To Buy or Lease Medical Office Space?

Physicians often contemplate whether it is a better investment for them to buy the real estate for their practice or lease medical office space. The motto ‘it is better to own than rent’ does not apply to every situation when it comes to medical office space. Prior to making a purchase, physicians should establish clear objectives pertaining to the short and long term goals for the practice. Here are some things to consider when deciding whether to purchase or lease medical office space:

  • Financing.  Available financing options play a role in the decision to lease or purchase.  Today, many lenders are fairly lenient when lending money to physicians, frequently offering 90% financing options (or better). Providers should consult with a financial lender on rates and terms for financing. Also, it is recommended to sit with an accountant to determine the costs and related rent structure that will be required to support a purchase.
  • Capital.  Availability or access to capital within the practice can be a huge factor when determining whether to lease or purchase. If a practice has excess cash and has no major operational purchases or needs in its future, it may make sense to invest that money in a new facility or building. However, if a practice does not have access to excess cash it may be wise to save the money to invest in future practice operations or potential expansion costs.
  • Fixed vs. Variable Cost. If a physician purchases medical office space, they have a good idea what the costs will be over the long term. This is especially true with a long-term, fixed-rate mortgage. When leasing office space, the market often dictates what the long-term costs will be.
  • Flexibility.  The ability to be flexible is a big factor in the lease or purchase decision process.  This pertains to a practice’s ability to grow or shrink as needed.  If your practice is relatively new and in a high-growth mode, leasing would impose fewer constraints on growth and allow more flexibility. If you purchase a property, you have a fixed amount of space, making it difficult for the practice to either grow or shrink.  .
  • Location. Physicians should evaluate and make decisions for the location of their practice based on their referral base from other physicians, lack of competition, and the ideal demographics for their patient base. Once the general location is determined, physicians may find that their options are limited in a particular market. Having a mindset of “must buy” or “must lease” could limit your ability to enter a market and lead to poor business decisions for the practice.
  • Taxes.  Taxes can make a huge impact in the lease vs. purchase decision . Both leasing and owning have tax advantages; it really depends on the individual practice to understand which situation benefits its bottom line more.
  • Exit Strategy.   Physicians need to ensure they have a plan in place should an event occur in the future that would affect the real estate. The following article by Equity Inc. expands on why it is crucial to have an exit strategy in place.

 

While all of this might seem overwhelming, getting advice from professionals (accountants, lawyers, commercial real estate brokers) who specialize in health care can significantly improve the accuracy of any analysis and streamline the entire process.  In the end, only the health care provider can make the final decision, but having guidance from the experts will assure you make the best possible decision.