If you own your practice or ambulatory surgery center real estate and remain a partner in the practice, you likely walk a thin line balancing the interests of both entities.
Given most practices are facing financial strain during the COVID-19 crisis, reducing overhead costs has become a necessity to weather the storm. With all but key personnel furloughed, often the next largest expense is rent.
Looking through your landlord lens, you may be inclined to offer some relief to your tenant, the practice, in the form of reduced or abated rent. And because of the symbiotic relationship between the real estate and practice entities, this feels like the right path, although not without financial strain.
Although this is hopefully just a temporary issue, to be resolved once you can see patients on a normal schedule again, understanding your options is paramount. By adeptly navigating the process, you will maintain a congenial relationship with all partners, both practice and real estate, and resolve the situation with as little damage as possible.
To aid in that process, we’ve prepared the following guide, highlighting steps you can take to help ease the burden of rent payments from your practice to real estate partnership:
Talk to your partners.
- Understand the practice’s cash reserves and intentions for payment of rent.
- Evaluate your real estate partnership’s cash reserves and ability to cover mortgage payments, real estate taxes, property insurance, and maintenance.
Explore government aid programs.
- If you received a Small Business Administration loan under the Paycheck Protection Program, provided 75% of your proceeds are used for payroll, the remainder could be used for interest on mortgages, rent and utilities, which would also be forgivable.
- Coordinate with your CPA and banker to confirm their understanding of the terms, ensuring proper expense allocation in order to maximize loan forgiveness.
Understand the options surrounding your mortgage.
- Many banks and commercial mortgage lenders have programs that will allow you to temporarily make interest-only payments towards your loan.
- Talk to your banker to begin the process of a potential mortgage deferral; this may not be quick and will require paperwork.
Strategize on a solution.
- Brainstorm a mutually beneficial solution for your practice and real estate partnerships that supports long-term viability.
- Document the final terms. Given the intimate relationship between your partnerships, an attorney isn’t necessary, but be specific in your notes to avoid future misunderstandings.
Remember, although they’re separate partnerships, your practice and real estate entities depend on each other to succeed. Focus on the collective objectives of each partnership and work towards a mutually beneficial solution. Doing so will ensure both entities get through these challenging times, while facilitating and continuing a long-term relationship.
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. He earned his MBA from the SC Johnson School of Management at Cornell University.