The benefits of owning property outside of your practice also apply to your practice.

Though this statement may strike reasonable fear into the commitment-averse, buying a building or condominium unit for your practice is an investment worthy of consideration. Sure, the stock market is more positive and interest on savings has risen from less than 1% to less than 2% — but investing in real estate will help balance your financial portfolio and diversify income. For example, a real estate investment will improve with inflation; it will increase in resale value while also gaining relative value. How? Its interest rate, over time, will be lower as compared to the cost of a new loan.

FIRST STEPS

Kick around sites before buying, because “location, location” matters, even for an ophthalmology practice.

It takes careful consideration and research before committing to a purchase. Expect to look for a year or two before finding the perfect fit. The initial limitation is that you must be bound to the new space for at least 15 years, which raises some concerns for the practice owner. What if the practice grows significantly or the location becomes less favorable over time? Another risk: Some properties come with the possibility of rising common area fees or unfavorable local real estate taxes.

Some possible solutions: Sometimes a good insurance policy to adjunct your business plan is to buy an extra 20% of space that you plan on leasing out for 10 years. This allows expansion in 10 years rather than moving. Also consider an exclusive in the building or complex to keep an optical or other eye-care practice from moving in next door.

INTERVIEW PROSPECTIVE NEIGHBORS

In the course of my own research, I had my real estate agent introduce me to other medical practices that owned space in the area where I wanted to buy. I found these conversations valuable. I learned the details of ownership from their experiences there. Some of the most helpful: One area was close to a major highway, allowing this referral-based practice to market and obtain distant referrals more easily; another practice mentioned that the parking lot was never full and there was close access into each office space. Since most patients were elderly, this short walk from the car without steps or an elevator ride was perfect.

SHOP FOR A LENDER

Once size and location are settled, do the math and see if the purchase makes sense on paper. Staring at the price of the space is usually overwhelming — digestion comes easier if the price is broken down into a business plan. Keep these guidelines in mind:

• A bank will typically require a down payment of 15% to 20%.
• A commercial interest rate loan is often about 0.5% higher than a residential loan.
• You should expect to meet with two or three banks while loan shopping.
• Each bank will have its own loan processes, interest rates and loan terms. Be prepared for that.

Among the differences: What level of collateral is necessary to guarantee the loan? It was important to me not to include my home or personal bank accounts as collateral for this new business loan. Often securing the assets of the practice is enough, but it depends on the market and other factors.

BREAK OUT THE CALCULATOR

Having the amount, interest and term of your potential loan lets you calculate a monthly loan payment. Your real estate agent should tell you how much the practice would pay in rent each month based on comparable spaces. There is also a cost to build out the space for your use; often a contractor can give you a rough estimate based on square footage. Setting up this business plan and “running the numbers” on an Excel sheet will allow you to realize the value of being your own landlord.

Here is an example of an investment. A 2,500-square-foot condo or building may cost $500,000 to buy and another $200,000 to build out. Big numbers, but you are actually paying for this when you rent; it is just hidden in your monthly rent payment. In this example, a bank requires 20% down, leaving a mortgage on $400,000 at 4.5% with a term of 25 years, which would cost about $2,200 each month for the loan. However, the monthly rent from your practice (when you purchase a retail space, typically a new corporation is formed to hold the property; your practice then pays rent to it) would yield approximately $5,200. A triple net lease allows the practice to pay the yearly real estate taxes, condo fees and even absorb the build-out; the property-holding corporation does not. This may all total $1,000 to $2,000 more in expenses each month for the practice, depending on how quickly you pay back the build-out loan.

You realize this could work. But there are some other long-term advantages to consider. First, at the end of 25 years you will own your office space, along with any appreciation over time. Second, the rent will increase 3% or so annually, creating more positive rental income each year. Third, as you add doctors to the practice their revenue will help pay rent, condo fees, taxes and build-out costs since these are expenses to the practice and not the real estate entity.

At the end of 25 years, the $500,000 condo could be sold for $1.5 or $2 million or more, during which you had positive rental income that was increasing 3% each year. This real estate could become a retirement vehicle, used as collateral to buy more properties or, if interest rates went low, then refinancing and pulling cash out of any acquired equity may make sense. These options give some value and stability to your investment portfolio.

WISDOM FROM MR. TWAIN

Still uncertain? If the ability to diversify and balance your investment portfolio, to no longer have a landlord do not sway you, consider this bit of wisdom from the legendary Mark Twain: “Buy land, they’re not making it anymore.” OM

* This column is not meant to substitute for a discussion with your accountant for a better analysis of your specific business plan.

Scott LaBorwit, MD, is a principal at Select Eye Care, with locations in Towson and Elkridge, Md., and is an assistant professor, part-time faculty, at Wilmer Eye Clinic of Johns Hopkins Hospital, Baltimore. His e-mail is Sel104@me.com.
Disclosures: Dr. LaBorwit is a consultant to and speaker for Alcon.