Medical Office Real Estate: Why Doctors Sell Their Buildings

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What Should You Prioritize?

One of the biggest benefits of selling a practice is found in the amount of time that it frees up. While owning and operating medical/dental practices is appealing, many often become disenchanted with the amount of work that goes into things that they had not accounted for.

It certainly did for me when I started my dental practice. 

For instance, younger docs may want to be hyper-focused on sharpening their skills (no pun intended), developing relationships with patients, and establishing themselves as a trusted source of medical services.

For older doctors, it’s not uncommon to start planning for retirement.

In addition to caring for patients, many are ready to start thinking about the next chapter of their lives, including the process of either:

  • closing their practice
  • passing it on to a protégé
  • or selling it

Ultimately, even the ones who once craved the independence of working for themselves often realize that they don’t want to deal with the issues associated with property ownership and management.

While owning a medical/dental practice is a large responsibility, those associated with owning the building are often even more time consuming. In addition to the often burdensome nature of owning and maintaining a property, it’s also worth considering the potential conflicts that can arise if there’s more than one doctor practicing in the office.

One partner may notice water damage to a single ceiling tile and feel that the roof needs to be replaced while another partner thinks they should patch up the damaged area of the roof and spend money elsewhere.

If the conflicting voices are equal owners in the practice and the building, coming to a resolution can be challenging and interfere with the primary focus of the business – caring for patients.

Ultimately, not owning the doctor’s office allows them to focus more on what they originally wanted to do with their lives….treating patients.

Instead of worrying about specific needs such as electrical issues, roof repairs, plumbing problems, and every other issue that comes with owning a piece of real estate, selling the building allows them to focus on being doctors instead of tying up their time practicing real estate management.

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The Pains of Partnership

It’s common for healthcare providers to go into business with someone who they’ve developed a professional relationship with, perhaps even a friend they’ve made during training.

During the years of intense study, two or more like-minded individuals may decide that they could have the greatest possible impact on their field by striking out on their own and creating a practice that lines up with their own core values.

While the business plan that the would-be entrepreneurs put together involves nothing but success, it’s not uncommon for partners to quickly turn into foes.

In fact, some studies indicate that somewhere between 50% and 70% of business partnerships fail.

When a partnership crumbles, the process of splitting things up between the former partners is as difficult as it is in a divorce. In some instances, even if one partner says they’re willing to simply accept a buyout and walk away, it can be difficult for the other partner (or partners) to come up with the money necessary to buy out the one departing.

Instead of trying to take on more debt, it’s often easier to simply sell the practice to an outsider, pay off the debts, and split any profits.

The process of creating and dissolving a partnership is often more than what medical providers want to take on, especially if he or she does not have a business background or a lawyer on retainer who can help through the dissolution process.

With that in mind, the issues that can arise from failed partnerships often lead to doctors making the decision to sell to a third party – and this can mean selling any real estate they may own jointly too.

Reducing Debt

The expense of maintaining and effectively operating medical office properties is one pain point, but the issues associated with monthly mortgage payments is a separate issue. In addition to dealing with the potential headaches of owning and operating a property, many doctors also quickly realize that the added debt associated with owning a building is more than they want to take on.

Obviously, operating a medical/dental practice can be profitable. However, when you’re paying a monthly mortgage in addition to any other debts and, more importantly, guaranteeing that debt, it can quickly go from being a dream scenario to a nightmare.

It’s not uncommon for doctors to contact real estate groups about wanting to sell their medical real estate because they simply don’t want to deal with the mortgage debt and continue to be liable.

Even if they own a successful practice with a healthy number of patients, there are multiple variables that impact the amount of money that an independent practice can generate.

Reimbursement rates from insurance companies can vary wildly and depend on any number of factors. This means that even if you see plenty of patients, there’s no guarantee about how profitable the practice will be on a month-to-month basis.

This uncertainty surrounding income, which is a stark contrast to the certainty of monthly mortgage payment obligations is often a major pain point. Failure to pay a mortgage is not only embarrassing, but can also lead to a host of financial issues that can plague someone for years.

And if things don’t go as planned, the doctor remains liable for the entire amount of the loan, in addition to losing the down payment made at the time they acquired the property.

