Real estate in the healthcare industry has traditionally revolved around a classic lease model for physician practices. Doctors would personally guarantee long-term leases and place their practice in the best possible locations to cater to their patients. This is a model that offered doctors little advantage outside of liquidity of capital.
Market conditions today offer physicians more options. Changing healthcare laws in recent years have impacted physician practices by decreasing reimbursements, which forces the physician to see more patients throughout the day. Though patient care is at the forefront, physician practices, like any business, still revolve around being profitable. Many responded by closing their individual practices and joining large hospital groups. Others took a more entrepreneurial approach and decided to further invest in their practice by investing in the real estate. (Why pay a landlord hundreds of thousands of dollars over the course of 10-year lease and walk away with nothing to show for it?)
Seeing a need in the market, I co-founded Wynmark Commercial in 2009 to specialize in medical office space. Here’s what I’ve found when it comes to leasing versus ownership.
Investing in real estate provides an additional profit center to help with a physician’s long-term goals. And with interest rates still hovering near a 10-year low, it’s still a great time to lock in rates now before the Fed starts increasing them.
Lenders will require between 10 percent to 20 percent down, depending on the type of loan (SBA vs. conventional) and the leveraged investment will build equity and provide additional tax benefits. Even in the worst-case scenario of the asset not appreciating over the 10+ years of owning a building, physicians are still paying down principal and utilizing the tax benefits. This commitment is an exit strategy and retirement plan rolled into one. If a physician practices another 15 to 20 years, the real estate has served as a forced savings plan. With every payment made over that time, a doctor has been paying off an asset that can now be sold or leased.
The presence of this asset can increase the value of the practice as well. This is especially true in dental practices. A thriving dental practice will, to a certain extent, always be tied to a location. If a practice has been at a certain intersection for 15 years, it is not as valuable if it has to be relocated outside of a two-mile radius when the lease expires. Doctors will take this into consideration when evaluating the purchase of an existing practice. If the practice is on a lease, the length of time remaining on the lease and a potential forced relocation at lease expiration are factors in trying to determine the value. A practice with a fixed asset tied to it is more valuable at the point of sale.
Ownership also carries with it valuable tax advantages. With a standard ownership model, there exists the ability to depreciate the building over 39 years, write off the interest, and write off the budgeted expenses. (As always, a CPA can go over all the benefits and how ownership will affect you personally.)
Physician leasing isn’t going away any time soon, though. In fact, the more traditional lease model remains the best option for start-up physicians or groups needing the capital for large growth expansion plans. Doctors looking to start a new practice are motivated by the lower initial cost offered by leasing. It allows the physician to establish a patient base and identify the growth potential for the practice before setting up more permanent roots.
Lenders also want to see historical trends for a practice before investing in the real estate. Leasing allows the flexibility to build that credibility and establish the practice. A healthy long-term forecast is especially important for start-up practitioners.
For most physicians, the own vs. lease debate will come up throughout their careers. It’s a choice that has significant implications on both their practices and long-term investment goals. For those faced with the decision, it’s important to establish your objectives, do your research, and crunch the numbers before choosing what option is best for you.
Justin Keane is president of Wynmark Commercial. Contact him [email protected]