In Part 1 of a two-part series written exclusively for the American Academy of Ophthalmology, Collin Hart, MBA, CEO, Managing Director ERE Healthcare Real Estate Advisors identifies a few common practice management scenarios and how they may affect your practice real estate investment.
5 Considerations for Your Practice Real Estate | Part 1
Collin Hart, MBA, CEO & Managing Director − ERE Healthcare Real Estate Advisors
As a veteran ophthalmologist, you may have built your career toward the goal of owning your own practice. Along the way you had the opportunity to buy your clinical office or even build an ambulatory surgery center, giving you control over the destiny of your practice.
There is a wealth of information surrounding practice management, but what about real estate? Your facility was developed to meet the objectives of your practice. Was it structured to meet your personal and partnership investment objectives as well?
In this article we will cover a few common scenarios and how they may affect your practice real estate investment.
How is your partnership structured?
Many practices are set up with separate practice and real estate entities. In this structure the practice entity pays rent to the real estate entity. Often, these entities involve the same partners with similar objectives. Over time, through retirements and other life events, interests can become less aligned.
Junior practice partners may wish to buy into the real estate, but none of the real estate partners are willing to sell their shares or dilute their holdings. With larger physician groups, sometimes quorum for a buy-in can’t be reached, creating a stalemate. As this continues, the junior partners may develop resentment toward the real estate owners. Now, instead of serving the practice, your real estate investment has created tension in your professional relationships.
Varying partnership structures can support a continued investment in real estate or make exploring a real estate sale attractive.
Where are you and your partners in your careers? Is retirement on the horizon?
Are you planning to practice for another five, 10, maybe 15 years, or are you dialing back your practice now? How about your partners?
As the physical presence of your practice, your facility has served you well as a real estate investment. Looking forward, what is your exit strategy? Even if you plan to practice for another 10 years, what will you do with your building when you retire? If your partners have staggered ages and projected retirements, perhaps the idea of continuing to collect rental cashflow post-retirement is attractive. If that’s your objective, it’s important to consider whether your then 10-, 15- or 25-year-old building will continue to serve the needs of your future tenants. If they’re entrepreneurial like you, they could decide to relocate. What is the value of an unoccupied ambulatory surgery center?
Understanding your career trajectory can help bring direction to your real estate objectives.
What is your succession plan?
Do you have junior partners, mid-levels, or are you actively recruiting? With headwinds on reimbursements and the way medicine is practiced, we’ve seen fewer new physicians considering the entrepreneurial route of practice and real estate ownership. Maybe they’re laden with debt from medical school, seeking more work-life balance, or just don’t like the idea of investing in a 15-year-old building. How do their choices affect you?
Once you retire, your CFO or practice administrator will continue to manage the providers in your practice, ensuring they remain involved and operating in your facility so the practice can pay you rent.
Depending on your relationship with practice leadership and successor providers, this may or may not yield a favorable real estate outcome.
Do you have outstanding debt on your property?
With your career and succession plans in place, what is your real estate capitalization strategy? The concept of passive cashflow from your practice real estate is an attractive proposition. Do you own your property free and clear or have you introduced some element of financial leverage? Loans are a terrific way to finance the growth of your business or expand your facility, particularly when you’re practicing and generating revenue for the business.
Once you begin to retire and move toward a fixed-income lifestyle, debt can shift to a burden. Now, you’re dependent on your rental cashflow to cover the debt service, pocketing the difference as passive income.
With consideration for some of the previous scenarios, it’s important to assess your risk tolerance for debt, particularly when it comes with personal liability.
Are you considering selling your practice or bringing on a practice management company?
With the heightened prevalence of practice consolidation in ophthalmology, we’re witnessing more physicians aligning themselves with private equity or a practice management partner. Not only does this create liquidity for your partnership, it also facilitates succession planning. You’ll capitalize on the successful practice you’ve developed over your professional career.
By owning your clinic or ambulatory surgery center you have controlled the destiny of your practice through your career. Now, as you’re considering the sale of your practice, the dynamic of real estate ownership will change. You’re no longer the tenant, a corporation is.
As identified in the preceding scenarios, the dynamic of your practice real estate investment can change over the course of your career. As the circumstances vary, there are several solutions to the challenges. The answer may be an internal restructuring, an outright sale or even a sale and leaseback.
Just as you thoughtfully structured your real estate partnership at the beginning of your ownership, similar considerations should be evaluated as you move forward with a new model of practice.
Equipped with a better understanding of investment real estate fundamentals, you’ll be better prepared to reap the rewards of your real estate investment. We’ll address a few of these concepts in our next segment.
ABOUT THE AUTHOR
Collin Hart is the CEO and managing director of ERE Healthcare Real Estate Advisors where he leads the company’s strategy to provide executive level advisory to owners of healthcare real estate. Before co-founding ERE Advisors, Collin was a director in the real estate division of a private investment banking firm where he focused on advising physician partnerships and hospital systems in sale-leaseback transactions.
Collin earned his MBA from the SC Johnson School of Management at Cornell University.