Should You Rent or Own Your Physician Practice Facility? – August 15, 2017

You’ve decided to open your own practice, or maybe you are ready to move to a different, more suitable facility. Once you’ve chosen the general geographic location, you’ll face a bigger decision: Should you rent or own? They both have their pros and cons.
 
It’s entirely possible that the decision will be made for you. Many practices simply don’t have the funds available to build or buy an office. After all, building means a land purchase along with the considerable costs of a construction project. Buying, meanwhile, usually helps avoid building expenses beyond remodeling. But the purchase of an existing structure will still involve a substantial cash outlay. 

Pros and Cons of Renting

One advantage to renting is that start-up costs are lower and, generally, it can be less expensive. Typically, you need a first and a last month’s rent, but not necessarily a down payment. And lease sites often have high-visibility locations that can be difficult to duplicate for a facility you might build yourself.
 
In addition, renting allows you to be more flexible about choosing the space and size you need. For instance, you can start small and, when your practice grows, lease additional space or find a new space. Otherwise, you might get stuck building a 10,000-square-foot structure and using only 4,000 square feet of it for the first five years — while still paying for the full space.
 
On the negative side, expanding your leased space might not be possible. And, of course, as you rent, you aren’t building equity in the property — the landlord is. Further, if you do make any improvements to the property during your time as a renter, those improvements will revert to the landlord at the end of the lease.
 
Some landlords limit what types of services physicians are allowed to offer. Often, common area maintenance fees are part of the lease, and renters have little control over them. Finally, when you eventually decide to sell your practice, the process will be significantly more complicated if you’re renting. The lease may need to be renegotiated, or the landlord may require approval of the practice’s new owner. 

Pros and Cons of Owning

If you build or own the site, your building is both an asset and investment, which can build equity over time. In addition, owning the facility can provide stability and control, making the practice more marketable in the future. And you can make your own building a component of your retirement plan through a sale or by renting it to new tenants.
 
When you own your building, you’ll also likely have more control over expansion. And if you build new, rather than buy an existing structure, you’ll have more creative control over space use and aesthetic considerations, such as architecture and materials.
 
As mentioned, owning or building your own facility will likely be more expensive in the short term. You’ll need a down payment and financing. Zoning for your locality may dictate and limit where you can build and the services you can offer. Plus, you may have to navigate local politics to gain all the necessary permits to build a new medical facility.
 
In addition, when the time comes, a single-use facility sometimes is harder to sell. Although it’s not the worst development in the world, if your facility’s location goes through a real estate boom, the resulting increase in property value might make it so expensive that it becomes more difficult to sell along with the practice. 

How Much Space Do You Need?

Determining how much space you’ll need for a new facility depends on the type of practice you’re planning to have, whether you have (or plan to have) partners and whether you need a surgical suite. The basic equation is 1,200 to 1,500 square feet for the first physician and 1,000 to 1,200 square feet for each additional physician up to four or five. Traditionally, a single-physician office has three exam rooms, a consultation room, a reception room, and a business office and storage space.
 
The standard equation for your reception room is linked to the number of exam rooms — the more exam rooms, the smaller the reception area. First, think about your busiest hour and decide on the number of patients you expect to see during that period. Multiply that number by 2.5. This allows space for patients, parents of children, or relatives and friends of the patient.
 
Next, subtract the number of exam rooms to arrive at the number of chairs for your reception room. Multiply the number of chairs by 20 square feet. That’s the square footage of your reception room. As you consider your space needs, consider lunch and break areas for staff, along with storage space. Electronic health records and computers can cut down on storage needs, but you’ll still need room for tangible supplies. 

Do What Works for You

Whether you’re focused on building your own facility or building your practice, it’s a good idea to regularly assess if owning or renting best serves your needs — and those of your colleagues, employees and patients. This will ensure that your practice continues to operate in the most optimal way both now and in the long term.  

Contact Paul Gregory at pgregory@cohencpa.com or a member of your service team for further discussion.
 
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.