Finance
Passionate debate continues in medical staff lounges across the country over the merits of leasing vs. owning. This important decision is impacted by economic conditions, demographic changes within a community, individual risk tolerance, financial history and future practice expectations. Sales and leaseback options provide a way to protect your investment within these parameters.
Inherent Obsolescence
Many physician owners simply pay down their mortgage, assuming the sale of their office can be married to the sale of their practice upon retirement. The problem with this approach is "obsolescence" - both economic and functional. Similar to inflation, obsolescence reduces value of an asset, and therefore, financial wealth. The physician owner has no assurance the property will be located in a vibrant part of the market in the future. Often, locations become less desirable over time. In addition, as technology and work processes evolve, even a well-designed facility will become less efficient over time. Both of these factors negatively affect real estate properties.
Protecting Your Investment
A sale and leaseback transaction is one way to protect the physician's investment. Let's say a physician is planning on practicing medicine for another 10 years. The best time to sell is now - when the facility is near its prime functionally and geographically (i.e., in a growing area or next to a major hospital). As discussed, the future holds many uncertainties: the hospital might move, the building will likely require updates, the infrastructure may not support technological advances, etc. While you may be able to sell the "practice" in the future, the sale of the estate is a separate issue. Physicians are often left with obligations to manage their former office building with less than rosy expectations for its sale in the near future.
Just What The Physician Owner Ordered
A sale and leaseback strategy allows the physician to remove accrued equity by selling to a third party investor. The physician then enters into a long-term lease commitment (i.e. 10 years) with the third party at or near his current lease amount. Market value in commercial real estate is figured on the net operating income generated by the lease(s) in place today and tomorrow within the building. There is no economic impact on the practice because the occupancy costs (lease, taxes, utilities, etc.) remain the same as when the physician owned the property.
Physicians who have acquired their medical property as a new construction project will likely realize a rapid increase in value because the difference in development/construction costs and market value will be significant. In many cases, an increase in value within the first five years of ownership exceeds 30% (excluding the effect other economic forces might have on value). Physicians who have acquired an existing building may not realize as big of a gain. Either way, the cash that has been pulled out of the building is now available for financial redeployment into additional real estate investments, stocks, bonds, etc. A sale and leaseback strategy also removes the asset from the physician's balance sheet, which provides an additional source of capital from third party lenders that can be put to work for wealth-building activities as well.
For more information regarding sale and leaseback strategies, as well as other wealth producing real estate strategies contact Mike Krach at Nueterra Real Estate Companies, a real estate development company committed to creating economic and personal wealth for our partners (mkrach@nueterra.com or 913-647-6446).
Written by Mike Krach, COO, Nueterra Real Estate (NRE); and Kevin Stuckey, CEO, NRE