MDNews - Central New York

REAL ESTATE + Fixed vs. Variable Cost — If you pur- chase your medical office space, you'll have a good idea what your costs will be over the long term. This is especially true if you have a long-term, fixed-rate mortgage. If you lease office space, the market will dictate what you will end up paying for rent over the long run. Lease vs. Own Medical Office Space: H By Brian M. Balash, CCIM AS YOUR PRACTICE asked itself the age-old question, "Should we lease or should we own?" Many practices reach a point at which they are curious whether it would be beneficial for them to purchase rather than continue to lease office space. While every practice is different, a few common factors should be considered when evaluating whether owning office space would be better than leasing it. There is no right or wrong answer, nor any benchmark by which all practices and health care systems can measure themselves in order to come to a definitive conclusion. The decision- making process should be the same, but the outcomes can be very different. Here are some of the things to consider when deciding whether to purchase a medical office building or condo or continue leasing medical office space: + Cash Expenditures — Typically, if you are planning to purchase a building, you can expect to make a down payment of between 10% and 25% of the purchase price, depending on the lender and your credit. On top of acquisition costs, you should also consider the costs of improving the property to serve the new practice. When you lease office space, you will typically have the landlord pay for the improvements as part of the deal. You may have to contribute toward your build-out or supply a security deposit, but your outlay of cash will be a fraction of what is required when purchasing a building or medical condo. A big reserve of cash could be used for acquiring new equipment or personnel. + Flexibility — The growth phase of your practice should be a major consideration in making the lease vs. own decision. If your company is relatively new and/or in a high-growth mode, leasing would allow more flexibility and impose fewer constraints on that growth. On the other hand, if your company is mature and stable, owning office space is great way to meet your future office space needs. + Property Management — Do you want to cut the grass during your lunch hour? If you own your space and want to see patients, you'll have to hire someone to tend to the day-to-day issues of maintaining real estate. Many practices with long-term growth plans will own more space than they need and rent out their future expansion space. The tenants will most certainly want to see a professional property management company in place. + Financial Analysis — Don't be penny wise and pound foolish! In order to fully understand the financial aspect of purchasing your medical office space, you need to have a knowledgeable pro- fessional prepare a detailed comparative net present value cash flow analysis that takes into consideration your predictions on the future, including holding period, anticipated appreciation vs. rental rate increase, interest rates and increases in costs of expenses. The same analysis can be performed for your potential lease obligations as well, and the two can be view side by side to help you make your decision. These topics can help you formulate a plan, but there are still the unknowns that need to be taken into consideration. Left twisting in the wind along with our pending health care reform act and changing reimbursement models, the Financial Accounting Standards Board (FASB) has considered changing how real estate lease agreements are treated for accounting purposes. Existing rules allow health care providers to enter into real estate lease agreements for between 10 and 15 years, usually without negatively impacting a health care provider's balance sheet. However, FASB has proposed rules that would treat a majority of real estate leases as capital leases. For accounting purposes, a capital lease is treated as a liability on the tenant's balance sheet. This approach is undesirable for many health care providers. This lack of decisiveness has created uncertainty in the marketplace, causing a number of health care providers to place long-term space requirements on hold. Leased space may not be desirable if the leases will be treated as a liability on the tenant health care provider's balance sheet. Instead, it may be more advantageous for the health care provider itself to own and finance the project. While all of this might seem somewhat overwhelming, getting advice from profes- sionals (accountants, lawyers, commercial real estate brokers) who specialize in health care can significantly improve not only the accuracy of any analysis, but also streamline the process. Only the health care provider can make the end decision, but having a helping hand from the experts will assure you make the best possible decision. Brian M. Balash, CCIM, is a licensed sales agent specializing in medical and corporate real estate at Pyramid Brokerage Company, a Cushman & Wakefield Alliance Partner with 10 offices across upstate New York. He is involved with Cushman & Wakefield's Healthcare Practice Group. The Healthcare Practice Group is a national platform of real estate professionals specializing in various sectors of the health care industry such as leasing, acquisition and disposition, and management of highly integrated, state-of-the- art medical facilities. For more information, Balash can be reached at (315) 445-8506 or bbalash@pyramidbrokerage.com. ■ MDNEWS.COM ■ MD NEWS Central New York | 15 ++++++++++++++++++ + +++ +++ ++++++++++++++++++ +

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