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Lease, Build, Buy, Sell: Finding the Best Fit for Each Medical Practice By CiNDy SaNDerS

Best practices augmented by analytical evidence drive the decision-making process behind clinical care delivery. That same informed approach should apply to the complex decisions surrounding healthcare real estate. For physicians, the decision to build, buy, lease or sell their practice space should only be made after carefully weighing long-term goals, needs, market forces and economic realities. What makes perfect sense for one group might be the wrong solution for another practice. Turning to medical real estate experts with their specialized knowledge helps physicians sort out the available options to make the best decision to meet a practice’s unique needs.

Lease or Own “There are so many physicians who subconsciously believe owning a building is the next evolution in their practice. Sometimes they are absolutely right – it’s Rich Campbell, CCIM a fantastic opportunity – but sometimes it’s not,” said Rich

Campbell, CCIM, principal with Birmingham-based Veritas Medical Real Estate Advisors. “Our physician clients hire us to offer clean, unbiased advice,” he continued. Campbell said the decision to lease vs. own comes with many considerations from location concerns to operational structuring. One of the most important factors, he noted, is to consider total occupancy cost. “The practice always needs to be considered as an occupancy cost,” he explained. “Even if you buy a building, the practice is always going to be a tenant.” To get a true picture of financial obligation, Campbell said that occupancy cost should be factored into each scenario being considered – lease, purchase, build or buy. “The cost can vary drastically … not only city-to-city and market-to-market but also street-to-street,” he pointed out. “You have to know how the total occupancy cost in any location affects the operations of the practice.” One factor that shouldn’t play into the decision of whether or not to pursue ownership is emotion. “It’s just another investment opportunity that needs to be looked at completely separately from your practice,” Campbell counseled. That investment, he continued, doesn’t happen in

a vacuum so other financial options also should be vetted to decide the best use of each physician dollars – whether that means investing those dollars in a building, technology or equipment upgrades or the stock market.

Buying & Selling “For a variety of reasons, including low interest rates, medical office building transactions have more than tripled during this decade,” said Chip Conk, CEO of Montecito Medical Real Estate, which is headquartered in Nashville. He added that his company anticipated this trend, and it has fueled Chip Conk Montecito Medical’s growth into the nation’s largest privately held acquirer of medical office real estate. “In addition, we pioneered a model that enables sellers to reinvest in the property – getting a second bite of the apple, if you will – and also to co-invest with Montecito in additional properties we acquire. The attractiveness of that model has played a big role in our growth.” Conk noted an office building is typi-

Michael Solomon, M.D. Phlebologist

cally the most valuable asset a physician practice owns. “Individual physician partners within the practice often have invested a meaningful amount of their net worth in the property,” he continued. “Selling the property and then leasing it back unlocks capital that the practice can invest to meet a variety of needs – from staying abreast of medical technology, expanding their services or operations, implementing electronic medical records, recruiting new physicians or covering rising salary and insurance costs – all of which ultimately can contribute to improved patient care and satisfaction and the sustained health of the practice group.” Montecito Medical’s investment vehicle, dubbed the Provider Real Estate Partnership (PREP) program, offers physicians in a practice group the opportunity to reinvest a portion of the proceeds from the sale back into the medical office building. Conk said the investment is typically 10 to 15 percent. “As investors, they enjoy significant tax advantages for the duration of time we maintain ownership of the property,” he explained. “They also receive quarterly distributions from the partnership based on the amount they invest. Then, when Montecito sells the property, (CONTINUED ON PAGE 14)

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