Dizzy

  • Search
    • Brokers
    • Haves
    • Wants
    • Transactions
    • Marketplace Advertisers
    • Directory
  • Blog
    • tBL Blog
    • How To Blog With Us
    • Blog Contributors
  • Marketplace
  • Advertise
    • Advertise on tBL
    • Marketplace Program
    • Placement Opportunities
  • FAQ
    • tBL FAQs
    • Why theBrokerList?
    • In the News
    • BULK SUBMISSION
    • Buildout Syndication
    • Site Updates
    • Contact Us
    • Feedback

Leasing vs. Buying Medical Office: The Upsides & Downsides

This post originally appeared on Ensemble Real Estate Solutions's Blog and is republished with permission. Find out how to syndicate your content with theBrokerList.

Share
+1
Tweet
Share7
Pin
7 Shares

By Tracy Altemus, CCIM Executive VP, Healthcare Brokerage Services Agent, Arizona, Nevada & California, Ensemble Real Estate Solutions and Marina Hammersmith, Senior VP, Healthcare Brokerage Services Agent, Arizona, Ensemble Real Estate Solutions

As you might imagine, there are many factors to consider when making a decision about whether your business should buy or lease real estate. If you’re hoping for a simple “one-size-fits-all solution” we’re sorry to disappoint—you won’t find one. Every business is different, with varying needs, requirements and objectives.

It’s always recommended that you create a separate entity for the purchase of real estate and have your practice sign a lease from the ownership entity. Ensemble’s approach to the question of ownership is to break it down into two parts: 1) Does this purchase make sense as an investor? and 2) Is the lease rate you will have to charge your practice competitive with comparable lease rates for a similar product? It’s important to consider each point independently and arrive at a consensus if you want to secure the best long-term outcome.

We have developed economic models to assist our clients in these assessments so we can compare outcomes with lease versus buy options, thereby arming our clients to make the best decision. Of course, there are other variables, besides just the economics, to consider. Let us break down some of the pros and cons of each approach:

Leasing Icon

LEASING:

Flexibility

Leasing offers greater flexibility than owning, so if you’re unsure if your business is going to expand or contract in the coming years, this option may be your best bet. Leasing also makes sense if you encounter the following prohibiting factors:

  • A short time horizon—a purchase can take three months or longer to close, and then you need time for any necessary improvements to make the office suitable for you.
  • Costs are high for building or buying when you’re ready to make a move—as purchase prices pick up, interest rates rise and/or construction costs increase; they can create a barrier to entry for ownership.

Costs

There aren’t many unforeseeable costs with leasing since your lease dictates what your costs will be and most high-ticket capital items fall to the landlord. Typically, the only variable is operating expenses, but these are the same on both sides of the lease-or-buy discussion, so they aren’t too important to the overall decision as whether to lease or buy.

Market Fluctuations

Of course, when you’re leasing you’re exposed to changes in the market at the end of each lease term.  If the market has risen considerably during your lease term, you could be faced with a significant increase in rent. It’s also important to recognize that if the market declines during your term, you will likely be able to negotiate a lower lease rate. In short, when leasing you are always riding the market.

Every market is different, but we’ve seen a very tenant-friendly atmosphere in the Phoenix area over the last five years—with attractive lease rates, paid tenant improvements, free rent and more. Phoenix is just now beginning to tighten up, with less supply in the market, rates inching up a bit, and more and more tenants now need to contribute out of pocket towards the cost of their own improvements.

One of the most important elements of leasing is that you have optionality at regular intervals. Nearing the end of each lease term, you are afforded the opportunity to evaluate all your options with your practice, your real estate needs and the market in order to make any necessary adjustments at that time.

 Buying Icon

BUYING:

Are you landlord material?

Although leasing offers more flexibility in your short-term future, owning lets you control your own destiny and potentially build personal wealth. Want your name on the building and the freedom to do whatever you want within the space? Then you might want to consider ownership. But with that control comes all the costs of ownership. Those high-ticket capital items that are covered by your landlord when you sign a lease become your responsibility when you’re the owner.

Risk

Owning—whether buying an existing building or constructing a new one—involves risk. When looking at ownership options you need to make some assumptions (i.e. guesstimates):

  • What do you need to invest now for the base building and any necessary tenant improvements?
  • What will you need in the future—are there deferred maintenance items, parking lot repairs, etc.?
  • If you have excess space to lease, how long can you carry the vacancy, what are the leasing costs and what rent can I achieve?
  • Most importantly, what will you sell the building for at a later date?

With “assumptions” comes risk. You can control some of the risk with insurance and warranties, but many things are out of your control, like the market in general, time delays and cost escalations. And if you’re looking at a condominium as an ownership option, some of your “freedom” to do what you want will be limited by the association restrictions, rules and regulations.

Market Fluctuations

The market might hit a downturn, we might have a recession, and suddenly you might find that your building isn’t worth what you paid for it, or what you were expecting when you started. We’ve all seen it happen before, and it can happen again. That said, even if appreciation doesn’t meet your projections, ownership might still be more financially advantageous than leasing because low interest rates and/or the tax benefits ownership provides could offset some market blips. Since those are based on an individual’s overall situation we always advise our clients to talk with their CPA.

Most building owners will tell you the best reason for buying is no longer paying rent to someone else (and watching them make money off of you). As we alluded to above, we advise our clients to have their professional corporation/LLC sign a market lease with a separate ownership entity which is presumably owned personally by the principal(s). This way, the tenant entity’s “rent” is a business expense to the practice and the profit is returned to the individual, and tax deferred until the investment is recouped.  Ideally with ownership, if you’re paying market rent to yourself, and paying your expenses and mortgage out of that rent, you pocket the amount left over as your return. Then a few years down the road—market willing—the building appreciates in value and you sell it for a sizable profit.

