KEY DETERMINING FACTORS IN PURCHASING OR LEASING HEALTHCARE REAL ESTATE, PART 1
By Ken Jorgenson, CARR
One of the most common questions healthcare providers ask regarding their practice’s real estate is, “Should I purchase or lease my office space?” Many providers are quick to assume that since they own their home, they should also own their office space. While that logic is sound and often times owning is the top option by far, there are scenarios where owning your office space may not be in your best interest.
The simple answer to the question, “Is it better to own or lease?” is … it depends. Unfortunately, there is no easy, one-size-fits-all answer on ownership vs leasing. Instead, there are many factors that come into play and need to be fully vetted when contemplating this decision.
Analyzing considerations like the season of your practice and future growth needs, available financing, cash flow and your dental practice’s financial position, tax implications, and market availability all play roles in determining whether to lease or purchase. The following considerations are important to evaluate and will help guide your decision on this topic.
Leasing your office space
Flexibility: When you lease a property, you typically have more flexibility to relocate your office space as you will likely be signing a 5-, 7-, or 10-year term. At the end of that initial term, you can easily walk away from the space, relocate to another property, or decide to sign on for another term. You don’t need to prepare the property to sell, list and show the property, or walk through a sale transaction to get out. You simply walk away at the end of the term or you renew the lease.
Concessions: Another great benefit of leasing comes in the way of the concessions that landlords will offer blue chip tenants, such as healthcare practices. When you are properly represented and have the appropriate posture and negotiation strategy, many landlords will become more aggressive and stretch further to make a deal with a healthcare provider than with other traditional tenants.
Some examples of these concessions are tenant improvement allowances where the landlord will provide money to help build out the space in the property, or a free build out period to complete the construction so the tenant is not paying rent before they occupy the space. It’s also possible to achieve free rent once the practice opens.
With expert representation, a healthcare tenant can often times create leverage to demand concessions that reach into the six-figure range, totaling $100,000, $150,000, $200,000, and more in build out allowances from the landlord, along with six to 12 months of free build out time and additional free rent upon opening. These concessions are huge benefitting factors to leasing verses owning, as it means less money from the tenant on the frontend to get the office up and running, and less money and interest paid to a lender.
Availability: An important factor to consider when determining whether to lease or purchase is market availability. If you are in a high-growth, dense urban, or downtown area, there may be very few options to purchase. In most markets, lease options outweigh purchase options by 10 to 1 and, in more populated markets, the disparity is even greater. It’s important for healthcare providers to not get “set” on only one scenario. In these decisions, it is best to keep the needs of the practice as the main priority, as the practice is what drives revenue.
It’s also imperative to look at an all-encompassing apples-to-apples comparison that takes into account the principle paydown, monthly figures, concessions and costs, tax implications, and the equity position after 10, 15, and 20 years. Those are the figures that will ensure the decision is informed and factual.
We will pick up with purchasing your office space in the next installment of this article.
CARR is a partner of Fortune Management and the nation’s leading provider of commercial real estate services for healthcare tenants and buyers. CARR’s team of experts assist with start-ups, lease renewals, expansions, relocations, additional offices, purchases, and practice transitions. Healthcare practices choose CARR to save them a substantial amount of time and money, while ensuring their interests are always first. Visit CARR.US to learn more and find an expert agent representing healthcare practices in your area.