expand your practice through leasing, or how to capture the maximum return on your equity if you own your office space.
Part One A: Leveraging Assets through Leasing
Let’s take a look at practices that lease their practice location and what options may be available outside the typical commercial real estate point of view. What is the primary advantage of leasing? Answer: Leveraging other people’s money. This is a concept private equity firms understand well. Leveraging another person’s property and their build out allowances will allow a practice to startup, expand, add a new location, or relocate with minimum upfront costs. In addition, this avenue also allows the practice to minimize the impact on their financing. One of the first questions I ask a prospective client is, “What are your long-term goals?” Their response can significantly impact the strategy we choose.
Client story: I had a client who was initially quite determined on purchasing a building. As our conversation continued, I discovered he had a goal of owning three locations in the next five years. This information had a profound effect on the properties on which I would focus. Here were the facts: Purchasing a building would require substantial upfront costs. Banks would view his mortgage as debt. Conversely, if he were to lease, the bank would not consider the lease payment as debt.
Bottom Line: The cost of purchasing real estate and opening one practice, was nearly the same cost as opening two to two and a half practices if he were to lease.
Now, let’s take the advantages of leasing to another level…
Many doctors have shared their desire to have more than one location. Why are they waiting? As you might expect, the obstacle is not having enough money. Did you know that if your practice is currently established, and stabilized with good cash flow, there are real estate investors who will offer 100% financed turnkey properties for healthcare specialties? You will not find this option in your local real estate listings, nor is it offered to other industries. These are vetted partners and investors that will come alongside the practice and either purchase a building and build it out turnkey OR build a new building for you to lease fully built out to your specifications with very little to no money down.
Running a market review or analysis on your practice’s objective is not a difficult process. Because an investor will likely be fronting the majority or 100% of costs in these scenarios, they will need to review the practice’s financials. Additionally, there would be an initial interview, so all parties are on the same page and comfortable with one another before making the decision to negotiate further on targeted properties.
Does the 100% built out office delivered turnkey sound too good to be true? It is…IF you choose the wrong partner. It can, however, be a remarkable offer when you surround yourself with the right people. Our firm has worked on these types of transactions across the country as a practice’s advocate shaving off $3-$7/SF or finding ways to limit escalations and other concessions. These tactics can equate to 100’s of thousands of dollars. Keep in mind, not all contractors and investors are created equal. Some have higher margin requirements than others that could immediately disqualify them per a practice’s scope and budget requirements. Knowing who can deliver the expected product, within budget, and on time is crucial. Our job is to help identify and provide you with supporting data and comparisons so you can be confident you are with the right people, and you are getting a “good deal.”
Part One B: Leveraging Assets by Leasing with Option to Purchase
If the 100% financed options are what you need to move forward in opening a new office, or relocating your current office, yet your desire is to eventually own the real estate there are financial considerations when exercising the purchase option. It is essential for the investor to understand the practice owner’s intent because it could impact the lease rate. Why? Because an investor needs to know how to calculate the amortization and repayment schedule of their investment. If a straight lease were in place with no purchase options, the landlord could plan on recouping their expenses over a period of 10, 12, or 15 years. Likewise, they could decide to sell the property to a REIT or other real estate entity that targets stable long-term assets.
Client Story: A few years ago, I helped a practice with a turnkey lease with option to purchase in a multi-tenant building. The practice was having excellent success, and due to strong cash flow wanted to purchase the entire building. Despite the adequate cash flow, they did not have enough savings to cover the appraisal shortfall due to the outstanding balance of the interior build out.
Bottom Line: Be aware that a purchase price includes the land, building, and any unpaid balance of the interior build out.
If you decide to own, this could change the velocity of recovery for which the investor has prepared. It could mean accelerating the repayment of build out values to you. Accordingly, this most likely would require payment of the appraisal shortfall due to any outstanding balance of the interior build out plus some interest.
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