Should I build?

If you decide to build, there are a multitude of things to consider: finding the land, loan costs, construction costs, the possibility of rising interest rates, and a time period of no less than 18 months to two years from the time you start your search until you occupy. You have to ask yourself “can we wait that long to take occupancy?” And “what will the market and interest rates look like when you have to lock the loan in?” Also “how big should I build”? In any ownership scenario you also have to consider your exit strategy and what happens if your practice needs to expand or contract over time. Are you willing to possibly be a landlord to other tenants or sell and relocate?

TO LEASE OR TO BUY?

That is the question, and there’s no general rule-of-thumb for the answer. Except this: make sure you work with the right real estate advisor who has the tools and experience to help you make a decision you are confident in.

Nov 17, 2018Ensemble Real Estate Solutions
3 months ago Best Practices, Press ReleasesArizona Medical Office, Ensemble Real Estate Solutions46
Ensemble Real Estate Solutions

Ensemble provides services for all phases of healthcare development—from conceptual design to physician-specific marketing—under one umbrella.

Our all-inclusive service platform is unique in the healthcare real estate industry, where resources are typically fragmented between outside service providers. Ensemble clients have access to knowledgeable, cross-trained service providers for all of the healthcare real estate needs.

Specialties - Our healthcare-specific services include:

Land Acquisition, Development, Design and construction services for tenant improvements, Landlord/Seller Representation, Buyer/Tenant Representation, Property Management, Asset Management, Property Acquisition & Disposition Services

Understanding the lease - part 1NAI Isaac Brokers Sale of Starbucks Center in Lexington, Kentucky
  You Might Also Like  
 
Ensemble Real Estate Solutions hires Curtis Robertson as Controller
 
Ensemble Announces Claudine Rousseau as Lease Administration Manager
 
Ensemble Featured in New York Times

You must be logged in to post a comment. - Log in

 Advertisers 

 Subscribe 
unsubscribe from list

powered by MailChimp!

 #CRE Is... 
No. 6 Commercial Real Estate Is…Virtual, Lifelines, Passion, Fun
No. 5 Commercial Real Estate Is…Hardwork, Old School, & Funny
Commercial Real Estate is Teamwork and Creativity
No. 4 Commercial Real Estate Is Organizations, Kudos, Grassroots and Thanks
 Top 10+ #CRE Blogs 
Top 10+ CRE Blogs in 2017
Top 10+ CRE Blogs in 2017
1 year ago
Top 10 CRE Blogs 2016
Top 10+ CRE Blogs in 2016
2 years ago
Top Ten CRE Blogs of 2015
Top 10+ CRE Blogs of 2015
3 years ago
Top Ten tBL Blogs of 2014
Top 10+ CRE Blogs of 2014
4 years ago
Top 10+ CRE Blogs of 2013
5 years ago
 DNA of #CRE Survey 
#DNAofCRE 2018 Survey is OPEN!
1 month ago

It is with bubbling excitement and fanfare that we are thrilled to announce the 4th anniversary (OMG 4 years have gone by!) of the amazing collaboration between Buildout and theBrokerList to produce the 2018 #DNAofCRE Survey. Remember, we are saying 2018 because we are asking you to download your brain and tell us what you did last year!

2017 DNA of #CRE Survey Results are LIVE!
11 months ago

485 Respondents for DNA of #CRE Survey! Yes, you heard right, almost 500 commercial real estate professionals contributed to the 2017 DNA of #CRE Survey this year! That is an increase of 60% over last year! This year was so special because we had so much enthusiasm as a result of this being our 3rd year. […]

2016 DNA of #CRE Survey Results are LIVE!
2 years ago

Just an Idea The idea of the DNA of #CRE survey began as a collaboration between Buildout and theBrokerList teams. We all wanted to know more about the people who make up the commercial real estate brokerage industry because it has been such a hard to understand facet of real estate. Generally people think of […]

2015 DNA of #CRE Survey Results
2015 DNA of #CRE Survey Results!
2 years ago

Yes, it is true, we completed the first, official tabulation of the 2015 DNA of #CRE Survey! Please review and digest this historic attempt to obtain the actual DNA of the commercial real estate brokerage industry. Huge thanks to the team at Buildout for the amazing collaboration. It was our first one, so we are […]

 Categories 
  • Best Practices (1,049)
  • Brokerage Life & Leadership (252)
  • Business Trends (270)
  • Commercial Real Estate Is (6)
  • CRE Market Reports (301)
  • CRE Marketing (1)
  • CRE Promotions/Job Changes (41)
  • DNA of #CRE (4)
  • Done Deals (391)
  • Events & Conferences (97)
  • How To Use theBrokerList (90)
  • Marketplace Partners (1,860)
  • Member Blogs (14)
  • Press Releases (205)
  • Sponsored Blog Posts (2)
  • theBrokerList Podcast (1)
  • Top 10+ CRE Blogs (5)
  • Uncategorized (131)
 Company 


Contact Us
Technology Partner Program
Terms of Service
Privacy Policy

Copyright 2019 - theBrokerlist
 Connect 
Become a Member
Subscribe to theBrokerlist Daily
Subscribe to Property Announcements
Submit a Property Have
Submit a Property Want
Submit a Property Transaction
Submit a Blog Post or Feed
 Advertise 
Advertise with theBrokerList
Join the Marketplace
Custom Media Opportunities
Property Promotion Advertising [coming soon]

Heap | Mobile and Web Analytics
2019 © theBrokerList Blog