ODs’ guide to healthcare real estate

July 27, 2020

How confident are you in negotiating your office lease the next time it’s time to re-up the contract? When’s the right time to look at owning instead of renting? Were you supposed to have learned how to answer these questions in that one semester of practice management education back in optometry school?

Don’t stress. This podcast has you covered with a primer to optometric real estate, featuring commercial real estate expert Colin Carr, founder of Carr Healthcare Realty which represents only healthcare buyers and tenants. He answers the most common questions he receives from private practice optometric owners.

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Ideal practice location

“We ask our practitioners if they desire being in an office property with other medical professionals or do they want a retail property where people come to shop?” Carr says. “Usually doctors have a desire for one or the other, but we encourage them to consider all of their options.”

He recommends doctors choose the geographic area where they want to practice, then have their real estate agent bring them all available options in that area, both for rent and for purchase, for retail space or office space.

From there options should be narrowed down with the help of the real estate agent to the top 5 or 8 contenders before investing time physically going to see the spaces.

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Consider the following when selecting those top contenders:

• Adequate and convenient parking

• Visible signage

• Synergy of other tenants

• Cost

Also consider the local competition from other optometrists in the area of choice. Carr encourages doctors to do more than just Google to see how many other optometrists are nearby. Look at the office websites, social media presence, and the services these optometrists are offering. These other doctors may not be serving the same patients an OD would be targeting to serve in the same community, which makes them less of a direct competitor.

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A great opportunity for healthcare real estate location is in areas of new growth in the community. Finding for a new shopping complex with multiple new apartment buildings going up in the neighborhood, for example, could give an OD a chance to plant her flag before other competition enters the area.

“If you find yourself with a beautiful storefront and you pick up the synergy of other retailers that draw repeat shoppers like a grocery store, coffee shop, or nail salon, and then you couple that with a strong digital footprint, you can create a highly desirable optometric office location,” Carr says.

What to avoid

Carr encourages doctors to look out for shopping centers where fellow tenants could detract from the presentation of their medical office. As examples he cites concerns over the store fronts of more controversial retailers like vape shops, medical marijuana stores, liquor stores, and check cashing locations.

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Another consideration is the sounds or smells of nearby tenants. Locating next to a restaurant, for example, could create a concern when smells from the kitchen permeate into the office space.

“There is no perfect space; there is no perfect deal,” Carr says. “There is always going to be some issue even when you own a property. What we do [as commercial real estate agents] is to try to eliminate as many unknowns as possible.”

Rent or own?

Some consulting groups don’t favor ODs owning their locations, but Carr encourages doctors to understand that there are pros and cons to each option. Which choice is better for each OD involves a careful calculation of the economics.

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Leasing pros

“Landlords cut large checks for quality tenants,” Carr says. Look for benefits in your leasing agreement including:

• Tenant improvement allowance (or tenant buildout allowance). If building out or remodeling a property to suit an optometry office, it is customary to receive free rent during the buildout phase (around 6 months) and free rent after opening (another 4-6 months). This is money an OD isn’t borrowing and paying interest on.

• Renting a high foot traffic location which generates more patient revenue each year could be more economically advantageous than owning a location. “If you will make $20,000 a year more in patient revenue being in a highly desirable retail location where you have to rent, renting may still be better financially than owning a practice where you will be seeing less patients,” says Carr.

Owning pros

Remember that owning a physical building space increases net worth every year. And when looking at retirement, the ability to sell a physical location increases the value of the practice substantially over selling only the practice name and patient base. Carr encourages doctors to consider that owning is a long-term commitment.

• A buyer must like the property and want to stay for at least 10 years to get a good return on the investment.

• Understand that with owned property, the space is most valuable when selling to someone else in the same profession.

To decide if owning versus renting is best, Carr educates ODs to compare more than just monthly costs. Be sure to consider monthly costs in addition to leasing discounts like a tenant improvement allowance and eligible tax deductions.

“Sometimes it costs $3,000 a month more to own than to lease, but when you look at the tax deductions at the end of the year, the ownership opportunity beats the leasing opportunity financially,” Carr says.

How to negotiate a lease

This is an area that many doctors get wrong, and it costs them substantially, says Carr.

“Lease renewals are the most common transaction in real estate, it’s the number-one transaction where doctors leave money on the table, and it’s the number-one transaction where doctors get taken advantage of,” Carr says.

In commercial real estate, it is customary to negotiate with multiple landlords simultaneously. Negotiations are non binding, so it is normal and expected for tenants to go to market prior to lease renewal to find three or four properties and negotiate offers on all of them at the same time.

“When your landlord understands that you aren’t just working on one property but with three to four, they understand they have to be competitive and they need to come to the table with a great deal to get your business,” says Carr.

This is where hiring a commercial real estate expert can save a practicing doctor time and money. The real estate firm will do the homework in finding viable alternative properties, narrow them down to the top few contenders, and then negotiate simultaneously on these properties on the OD’s behalf. It is common for negotiations to go through three or four rounds of back-and-forth offers before terms are reached. The benefit of all of this work? It’s the only way to guarantee that at the end of the negotiation no money was left on the table.

Most doctors fall into a common lease negotiation trap.

“Ninety-nine percent of all doctors wait until the lease is a couple months from expiring,” Carr says. “Landlords love to run the clock out on your contract and put you in a place where they know you haven’t had time to research your options. With a few months left they will come to you and ask, ‘Do you want to renew?’ Doctors will say, ‘Sure, send me a contract.’ The doctor has communicated to the landlord, ‘I have no idea what I’m doing and I’ve totally missed my window. I’m not prepared to move so please don’t hurt me.’ If your landlord thinks you don’t have a strategy to move, you’re going to pay a premium.”

Instead, Carr suggests beginning to reasearch 12 months prior to the lease expiring.

The first step is to hire a commercial real estate expert to find viable alternative properties for consideration and conduct the due diligence on these properties. The real estate agent will submit offers to the top choices and go through several rounds of negotiation.

Once the agent has secured several contracts, he will contact the OD’s landlord to say, “I represent Dr. Smith. Prior to me calling you we have negotiated three contracts that we are strongly considering. Dr. Smith is open to considering renewing the lease, but it will be on very specific terms to make sure it’s competitive to her other options.”

The landlord understands that he must compete to earn the OD’s business and must come to the table with his best offer.

“That’s how you level the playing field with landlords,” Carr says. “If you don’t, it is going to cost you an extra $2 to 3 per square foot, which adds up fast. If you have a 2,500 square foot office, that’s an extra rent of $7,500 a year. Over the course of a 10-year, lease that’s $75,000 lost. Additionally, you probably didn’t take advantage of negotiating a tenant improvement allowance which could have been worth another $50,000 to $80,000 in free or reduced rent over that time.”

Carr offers resources such as a blog with real estate information and an evaluation tool for ODs to compare their rent costs against average pricing in the area.

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