DrSParticipantStatus: PhysicianPosts: 7Joined: 10/08/2018
Thank you to the community for your continued help and advice. A question many people on here must have dealt with previously: purchasing an office building or property for your main place of business.
Scenario: 13 doctors in sub-specialty practice currently in four different offices. We only own one of the buildings we will call north. Seven of the doctors practice in the south location. Ages of the doctors range from 33 to 72. We wish to purchase and or develop an office building/property to replace a south office. How would you structure the deal?
– Form a separate LLC to purchase, I assume? If so, how do you figure exit strategy? E.g., doctor X retires in two years who buys his shares? What’s the process? What about if a new doctor joins how do you calculate his buy in? A new evaluation each time? Let’s say the property is overall worth 6 million. A new partner trying to join would then be asked to front 1/6 of 6 million or something? Seems like a high hurdle. I’d love to hear your thoughts and experience.
Thanks for your thoughts!December 6, 2018 at 5:48 pm MST #172092CordMcNallyParticipantStatus: PhysicianPosts: 1410Joined: 01/03/2017
This is where having an attorney with this kind of experience can be valuable. It likely won’t be cheap but it’ll be cheap in the long run.
“But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
― Benjamin Graham, The Intelligent InvestorENT DocParticipantStatus: PhysicianPosts: 2476Joined: 01/14/2017
How did you do it for the North building? Are you all owners of this or just the physicians who practice there? If you are geographically diverse and want to commit to buying over leasing I’d recommend all parties going in on all locations. Unless everyone is bought in you have the awkward situation where partners are charging other partners rent. One wants the rent at the low end of FMV, the other wants it at the higher end. Conflicts of interest. You’ll need regular assessments of the properties for buy-in and buy-out purposes. Best to have the buy-ins and buy-outs happening over multiple years so you don’t get those large requirements.DrSParticipantStatus: PhysicianPosts: 7Joined: 10/08/2018
Thank you both for your help. The north building purchase was in fact an LLC purchased by only five of the doctors. It’s a bit more complicated because it was only buying part of a floor of one building. One of the doctors, I believe, doesn’t work the practice anymore. It does run into the conflict of interest problem which is why we were trying to figure out if there’s any other way to proceed. They do in fact charge rent back to all of us and there’s a conflict of interest there.December 7, 2018 at 9:21 am MST #172221RasterParticipantStatus: PhysicianPosts: 37Joined: 02/01/2016
One thing to keep in mind is that the building is, in many ways, a completely separate investment and some partners may not want to own it. It could easily add $500k-$1M to the cost of the practice buy-in, which in my experience will be viewed much differently by new grads with $500k in student loan debt than established physicians for whom this is 10% of net worth.
One option I would caution against is making things other than close to market value for the building purchases (buy-in and buy-our). With private equity groups being very aggressive in approaching building owners, it’s a recipe for discord to be required to sell your share for half of what you were recently offered.December 7, 2018 at 1:38 pm MST #172296jdkelsoParticipantStatus: AttorneyPosts: 3Joined: 11/30/2018
The sky is the limit on how this arrangement would be structured and I would not try to provide estimates because it is literally all over the board. It will mainly be dependent on whether the group is collegial or profit minded. The problem comes in down the road. Many times the owners want to pay a little bit higher rent which would be closer to the high end of market. (They can really pay themselves higher than fair market value for the rent.) They want to pay high rent because they will have better real estate profits. (This is a larger discussion also.) When a new physician comes on board, if the physician has to pay overhead before getting a bonus or has to pay a higher rent without ever getting to buy in, this can create a real problem and cause friction. I see this happening a lot in orthopedics. If market rent is $26 per sq ft in the area but the practice is paying rent to its own entity at $36 per sq ft, the practice may end up looking less interesting to a candidate. Sometimes the younger physicians don’t get this and they feel trapped and they basically are.