Practice Matters: Real Estate Strategy for Healthcare Practices

What should healthcare leaders be doing today to create more flexibility and opportunity tomorrow? 

In this episode of Practice Matters: Executive Insights for Independent Healthcare Groups, Christina Sanders, Director of Healthcare at DMJPS, is joined by Mike Hammel, MAcc, of McGuire Sponsel and Andrew Reilley of CARR, Inc., for an insightful discussion on two often overlooked drivers of physician practice value: real estate strategy and tax planning.

Together, the panel explores how healthcare organizations can take a more proactive approach to facility ownership, lease negotiations, expansion planning, and location strategy, while also leveraging specialized tax incentives and credits that can improve cash flow and support long-term growth. 

From healthcare real estate transactions and market dynamics to tax strategies that many practice owners may not realize are available, this conversation highlights opportunities that can have a meaningful financial impact.

A recurring theme throughout the discussion is simple but important: plan early. The most successful organizations evaluate these decisions well before a lease renewal, acquisition, relocation, or major investment is on the horizon.

Be sure to stay through the end for a Q&A session with Christina, where Mike and Andrew address common questions and share additional practical guidance for healthcare executives, physician owners, and practice administrators.

DMJPS CPAs + Advisors provides specialized tax, accounting, advisory, and healthcare consulting services to independent healthcare organizations across North Carolina. Through Practice Matters, we bring together healthcare leaders and industry specialists to discuss the strategies shaping the future of independent healthcare.

Give it a listen.

Presenters: Mike Hammel, MAcc - McGuire Sponsel + Andrew Reilley - CARR, Inc.
Facilitator: Christina Sanders, CPA - DMJPS Healthcare Director

Transcript

SPEAKER_01 0:00

Hello and welcome to Practice Matters, Executive Insights for Independent Healthcare Groups. I'm Karen Rodriguez, Chief Marketing Officer at DMJPS CPAs and Advisors, and we're excited you've joined us for another conversation focused on helping healthcare leaders make informed decisions that strengthen their organizations today and position them for success tomorrow. At DMJPS, we work with physician groups, dental practices, and healthcare organizations across North Carolina and beyond, providing tax, accounting, advisory, and healthcare consulting services that support growth, operational efficiency, profitability, and long-term strategic planning. Today's episode features a full house. Joining us are Mike Hamill, Shareholder and Relationship Manager of McGuire Sponsor, and Andrew Riley, commercial real estate broker specializing in healthcare properties at CAR. Joining them is our facilitator, Christina Sanders, Director of Healthcare at DMJPS. This conversation explores two critical drivers of practice success that often don't get enough attention until key decisions are on the horizon: healthcare real estate strategy and proactive tax planning. Mike and Andrew share insights on everything from leasing and expansion decisions to tax incentives and planning opportunities that can strengthen cash flow, preserve capital, and support long-term growth. If there's one takeaway from this episode, it's simple. Plan early. The best opportunities are often available to organizations that start planning long before lease renewal, expansion, or major investment is on the horizon. And be sure to stay through to the end for Christina's QA session where our panelists answer audience questions and provide additional insights on real estate, tax planning, and long-term practice growth. Thanks for listening and let's get started.

SPEAKER_02 2:03

My name is Christina Sanders. I'm a healthcare director here at DMJPS CPAs and Advisors. One of the goals of this series is to provide more than theory. Each session is designated to deliver practical insights that you can apply immediately, along with strategic thinking that practice leadership teams need to make informed decisions. Real estate is one of those decisions that touches everything from cash flow to tax strategy to patient access and long-term enterprise value, making it a critical area of leadership oversight. Now it's my pleasure to introduce our speakers. First, we have Michael Hamill. He's a shareholder with Meguiar Sponsor, where he focuses on cost segregation studies and tax strategies related to real estate ownership. Joining him a little later is Andrew Riley, a healthcare real estate broker with Carr, who specializes in advising medical practices on site selection, lease negotiation, and ownership strategies. Together, they bring a unique combination of market expertise and tax strategy insight, helping practices think more holistically about real estate decisions. At DMJPS, we believe strongly in surrounding our clients with the right expertise in relationships like this that allow us to deliver even greater value to the practices that we serve. With rising costs, tighter reimbursement, increased pressure on margins, real estate decisions have become one of the most impactful and often overlooked drivers of long-term performance. Without further ado, I'll turn things over to our presenters. Mike, I'll hand it to you to get it started.

