By William Ledbetter of Harris Tynes Realty Group
In today’s uncertain medical environment, physicians and practices are looking at many approaches to maximize efficiency and performance while providing the best care possible to their patients. While most of the practice’s efforts are reviewed and critiqued, many physicians don’t realize they have another partner involved in the daily operations of their practice. Real estate is a contributor to each and every medical practice and can produce very positive, minimal, or sometimes negative results which have a direct correlation to the practice’s overall performance. Thus each practice should examine their “silent” partner and ensure the real estate is producing maximum benefits for the practice and its patients.
Real estate can take on several different roles and affect practices in many different ways. The two basic roles of real estate for a practice are to become either an owner (landlord) or to become a tenant. The concept of both roles is simple, but the characteristics and details can be complex and confusing and should be analyzed and approached on a case by case basis.
When a practice purchases real estate to house their operation, the practice has made a fundamental choice to become a landlord. This can affect the practice both positively and negatively. A positive example could be that the practice has decided to start seeing patients outside of routine business hours. The practice, as its own landlord, will sacrifice and absorb increased costs or resources used to operate the building to help the practice benefit from seeing patients at odd hours. On the contrary, a negative could be derived from the same example above. If the practice began seeing patients after hours, the landlord will have to sacrifice and absorb increased costs and resources spent to achieve the extended hours which could include security, maintenance, and personnel costs outside the costs associated with the normal operation of the practice.
Another aspect to consider when becoming an owner of real estate is from an investment standpoint. Purchasing real estate can be expensive, especially in desirable locations within the market. Further, once a practice enters the market, they become a market participant and the asset is subject to supply and demand factors which cause increases or decreases in the price of the real estate. Many owners have benefited from participating in the market over a long period of time. Purchasing real estate should be a long term investment with its performance measured over at least a 7-10 year timeline. Typically, investment parameters outweigh operational concerns when dealing with real estate, and this could negatively impact a practice’s performance.
If a practice has concerns becoming a Landlord, leasing is a viable option to secure the real estate. Some of the concerns could be the practice has a complex ownership structure and disagreement could exist or concerns of the risks faced from being an investor and market participant. Real estate leases can take on a variety of identities, but for our purpose, we’ll consider two basic types: 1) a “Full Service Lease” & 2) a “Net Lease” or a “Triple Net Lease.” A “Full Service Lease” is a lease agreement between a Landlord and a Tenant where the Tenant pays a premium rent, but the landlord is required to perform more services to accommodate the tenant. These leases are typically found in larger, multi-tenant medical office buildings and office buildings. A “Net Lease” is an agreement that defines the base rent required by the landlord and also defines and transfers the operational costs associated with the real estate to the tenant. These leases are typically found in buildings where each tenant’s consumption of the operational costs can be easily defined. For example, a tenant in a “Full Service Lease” agreement would not have to pay for its monthly power service in addition to the monthly rent, the service would be included. On the contrary, a tenant with a “Net Lease” would have to pay for its monthly power service in addition to the base rent paid to the landlord.
While becoming a tenant can be construed with a negative reflection from an investment standpoint, it certainly has positives from the operational side of the practice. Some of the costs and burdens faced with practices are passed along to the landlords and this allows practices to focus more resources to providing the best patient care possible. Certainly, becoming an owner has its advantages as well. Practices have more operational freedoms that allow for more customized patient care which could positively impact performance.
Each practice and physician should asses its own needs, requirements, and the objectives they would like to see their partner contribute. For further information or help in analyzing your current position as it relates to Real Estate, please contact William Ledbetter at Harris Tynes Realty Group.
Harris Tynes Realty Group Inc.
2001 Park Place North
Birmingham, Alabama 35203