Why Now Is the Time for Doctors To Cash Out of Their Buildings continued
Independent specialty providers in ophthalmology , gastroenterology , orthopedics , dermatology , and plastic surgery are all candidates for consolidation . The consideration of remaining independent or joining a broader network ( such as a hospital , private equity , or larger regional practice ) remains a hot topic at many physician conferences , making it clear that succession planning is on most physicians ’ minds .
While your client ’ s decision to sell their practice may be up for debate , their building lease should not be . It stands to reason that the value of most practice sales eclipses the value of the physician ’ s building . That said , real property still carries millions of dollars in value , which can be jeopardized if a practice ( the tenant or occupier ) is sold without a new lease being structured to secure the real estate .
A practice sale transforms a physician owner-occupier into a physician landlord . As real estate professionals , we all know that a good lease can make or break the value of a building . Navigating a lease negotiation during a practice sale can be tricky , but as a fiduciary to our clients , it is important that we help them structure a lease that preserves the value and salability of their building .
If the client fails to seek guidance or does so too late in a practice sale process , there can be real consequences . In our experience , physician owner-occupiers have one opportunity to structure a proper lease with their new tenant . Once the practice sale closes , your client likely has little leverage to renegotiate with their tenant , the new owner of the practice .
After all , they are no longer making business decisions on behalf of the practice , which includes lease-related matters . The lesson is to educate your clients early and often , keeping their real estate investment top of mind when considering a sale of their practice to the hospital , private equity , or a larger regional practice .
A further benefit is that if a capital expense arises , perhaps a roof replacement , the cost can often be transferred over to the new landlord , further reducing the physician ’ s ( now the tenant ’ s ) risk . Now that your client has sold their building , paid off their loan , and removed their personal liability , they have endless options for use of the proceeds ; their equity is unlocked .
Conclusion
The benefits of a sale and leaseback extend further than the points I have touched on in this brief article . Still , the common theme with each such strategy is that owner-occupiers must be educated that succession planning for their real estate should start very early in their ownership . In our profession , there is a saying that “ you make your money on the buy ,” but that assumes a properly planned exit strategy . While your physician or healthcare clients might not be interested today , eventually , they will want or need to sell . Our job is to educate them on the how and why , remaining respectfully persistent in order to help them maintain awareness of their real estate options .
Michael Campbell , CCIM , is Managing Director of ERE Healthcare Real Estate Advisors in San Diego , CA . Campbell specializes in providing executive-level advisory to developers and physician-owners of healthcare real estate .
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Sale and leasebacks have other benefits , too
With the intent to control their destiny , many physicians purchase vacant buildings , which they adapt to the needs of their practice and patients . Just like they knew when to buy a building , they must also consider the optimal time to exit . A sale and leaseback strategy provides physicians with a method of truly maximizing the value of their real estate investment at a strategic time . However , there are additional advantages that provide real value , including creating liquidity for expansion and debt reduction , along with eliminating personal guarantees and mitigating the risk of building obsolescence .
When a physician ( or group ) acquires a building , they generally use debt in the form of a mortgage or line of credit , which are typically personally guaranteed . Upon a building sale , any debt is cleared , as are the associated personal guarantees tied to that loan . So , while the practice can continue to conduct business in a building that they once owned , they have no personal guarantees tied to the building or lease .
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