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Surgery Center Investment Planning

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  • Surgery Center Investment Planning

    For those who have shares in a surgery center, I am curious how you prioritized cash flow leading up to said investment. Commonly one will have a waiting period before shares are offered, say 2 years into the practice. Also commonly I’ve seen people almost universally taking out a loan to cover this investment, despite the ability to save in the lead-up to share purchasing. And also commonly I have seen the after tax investment returns in a surgery center markedly outperform the alternative (stock/bond allocation) in the long run.

    Given these commonalities wouldn’t it make more sense to create a cash pile ready to invest in the lead up to the planned surgery center investment rather than take out a loan? The math here isn’t complex, yet I haven’t seen this discussed as a general strategy. What seems to be more common is that people shunt their cash flow into worse performing assets for a few years, necessitating the loan which impairs early cash flows from the surgery center. Benefits to the cash saving approach would be access to more surgery center cash flow early, and with large returns the ability to fund the alternative investment, albeit in a delayed fashion.

    Thoughts?

  • #2
    we had to take a loan the first time we invested in one.  practice loaned us some of the money, it was like prime + 1% or something to be paid back in one year.

    after that, it was a lot easier and on subsequent purchases, we were able to pay for it.  i tend to keep a lot of cash on hand anyways.  i just don't know that a lot of docs purchase into these more than once, and the two year lead up is often filled with paying down student loans, saving for mortgage, and other priority items.  also people here seem to hate to leave money in cash or low interest bearing accounts even for 'emergency' funds, which is something that this strategy almost certainly requires.  i also think for most, the buy in amounts are big enough that even saving for a couple years isn't likely to be enough for the whole nut (wasn't for me).  ymmv.

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    • #3
      I have partners that took out loans and structured the loan payments such that it was in-line with the quarterly distributions. Usually the ASC returning 20-30% and a portion of that goes to pay their loan payment while the remaining/surplus the distribution goes into one of their traditional retirement vehicles. I think if you could save the cash to buy in that is appropriate, but that whole time you're saving its not earning much money. You'd have to run some calculations to find out which situation would put you ahead - i.e. if you couldn't buy into an ASC until you saved a certain amount of money you might be missing out on the anticipated higher returns of the ASC.

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      • #4
        I don't think it is a good idea to assume a surgery center is a slam dunk over a basic portfolio. We're observing some parts of the country appear to be getting saturated. At some point, these partnerships will not be able to continue the returns many have been experiencing and the "common" trend will reverse, as it always and eventually does. Ditto the comments from q-school and Bonez.

        And you should always consider the business acumen of your partners.
        Financial planning, investment management and CPA services for medical and high-income professionals | 270-247-6087

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        • #5




          we had to take a loan the first time we invested in one.  practice loaned us some of the money, it was like prime + 1% or something to be paid back in one year.

          after that, it was a lot easier and on subsequent purchases, we were able to pay for it.  i tend to keep a lot of cash on hand anyways.  i just don’t know that a lot of docs purchase into these more than once, and the two year lead up is often filled with paying down student loans, saving for mortgage, and other priority items.  also people here seem to hate to leave money in cash or low interest bearing accounts even for ’emergency’ funds, which is something that this strategy almost certainly requires.  i also think for most, the buy in amounts are big enough that even saving for a couple years isn’t likely to be enough for the whole nut (wasn’t for me).  ymmv.
          Click to expand...


          I suspect the paying down loans and lack of ability to fully cover the buy-in are the reason that most don't consider the cash saving strategy - good points.  Saving every penny and not spending anything would still not allow for the vast majority to cover the buy-in over a 2 year window.

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          • #6
            @ENT Doc,
            I am not asking for one of your famous spreadsheets, but you are one of the best.

            Student Loans
            Taxable Acct - normal invest
            Saving for ASC
            Loan for ASC
            Income b4 ASC
            Income after ASC

            Your spreadsheet will spit out numbers.
            Low loan interest rate assumptions and rate of returns on investments will determine the outcome.

