Although most financial experts agree that it makes more sense to buy a home than rent an apartment, the pros and cons of office ownership aren’t quite so clear-cut.
Physicians need to weigh a variety of factors when making this important decision, including:
– The availability of rental office space in the area.
If office rent is reasonable in the area in which you practice, then it may be best to rent. But if rents are high and you are planning to practice in that area for a long time, then it may make sense to buy, especially if you buy a building that can be expanded or remodeled as needed.
– How long you plan to practice in the area.
Selling a commercial office building—especially office space designed for special purposes—can be an involved process. In a medical group, that leads to the thorny issue of what to do when you or someone else wants to retire or move.
– Whether the capital earmarked for a building will be needed for other practice expenses.
No doubt, real estate ties up assets. You have to decide whether it makes more sense to use your capital to invest in facilities or for growth and other aspects of practice operations.
– How fast you are growing.
Once you buy the property, you’ve obviously lost some flexibility if you need to move later. For this reason, purchasing may not be the best option for fast-growth practices or practices that have a hard time forecasting their space needs.
The Case for a Concrete Investment
Even with so many factors to consider, owning real estate outright instead of leasing may make good sense for a number of reasons.
- You lock in your cost of occupancy.
Rents typically will always go up, but your mortgage payment won’t.
- You build equity in your building.
Over the long term, the property can possibly represent more worth than the practice itself.
- You could potentially save on taxes.
You may enjoy tax savings if you lease space to additional tenants, and also have an opportunity in other ways to save on payroll taxes. *(Consult with your financial advisor for verification)
- You provide yourself with options.
When it comes time to retiring, you could include the property as part of practice assets or keep the property and lease it to the new owner. These rent payments can then provide a steady retirement income.
In the end, it may make sense to turn to a trusted financial advisor to “run the numbers” and help you decide whether purchasing or leasing makes the most sense for your practice.
The Issue of Liability
When you assume ownership of a building, you also assume all of the liabilities that come along with it— everything from slip-and-falls in the lobby to non-compliance with the Americans with Disabilities Act (ADA).
Most physician-owners develop a limited-liability corporation to manage the property, which charges rent to the physician group, making for cleaner bookkeeping. From an asset protection standpoint, this strategy is dead on. A risk-producing asset, such as an office building, should be contained in a separate entity from your other assets. *(Consult with your legal advisor for verification)
As I discuss with all of my physician clients that for each person the circumstances are different. It is important to communicate your plans with your trusted advisors (CPA, Healthcare Banker, Attorney, and Insurance Agent), and in the end the right plan of action will be clear.
By Jeff Holt, CMPE, VP, Senior Healthcare Business Banker with PNC Bank
Jeff Holt is a Senior Healthcare Business Banker and V.P. with PNC Bank’s Healthcare Business Banking and is a Certified Medical Practice Executive. He can be reached at (352) 385-3800 or Jeffrey.Holt@pnc.com.