With low interest rates and low prices for real estate, you may be considering purchasing a medical office condo for your practice. The decision: Owning vs. Leasing.
Such an investment will have a significant impact on your practice and your personal finances so you need to consider all aspects of that decision.
Following are several key questions to ask yourself when evaluating the decision to buy or lease:
1. What are your business goals and how will a medical condo fit into your business plan?
If you think your practice will remain largely unchanged over the next 10 to 15 years, a condo purchase may work for you. However, industry averages show more than half of medical tenants require space configuration every four to seven years. Another 20 percent of medical practices relocate for various business reasons — to capture a more profitable payer, to enhance the referral pattern of their business, or to expand (or contract) their practice.
Bottom line — it’s not easy to predict how changes in the healthcare industry will impact your practice and its space needs in the future.
2. Will the real estate investment allow you to make other sound business decisions?
A condo investment is illiquid so you need to make sure the capital invested won’t be needed for other business operations and opportunities. Investing in where you practice may restrict your ability to sell the property in a strong market, or require you to move when it’s not in the best interest of your investment.
If you need to sell, who would be your buyer? Given the specialty nature of most medical tenant improvements, the potential buyer’s market for most improved medical condos is extremely limited.
If you look at most large corporations, they don’t necessarily own their office locations. Instead, they use their capital for operations.
3. Have you considered all of the costs?
As with owning a home, owning a medical condo includes more than just the loan on the building. Your total cost may include property taxes, future interior upgrades, condo-association fees, cleaning and maintenance plus any extra costs when other condo owners in your complex can’t pay their share of expenses. When you lease your office space, your total costs are spelled out in your lease agreement, allowing you to budget appropriately.
Typically, rent is only a small percentage of the operating costs for a medical practice, ranging from five to seven percent.
4. Is it a good investment?
If your practice was not occupying the medical condo, would you still invest in it?
Historically, these properties have experienced tremendous decrease in value and the increased attention on them now is being driven by unusually low mortgage rates.
Healthcare real estate can be puzzling. Each medical practice has unique needs and opportunities. Answering the questions above will help provide you with the right direction for your practice’s real estate solutions.
William E. Molloy is the Managing Director/CEO of Phoenix-based Ensemble Real Estate Solutions (ensemblere.com). He has more than 35 years of experience focusing on providing real estate solutions for healthcare providers. Ensemble is a full-service firm offering healthcare-specific development, management, leasing and sales services, including both landlord and tenant/buyer representation. Molloy can be reached at 602-443-4026 or bmolloy@ensemblere.com.
Umm… Space reconfiguration every 4-7 years for more than half of tenants? I would like to these actual “industry averages” and “20% relocation factor” or the “more than half”… These stats clearly seem to be contrived as there are no sources referenced. The spin clearly seems to favor the landlord contextually within this piece… If you add up all of the money that a tenant is lining the landlord’s pockets with over the life of a practice, landlordship clearly has its advantages according to the way this commentary reads…
Upon your premise of a “good market” it appears that you are implying that because of one’s investment into their practice they will not be able to sell when they should. Unfortunately the following is misguided “…the potential buyer’s market for most improved medical condos is extremely limited.” ….So theoretically even when one should sell because of market demand, one won’t be able to sell because of their investment in their practice, albeit one wouldn’t have a buyer given the specialty nature of the improvements. Since you are speaking about “most medical tenant improvements” when referring to “improvements” this would imply general medical office improvements. So would not general office improvements be most likely entrant for demand as that product type caters to the largest audience (including investment audience which you mostly represent). Using your approximation of 5-7% of practice expense for rent, then a market flux clearly should not dictate a sale, period. The fact that you are implying such is just another evidence of your aligned interests.
You may want to change the name of your article to “Owning Vs. Leasing: What’s right for Mr. Molloy’s pocket.”
Lol… That’s interesting, landlord’s pocket is right! My practice’s needs haven’t changed that much. I worked with these guys about 7-8 years ago and they scared me into a lease pretty much verbatim to some of the stuff in the article, so I did… Seeing how some of the pricing in my area has recovered lately it probably would have been a better fit for my practice to own. Anyways I leased space in one of their buildings…. I just wish they were more straight with me back then and maybe I could have kept some of that money I paid them in rent! Lesson learned.
A friend of mine is a doctor and owns his office condo and is paying less than he used to pay in rent including all of the expenses… Not sure where this guys gets his math…