            Then you or the persons risk tolerance steps in.
            Do you really want low return Savings and low rate loans for a delayed return on the ASC or sacrifice investment returns for saving for the buy in?
            Long way of saying highest return on investment and loan interest loans allow leverage. But it comes with risk.
            After taxes, retirement savings, and living expenses you can compute it. Most likely personal risk will say pay student loans first, invest in taxable then the choice:
            keep the ASC as a stand-alone with debt, or drain the taxable and make a cash purchase. Most use debt, the ASC pays for itself. I think your spreadsheet will show maximum debt and maximum assets. Of course those returns are estimates.

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            • #7
              Ours is set up so that the buy-in is pretty small, but then you are on a partial distribution for a set period of time. Ends up being a pretty big chunk of sweat equity.

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              • #8


                Your spreadsheet will spit out numbers. Low loan interest rate assumptions and rate of returns on investments will determine the outcome.
                Click to expand...


                Agreed.  Might put something together for the heck of it, but I'd be very surprised if investing now and taking out a loan beats saving and using cash.  Two time periods matter as well - time until buy-in, and time until buy-out (end of distributions).

                The other factor is leverage and creating additional fixed costs.  Putting this on top of a mortgage, even for a short period of time, is a risky proposition.

                Comment


                • #9




                  Ours is set up so that the buy-in is pretty small, but then you are on a partial distribution for a set period of time. Ends up being a pretty big chunk of sweat equity.
                  Click to expand...


                  This arrangement is nice from a fixed cost protection standpoint, even though it's structured as a loan of sorts.  Curious what the "terms" are.

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                  • #10




                    Ours is set up so that the buy-in is pretty small, but then you are on a partial distribution for a set period of time. Ends up being a pretty big chunk of sweat equity.
                    Click to expand...


                    Sent you a PM that doesn't look like it's went through.  Let me know if it didn't.  2nd one in 2 days that's done that where I don't see it in my "sent" feed.  May be a glitch.

                    Comment


                    • #11
                      I think the PM is broken.  The last time I did one of these deals I paid cash.  It was an investment in a local hospital.  Many people took out bank loans.  Sometimes there was a quarter with no distribution.  Problematic for those with a loan.  I have invested in 3 such deals over my career.  One ASC that did well but I had to sell out when I moved.  Both times that I have invested in the same local hospital it has been bought out by a larger entity which produced a larger capital gain.  One thing to keep in mind is these investments are very illiquid.  Johanna has a good point about over-building.  Just because something has been a great investment in the past is no guarantee going forward.  Do your due diligence.

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                      • #12
                        Great point about not having a quarterly distribution on occasion. Needing to have extra cash around to make sure you can cover the loan in that event creates an opportunity cost issue as well.

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                        • #13
                          I try to never save cash for anything I can take a reasonable rate loan for.  Why have cash sitting stagnant for a year or two earning 1-3% when it could be invested.  When the time comes, get the loan, which will likely be a tax-deductible so effectively only 2-3.5%?  This is what we do with cars, equipment for the office, home renovations, etc.  I do pay non-mortgage debt aggressively though.

                          Comment


                          • #14
                            Is it a single specialty or multi specialty ASC?  Also do not assume that investing in ASC is without risk.  I have had a less than ideal experience with ours in the short term, losing about 80% of share price purchased and a halt on distributions.  Long term it will hopefully be a good investment.  I consider it part of my alternative class of assets which I don't want to be >8% of my portfolio (the rest being US and INT market cap index funds, and Bond index fund).  If you consider it as part of your portfolio it takes the emotions out of the performance.  There are not any asset classes I would borrow to buy into, but that is my own risk tolerance, and only you can decide for yourself.  Good luck

                            I do have a question, if you bought the share today how much of your portfolio percentage wise would the ASC comprise?

                            Comment


                            • #15
                              Admittedly the ASC was not part of my investment plan, nor were some other things (real estate mainly). But it has done well historically which I know doesn’t mean anything for future values/performance.

                              It would represent a minority of my investment portfolio. Single specialty for the most part.

                              Sorry yours hasn’t worked out in the short term, but I hope things change moving forward.

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