In addition to the stress of making a monthly mortgage payment, many doctors opt to sell their building because, well, the real estate market is largely unpredictable, and ownership just adds another stressful dimension to the challenge of operating healthcare practices.

If something happens and the market takes a negative turn, some loans make it possible for the lender to call for the loan to be paid in full even before maturity.

This uncertainty is often a major factor in doctors making the decision to sell their medical properties, putting the financial burden of monthly mortgage payments and liability for unpaid balances on someone else’s shoulders.

Minimizing the Conflict of Interests

When a doctor owns the medical space they practice in, there’s a conflict of interest that cannot be avoided. When the building itself is part of the investment that they’ve made in their career, they may elect to do the bare minimum to keep that building operational as doing so will have a negative impact on their profitability.

Even if postponing necessary maintenance and repairs seems a prudent cost saving at the time, with real estate small problems can rapidly escalate and become major issues if not handled quickly when first uncovered.

Obviously, they don’t want to let their medical office space fall into a state of disrepair, but they’re often tentative to spend the money necessary to repair or replace parts of the building that need addressed.

Much like the advice they might give a patient to improve their diet, as they know the immediate benefits might be difficult to see but the long-term benefits are profound, managing a building is in many ways similar.

Taking care of the little things today can help mitigate the chance of catastrophic failures further down the line.

The stress associated with these conflicts of interest are generally difficult for doctors on both a financial and moral level.

Obviously, they want to save as much money as possible to pay off:

  • personal debts
  • personal bills
  • debts associated with owning medical buildings and operating the practice

However, there’s also a moral conflict, as buildings that need repaired are often less than ideal for the health and safety of the patients and the employees of the practice.

Cost of Equipment

Depending on the type of practice being discussed, it may contain expensive equipment. Occasionally a large portion of it has to be purchased up front and involves a considerable initial investment.

While some equipment may not be very expensive, others not only require costly maintenance, but may also require expensive repairs and replacement parts.

Others may require well protected environments to ensure they continue to operate at optimal performance. That investment in equipment goes up even more when a large piece of medical property or equipment has to be replaced.

If the doctor/dentist practicing at the facility owns the building, they’re responsible for ensuring that the equipment is always protected and operational.

A large factor in many doctors making the decision to sell their property is they can pass the responsibility of building repair and upkeep to someone else.

This allows them to focus on the equipment they actually use, and not worry about whether or not the roof is going to leak and cause damage to the tools they use and need to run the practice.

Planning for Retirement

The concept of planning for retirement may seem like a good reason not to sell a building and the practice inside, but it can easily be argued that doing so puts medical professionals in a better position to retire.

As already discussed, there are a lot of costs associated with owning and operating a practice. In addition to paying a quality staff, there are:

  • mortgage payments
  • insurance
  • equipment costs
  • various other aspects that need to be taken into consideration

It’s not uncommon for those in the healthcare industry nearing retirement to look at what they have built and realize they’re working tirelessly to put themselves in a position to retire, but also spending a significant amount of time, energy, and money on distractions – such as building management.

They discover that even though they want to slow down from practice, they’re still putting time, money, and energy into running their healthcare facilities that has served them well.

While real estate investing and entrepreneurship are two credible wealth-building tools that can help with retirement, it’s important that prospective retirees strike the balance between saving and investing.

Additionally, it’s important they’re not using an excessive amount of retirement funds in order to keep the practice open or maintain a building they soon intend to exit.

The fact that many of them dip into their retirement to pay some of the practice’s bills makes selling the practice and the facility to a third party even more appealing.

Conclusion

Obviously, there are reasons for doctors to continue to own their building. There’s a certain level of freedom associated with doing so that helps them enjoy the rewards of entrepreneurship.

However, there’s also plenty of viable reasons for them to sell their buildings, allowing themselves to focus primarily on the patient care that originally motivated them to pursue a health care career.

Selling to a professional real estate operator, they can continue to remain in their buildings while watching the new owner handle the repairs and keep the building in optimal physical condition.

Have you considered selling your medical office building but still have questions?

Download 10 Reasons To Sell Your Medical Office Building today.


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jeff@debtfreedr.com
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