Be Your Own Landlord?

The value of real estate has done nothing but increase -- but you're still a tenant. You tell yourself you should be building equity in property, and instead you just write rent checks. You're cramped for space, and your competitor just boosted his efficiency by buying a building that suited his needs perfectly.

Owning your own office building can give you equity in a real property, offer you tax advantages, and give you better control over your practice. You can decide how much space you need, how to use it, whether to sublease space to other doctors or ancillary users, and even the best way to maintain it. Sometimes, if you own just the right building at just the right location, you can even exercise some control over your competition.

Yet practice management consultants and medical real estate experts insist the choice is not so simple. In fact, some tend to advise doctors against owning their own office buildings.

"Generally, physicians are better off leasing," says Joseph Williams, chief financial officer of Commons Medical in Orlando, Fla., which helps plan, develop, build, and finance medical office buildings and healthcare facilities. He believes medical practices face so many changes and uncertainties in the marketplace that doctors are hard-pressed to know whether the building they own today will continue to be a financial advantage five to 10 years from now.

"I've [seen] probably more failures with building ownership [by physicians] than successes," says Paul Angotti, president of Management Design LLC in Monument, Colo., a financial and operational consulting firm for physicians and medical groups.

There are lots of reasons real estate ownership can go south, but the biggest is the fallacy of the equity growth argument. The value of a medical office building, says Angotti, "rarely goes up like houses do." He tells doctors contemplating buying or building a medical office to assume that if they sell after 10 years and get back just 85 percent of the purchase price, that is a "solid, conservative approach. ... If you get some gains, then that's a windfall."

Thomas W. Tift III, CEO and founder of HealthAmerica Realty Group, a commercial real estate company in Atlanta that specializes in medical office buildings, says physicians who want to own their office building will have to address the uncertainties of interest rates, local real estate supply-and-demand cycles, and their own practices. Given the stresses that can accompany commercial real estate ownership, he says, "We feel doctors can make more money just focusing on running their practices." He says he tells physicians, "We won't practice medicine if you don't practice real estate."

Should you buy?

That's not to say owning your own building is a bad choice for everyone.

"Under the right circumstances, owning real property can be the right thing to do," says Robert James Cimasi, president of Health Capital Consultants, a St. Louis-based consulting firm for healthcare providers. In fact, he warns that deciding to rent office space just because it seems easier than facing the financial and operational hassles of ownership is "also an extremely dangerous and costly decision."

Thomas Gennosa, MD, is convinced he made the right move when he bought his Robersonville, N.C., office in 2002. At 2,400 square feet, the building is twice as big as he needs for his solo family practice, but he generates income by leasing half the building to an orthopedic group and an OB/GYN practice that use it for satellite offices. And there is still enough room in the building for a second physician if he decides to expand his practice.

The building had been unused for about three years, since the previous physician-owner retired. But Gennosa, whose family is in the construction business, did a lot of the refurbishing himself, and also does some of the routine maintenance.

And while it may be just a quirk of small town living, the best part was that Gennosa was able to essentially purchase the previous doctor's practice for the $145,000 he spent to buy the real estate. Patients were comfortable going to a man their previous physician trusted enough to let buy his building. "Having his blessing in no small part helped my success," Gennosa says. He's so bullish on property ownership that he's let community leaders know he'd like a chance to buy a community-owned building across the street -- currently used by the town's only other physician.

How do you know if owning your office building is right for you?

• Sort out all partnership issues up-front. Make sure your partners understand their financial obligations, and write the rules into your partnership agreements. In particular, spell out a way to let future, younger partners or associates -- who may not have the capital to buy into your real estate right away -- to rent from you for a while or make payments toward a full ownership share. Be forewarned, though: junior doctors sometimes grow resentful at having to pay their wealthier senior partners for property. Make sure you explain the terms fully to candidates before you bring on a new physician. You must also decide when retiring or departing senior partners must sell their stake, and make sure they can come up with the money. (That could be particularly dicey if you refinance the building's mortgage and a down real estate cycle has decreased the building's value.)
• Make sure you're prepared to be an owner. That means being on top of everything from getting the snow scraped off the parking lot to paying the property taxes and insurance. Invariably you'll have to deal with the unexpected. For Gennosa, the unexpected arrived last summer when a stroke patient drove herself to his office and, unable to use her brake pedal, crashed through the front of his building.
• If you lease part of your building to other tenants, make sure you're prepared to be a landlord. That means living up to your end of the lease agreement, and enforcing the rules you outline to the tenant. A good property management company can help you deal with all that, but that's another expense that can bleed your bottom line.

Should you build?

Building your own facility from the ground up offers the advantage of designing everything to fit your needs, but then your new title is "physician/developer." There's a long list of things to consider -- too many to name them all -- but for starters you'll have to hire a good architectural firm with medical office design experience.

You may also run into land management issues (like what to do with the extra acreage you may have been forced to buy just to get your desired location), and surprising costs (according to Angotti, building a 7,000- to 9,000-square-foot building can run 150 percent to 180 percent more per square foot than a larger structure).

And when you're done, you may have a building perfectly suited to your medical practice but with no practical resale value, since it's useless to anyone other than another physician.

The old "location, location, location" rule of commercial real estate applies in medicine, so whether you buy or build, choose carefully. For many specialties, "geographic proximity to a hospital is a very strong determinant in this value equation," says Cimasi. But the need to be close to a hospital matters most to surgeons, obstetricians, and others whose work is often performed in one. These physicians would be wise to look for a building near, or even next to, a hospital where they practice. Primary-care physicians, on the other hand, may not have as much need to be near a hospital, especially if they're using hospitalists.

The condo option

Condominiums offer a "reasonably inexpensive" opportunity, according to HealthAmerica's Tift, to enjoy the equity and tax opportunities of real estate ownership without having to build your own office or search for a stand-alone property.

But he is wary of the condo approach because expanding your practice would mean having to buy a neighbor's condo, and because condo offices are more difficult to resell than, say, a 40,000-square-foot medical office building.

"The bigger building is going to have institutions out there looking to buy it," he says. "It's a more marketable building." And don't forget that as a condo owner you're still on the hook for property taxes, maintenance, insurance, janitorial service, and the other responsibilities of ownership.

Whichever course is best for you, real estate experts are adamant that you delay any decision until you've consulted with your accountant, attorney, and a real estate professional who focuses on the medical office market. Cimasi says professional real estate developers accept the risk of filling their buildings as part of their job, and use careful financial and market forecasts to minimize that risk, increasing the chance that when you purchase, it will be a good fit. Doctors who go it alone may not have the tools to make good decisions. "It is not a decision that lends itself to ad hoc decisionmaking," he says.

Jeffrey Raymond can be reached at
editor@physicianspractice.com.

This article originally appeared in the February 2005 issue of Physicians Practice.