| Own your office? What to consider |
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 It's your workspace. Should it be part of your portfolio too?Do you currently rent your medical office? Are you thinking about buying or building your own? Do you see it as an asset as well as a practical solution for your need for office space? We asked a broad spectrum of experts what advice they give doctors who are considering a purchase. To Atlanta healthcare architect Richard Haines Jr., the decision to rent or buy boils down to two questions: Do you need specific space in a specific location? And, if so, how do you best meet these needs? "The most important thing," Haines says, "is to get the correct space that helps you be efficient and serves your patients well. Poorly organized and designed space is a bad investment, regardless of its costand whether or not you own it." Do you currently rent your medical office? Are you thinking about buying or building your own? Do you see it as an asset as well as a practical solution for your need for office space? We asked a broad spectrum of experts what advice they give doctors who are considering a purchase. Practice
management consultant David C. Scroggins, of Clayton L. Scroggins
Associates in Cincinnati, feels that the most important issue in
considering office space is productivity. "You may have to build your
office because what you want may not be available. With the correct
layout, you may be able to improve your productivity by 10 percent. "The
improvement in productivity," he continues, "may translate into a much
higher level of profitability, as high as 80 percent on the increased
income. For example, I've seen situations where a physician's income
increases by $15,000, with $12,000 of that amount profit." Ownership has its benefits "While
real estate has done tremendously as an investment in the past four
years, there's no unique advantage that medical real estate has over
other forms of real estate," says healthcare attorney David J.
Schiller, of Norristown, PA. "The control that owning the practice
gives you is the most important issue." Renting, he says, can be
disruptive to your practice. For instance, the property could be sold,
and the next landlord may have a different style or attitude toward his
responsibilities. He may raise your rent to intolerable levels when
your lease is up, or he may throw you out. "If you get tossed out, you
lose the improvements you've put in, whether you've paid for them
yourself or they've been reflected in your rent," warns Schiller.
Financial planner Craig E. Carnick of Colorado Springs says that one
way to avoid this possibility is to make sure during negotiations for
the original lease that an option or series of options to renew at
market rates is also included.
Schiller offers the
reminder that stability is important in building a practice. And if you
own the building where you have your practice, you know you have a
steady tenant.
In addition, your equity may
appreciate sharply, as Azar A. Korbey, a family physician in Salem, NH,
happily discovered with the building he purchased in 2001 to house his
practice. His area is a hot real estate market and that has extended to
his medical building, which he estimates has doubled in value.
Owning
your office space will also lower your practice's tax bill to a certain
degree because you'll be able to write off interest, property taxes,
and, if you purchase a condominium, condo expenses such as management
fees and maintenance expenses. If you have to spend for major
improvements, those are capitalized, and depreciated.
Another
way to reduce your tax bill is to pay yourself rent. Many doctors who
own their building do so through a real estate partnership,
corporation, limited liability company, limited liability partnership,
or family trust that's separate from their medical practice. Scroggins
recommends that doctors own real estate in an LLC. He notes, "It
provides liability protection that the partnership or proprietorship
can't." Cutting a monthly rent check to the real estate entity reduces
your income from your practice—and, consequently, your personal income
tax. Yes, this maneuver increases your profit from the real estate
entity, but partnership income isn't subject to payroll taxes, such as
those for Social Security and Medicare. Moreover, depreciation will
shelter some income from tax.
Schiller warns,
though, against reducing your personal income too much this way because
you might wind up shrinking the amount you can contribute to your
retirement plan (which is a percentage of your wages or self-employment
income).
Carnick has seen the purchase of medical
real estate work well for two of his clients. Each doctor built to suit
his own needs, not for additional tenants, and the building was owned
by a limited liability company established by the physician. After 15
years, the buildings were paid for. The doctors can continue to receive
passive income from the rent they pay while they're still in practice,
or, after they retire, they can sell the building or rent it to someone
else.
Geoffrey Anders of The Health Care Group, in
Plymouth Meeting, PA, adds this caveat: "As long as you have the
strength of conviction to move out of the real estate when it's
necessary to do so, buying is better."
But there are disadvantages, too
Some
practice management consultants contend that the disadvantages of
owning outweigh the advantages. One problem: Doctors have found it
difficult to sell their buildings when they were ready to retire. "In
many markets, space built for a medical practice is still far more
difficult to unload than regular office or retail space," notes Santa
Rosa, CA, practice management consultant and real estate broker Keith
Borglum.
Why? As Sherman L. Doll, a CPA with
Capital Performance Advisors in Walnut Creek, CA, points out, medical
office space is very specialized and not very adaptable to other uses.
"That narrows the list of potential buyers when the time comes to
sell."
Certainly, if your practice is going to
grow, renting is better. "With ownership, often doctors don't move when
they should," Scroggins says. Any number of things can sour a
once-smart choice to purchase space, he adds: Hospitals may move or
close, doctors may be leaving the area for whatever reason, or new
technology may require a larger office. Also, in contentious groups,
"owning a medical building is just another issue that will cause
arguments," says Anders.
In a rental situation,
maintenance issues are usually the landlord's responsibility. Carnick
has found that some physicians "don't like the difficulties associated
with ownership. They have to deal with problems, such as tenants who
won't pay or broken pipes. It makes their lives more complex."
A
purchase may also be unwise if it restricts your ability to invest
elsewhere, or makes up a sizable chunk of your overall investment
portfolio. By renting, you have the freedom to move into the space
that's right for you, when it's right for you. In some cases, you may
even be able to exit the lease, such as in the event of death or
disability. "You don't have that option of dumping the expense when you
own the office," says Borglum.
If you decide to buy, consider these factors
What
should you look for before taking the purchase plunge? First, consider
whether the office is close to your hospital, ancillary facilities, and
your home. Also make sure the space is accessible to patients via major
roadways, public transportation, or both. (An office in or near a
shopping mall can work well if it's easy to get to.) Examine the
building's construction quality and appearance, access to
public-utility hookups, potential for remodeling or further expansion,
and whether it has sufficient parking.
If you're
going to buy or build, plan on staying in your building at least 15
years. Consultants are of different minds on the size building that
will maximize your chances of financial success. Borglum suggests a
four-plex office so that you can spread your risk; the other
physicians, dentists, optometrists or physical therapists may be
selected for purpose of cross-referral and patient convenience. This
also allows you to purchase a larger piece of property than you might
be able to afford on your own.
Own vs rent: Key questions to ask
1. How long do I anticipate remaining in practice?
Written by Kathleen McKee, Medical Economics Magazine December 2005 |
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