At some point, and usually more than once in a physician’s career, the question arises: “Should I continue to lease my office, or would it make more sense to purchase an office instead?”If you have faced this decision, or will do so in the future, there are several factors that you should consider when making the decision.
The Cost
Physicians typically point to cost as the main determining factor in making the decision to purchase their office space. Too often, doctors and their advisors consider the cost as merely the price paid for the property. Sometimes they may go so far as to calculate the cost to renovate the property. Rarely, however, do purchasers consider the ‘true’ cost of ownership, which takes into account relocation and maintenance costs, lost revenue as a result of the move, the opportunity cost of your invested capital and your time in managing the acquired real estate.
I have encountered numerous practitioners who have purchased their office and are now ‘stuck’ due to their very high basis in the property as a result of excessive renovation costs upon acquisition and a lack of understanding of the market. Their monthly payment and mortgage balance make it unlikely the property can be leased to a third party or sold in the near term. This has a direct impact on their practice, as they are now making business decisions as a result of their real estate situation.
Your real estate advisor or accountant should produce a lease versus purchase comparison that lays everything out so that you can make an educated decision. Calculating your cost of ownership includes making assumptions as to the property’s value upon disposition, which ties in to having a well thoughtâout exit strategy. The analysis should include best and worst case scenarios; and if you elect to purchase, this analysis should be updated every five years.
Your Business
What are your business prospects over the next five, ten and twenty years? Will your practice grow? Will it contract? Will you merge with other physicians or sell the practice and be employed by a hospital or other health network?
When making the decision as to whether to purchase or lease your office, the questions above are paramount to making the right choice. If you have been practicing for ten years or more and don’t see any significant changes on the horizon, then purchasing may be the right choice. If, however, you see future fluctuations in your business model that will dictate the need for more or less space, then leasing may offer more flexibility unless you purchase property that allows for future growth or contraction. This is where purchasing a multiâtenant stand alone building could accomplish your objectives more effectively than the inflexibility that often comes with purchasing an office condo.
There are many advantages to purchasing commercial real estate, which may include appreciation, lower effective occupancy costs and tax implications. Most physicians like the idea that their monthly payment is benefiting them in some way versus lining the pockets of a third party real estate investor. Take the time to make an educated decision that accounts for your individual circumstances.
Your Age
Here are some questions to consider:
How long will you continue to practice medicine? Are you likely to have partners or associates who will transition into ownership of your practice? Will you be able to lease your office to the practice upon your retirement?
All of these questions should be answered when contemplating a purchase. The longer your practice horizon, the more likely it makes sense to purchase your next office. Looking out fifteen (15) years or longer, while hard to predict how the real estate markets will perform, gives you more room for error and the ability to pay down your mortgage to a level that will make leasing your office to a third party tenant, a viable option.
Alternatively, if you are newly out of residency and are one of the brave few going into private practice, your decision to purchase should be predicated on the growth prospects of your practice and how it will evolve over the next ten (10) years.
I mentioned having a defined exit strategy earlier in the article. Regardless of what stage you are in your career when you decide to purchase commercial real estate, it is important that you think this through. Do you have a son or daughter who will take over the practice upon retirement? Are there partners or junior associates in your practice who will eventually take over and sign a long-term facility lease? Having a clearly defined exit strategy, one that you revisit often, enhances the likelihood that you will look back at office ownership as a worthwhile and profitable experience.
In our next article I will provide those of you who already own your office space with some suggestions to maximize its value.
