In our first two discussions on starting a new practice we’ve examined both the fine points of doctors’ serious liability for debt involved with buying a building or financing a medical practice start-up and common issues physicians must consider when buying an existing practice to call their own. In this piece are issues to consider when buying a commercial investment property and the right way to think of the building you may buy to house your practice.
First, Decide if You Actually Do Need to Own a Building
This may sound basic, but don’t assume you need to own a building at all, especially if your practice does not require it. The owner of an existing medical practice may own both the practice you are buying and the building it currently sits in, but that doesn’t automatically mean the sale is required to be structured for both.
Leasing from the seller (or just continuing assuming or renewing the existing lease if the practice owner does not own the building) will often drastically reduce your debt and increase your chances at getting startup capital; you may have more luck getting one loan than two. Leasing may also allow you to upsize or downsize your physical facility more easily to adjust to the actual financial performance and needs of your business as well as other issues outside your control like demographics and traffic patterns. Once you’ve made a commitment, assumed the liability for the debt, and made improvements it becomes more difficult to leave when you should.
Treat it Like an Investment
It’s tempting to treat the purchase of a medical office building like something personal complete with the emotions you’d let influence the purchase of a home; don’t do that here. You are buying a “commercial investment property” as much as a place to run your business.
Consider factors like the ability to expand or sublease as well as an exit strategy. Would you want to be a tenant or own the building if you were not operating your specific practice there? If you did want or need to sell the building, would it be easy to sell or lease to someone else? Could it be anything other than a medical building or serve some more profitable use in the future? These are all questions that an experienced commercial realtor can help you answer in addition to the basics of finding the listing and providing relevant comps on nearby sales and leases. When you look at those comps, make sure they are within the last 12 to 18 months, as comps outside that range don’t reflect the current value or the effect the economy has had on the actual value due to the recession. The fact that the seller paid twice what you may be offering five years ago at the peak of the market is the risk he took when he invested. Keep that in mind and stick to your number so the investment makes sense for you.
Get the Building a Full Physical
An inspection is standard to many purchases, but given current economic conditions you may be buying a building that is sold as is from a bank or bankruptcy trustee. If that is the case you have substantially more risk as many of your inspection rights and contingency-based protections common to a home purchase contract may not exist or protect you as well. It’s also important to note that if you are buying from a distressed seller, even one with a successful practice, they may often have ignored maintenance issues that will mature into expenses for you. Invest generously in the required due diligence on the property; don’t save $1,500 when you are assuming six or seven figures in debt. I see this kind of bad math done by doctors all the time.
The seller and the commissioned salespeople will talk about an appraisal and a buyer’s inspection. Professionally inspect issues like mold, environmental liability, cost segregation studies, property tax studies, roof and electrical inspections (if unique to your building, i.e. not an office condo with shared infrastructure), and even consider confirming the boundaries of the property. We’ve seen cases where the purchaser of a property got sued and had to correct at huge expense an encroachment on a neighboring property as the innocent buyer of a condition not disclosed by the seller.
As always, the information presented here is general and educational and can never replace the advice of experienced counsel specific to your assets or situation. This article originally appeared at www.PhysiciansPractice.Com where Ike Devji is a regular contributor, and is reprinted here with permission.