Real Estate Strategies for Healthcare Practices
Making the right real estate decisions is crucial for the success and growth of your healthcare practice. Your choice in a location will have a significant impact on your ability to attract patients and drive profitability. However, it’s also a decision that comes with many complicated questions. Should you lease or buy? How much should you spend? What terms are negotiable on a lease?
Real estate is a territory nearly every player in the healthcare space needs to be able to navigate. Providers ask these questions as they grow their businesses–whether they have ambitions for one location or twenty. Multisite DSOs or MSOs scrutinize the details of a location’s potential when acquiring a new practice or starting one de novo. Independent buyers and private equity investors review lease agreements line-by-line during the due diligence process.
In this article, we’ll explore key strategies and considerations to help healthcare practice owners, sellers, or buyers navigate the complex world of commercial real estate.
What is the process for choosing the right location?
Let’s start with a process for making an informed decision about a location, outlined in a recent Skytale Insights podcast episode with Skytale’s Ben Hernandez and guest Colin Carr. Colin is the founder of CARR, a healthcare real estate expert company for providers of all sizes and specialties. Along with this process, Colin and Ben cover many complex components of real estate transactions in the episode.
- First, know your financial situation. Consider your budget for either a lease or loan how much you’re approved for.
- Next, study the market. A commercial real estate agent can help you explore options based on your demographics, local competition, rent caps, and other factors. Consider both leasing and buying options, office spaces, retail, or land. Only once you know everything available in your current market can you make an informed decision about what will be best for you.
- Negotiate multiple options. With the help of your commercial real estate agent, begin non-binding negotiations with multiple options to better understand the numbers.
- Meanwhile, talk with architects and contractors. They’ll be able to offer insight about zoning and build outs that might help you make your decision.
- A CPA can help you better understand tax implications for leasing or buying a property, if both options are available to you.
- Run the numbers. They’ll help you rule out a choice with potential pitfalls or reveal the option that’s best for your business.
- Once you’ve found the right location, a real estate attorney can help you negotiate and finalize your lease.
Assemble a Team of Real Estate Experts
At every step in the process above, Colin emphasizes the importance of expert guidance. Eric Pastan, Director of Management Consulting at Skytale, echoes this sentiment. “It’s important to identify quickly who you need to bring in from an expert perspective, in order to help you with questions and fill gaps in your knowledge that you might have along the way,” Eric shares.
Expert guidance may include a healthcare-focused commercial real estate agent, an attorney, a CPA, market researcher, or an internal expert on your team. Whether you’re buying, leasing, or acquiring real estate, arm yourself with the best team to get the best outcome.
Conduct Demographic, Competitive, and Real Estate Research to Find the Right Location
There are many factors that will help you determine if a neighborhood, retail space, or building is right for you. Creating a detailed playbook that outlines your must-have criteria for evaluating properties can also be a valuable tool. This playbook should include factors like square footage, price thresholds, parking requirements, and other key considerations specific to your practice.
First, analyze the demographics of the area, including population size, age distribution, income levels, and insurance coverage. Make sure you’re choosing an area with a high population of your ideal patient. Understanding the competition and market saturation in the region is also essential. Is a location right down the road from your biggest competitor? Are there enough patients for both of your businesses?
You’ll also need to consider accessibility and visibility. Is there convenient parking available? Will nearby businesses attract the right kind of traffic? A pediatric practice may choose to be in an area with other family features, rather than right next door to a liquor store. A high-end medical spa may want to be positioned near retail, while a volume-based dental practice might drive patients from a nearby grocery store. Also, find out if you’re able to display signage. And if not, can you negotiate another part of your lease?
This type of research can ensure you find a location that is aligned to your vision and you brand–as well as to help you drive more patients through your doors.
Leasing vs. Buying: Weighing the Pros and Cons
Should you lease or purchase real estate? Both options have advantages and disadvantages, which we’ll outline below. Keep in mind that the best option for you will largely depend on your market and business.
Leasing:
Leasing can provide some flexibility, allowing you to adapt to changing market conditions or business needs. It also typically requires less upfront capital investment. With a lease, your landlord can take the responsibility of expenses and repairs that come along with the building, from septic tanks to air conditioning to roof leaks. Of course, you won’t build any equity in the property if you’re leasing, and you may be subject to rent increases or competition over time.
Buying:
Buying, on the other hand, can be a long-term investment that builds equity and provides some stability. It also requires a significant capital investment and may limit your ability to expand or relocate in the future.
Consult a CPA to better understand the tax benefits of purchasing. Could a write-off offset some expense? What does it look like after you paid down principle or after depreciation? Is it a location you’d still like to occupy in 10 years?
Finally, if you plan on transacting in the future, keep in mind that buyers are not always interested in buying real estate. While you may be successful in selling your practice, you’ll also have to consider selling the real estate that comes along with it.
Ultimately, the decision will depend on your practice’s growth plans, financial resources, and risk tolerance. Some healthcare organizations place importance on the real-estate side of their business, while others prefer to lease. You should look at all your options before making a final decision.
Negotiating Favorable Lease Terms: Being a Savvy Tenant
When it comes to leasing, the negotiation process can be crucial. Aim to secure favorable terms, such as tenant improvement (TI) allowances from the landlord, competitive rent rates, and flexible lease durations that allow for future growth. Your lease terms are 100% negotiable. Different types of landlords may have different levels of flexibility. A small mom and pop landlord may not have money to give you for TI, but they may be able to offer free rent during the buildout. A larger commercial real estate group might have more money to give, but tighter negotiation terms.
A savvy tenant is one who understands how to create posture in a negotiation with multiple options. It’s a mistake to only negotiate a single contract–it means that you don’t have a benchmark to compare other options. That’s why you should negotiate multiple options at a time to allow you to choose the one that’s ultimately the most competitive.
It’s also important to know how to negotiate lease renewals. Don’t push through them too fast when there are terms you can move in your favor. Keep in mind that your landlord would probably rather keep you where you are than have to leave the space vacant while they find a new tenant. Negotiating a renewal can save you money and improve your profitability and attractiveness to buyers.
Navigate Complex Real Estate Decisions with Skytale Group
By following a strategic process and making informed real estate decisions, healthcare practice owners can position their businesses for long-term success and growth. Remember, the right real estate decisions can be a powerful catalyst for practice expansion and profitability. For more guidance on this decision and others that impact the growth and value of your healthcare business, contact our team.