SPEAKER_03 3:51

Thank you, Christina. Thank you guys for everybody and taking the time here to join us and to DMJPS for the opportunity to work alongside you guys and talk about some key insights as it relates to independent health care groups because it is a very key piece when we start talking about the tax planning and various strategies that are out there for various business owners, especially in the healthcare groups. And then as Christina talked about, Andrew will talk a little bit more about the market conditions, but I want to make sure that we have enough time to kind of cover some of everything today. But I'm a shareholder with a firm based in Atlanta. We've had a strong relationship with DMJPS over the years, helping support them and in a various multitude of ways, and one being the real estate space alongside cost segregation. And I don't want to spend the bulk of the time talking about us, but really want to get into the meat of today's topic around real estate, cash flow, tax planning, and things to be aware of because there have been a lot of changes when you look at the tax landscape with the one big beautiful bill. Everybody's heard about it, whether that be the OB3, the OBBA, right? There's all these terminologies that are out there, but it is presenting a lot of business owners with opportunities to plan, to invest, figuring out exactly how those match up, not only on the business decisions that you guys are making, but the tax strategies that go alongside that. And so most of our conversation will be centered around the fixed asset practice of what we call it, which is cost segregation, property tax appeal work, a lot of various decisions that go into this that are mainly driven off of the real estate initiatives that healthcare groups go out and reinvest with buying property, building property. And then as those start to come online and go into service, obviously there's property tax appeal work and assessments that come into it. And so our agenda today to talk about is really in a series of three different ways. It's what is cost segregation and what's the power of cost irrigation, what are some of the updates out of the one big beautiful bill that basically fuel costation in a way to help the planning opportunities. And then to close out before handing it over to Andrew will be mainly on the property tax assessments and what we're starting to see both on real property and personal property as it relates to various independent healthcare groups. And so switching gears when we start talking about cost surrogation, really what it is, right? The in essence, it's all about time value of money. So when you look at a building, especially in the commercial space, it's typically depreciated over 39 years. Okay. So what we're trying to do is to increase cash flow, speed up deductions, because when you look at a building like a medical office building or a dental practice, an office building that you then lease out to dental practices or various healthcare groups, is you have a building that's over 39 years, what can we move into a 15-year land improvement? So anything on the outside of the building. So think of parking lot, curbing, landscaping, any of that exterior work, or anything on the inside into a seven or five-year bucket, because when we do that, it's placing a deduction in the year that you file your return and also speeds up cash flow to help offset any tax bills that might be generated in the year that the building's bought, the year that the building's placed in service. And then there's also additional opportunities as we get into talking more about what when a study makes sense and what exactly how to utilize this is any renovations. We see this a lot in the healthcare space where you might not own the building. You have a landlord that owns the building and you're leasing to it, but there's a tenant improvement allowance to go build the space out, and you can also be you're also depreciating that at that point in time. So there could be potential leasehold improvements that you could take, and those are also eligible for bonus depreciation, which we'll talk about later on. But in short, it's really a cash play because cash is king in today's world. And now with bonus depreciation being where it's at, we're trying to monitor that, work alongside DMJPS to say, okay, here's this deduction because we bought a building. How are we then going to utilize that in that tax year and when does it make sense to take it? Because looking at studies, yes, there's these deductions, there's these great opportunities, but it also needs to marry up with when you are able to take it. And so it depends on the ownership group, depends on how everything's structured and how everything's set up. But these are the three areas that we tend to see a lot of cost segregation opportunities come into play. Anytime someone's buying or building a building of an in a basis amount above $750,000, and that's when you back land out. So we are talking depreciable basis when we look at this. And then secondary to that is renovation costs. So if you're enhancing a space, if you're building out a space of let's just call a couple hundred thousand dollars or more, then there's some planning opportunities around bonus for those years that those assets are placed in service or when construction is complete at that point in time. And then the third one is often in a very overlooked area, is you know, we say depreciation records for numerous assets. Well, there are cases where you know you might already own real estate. Let's just talk that you're expanding and you're expanding your footprint into various geographic areas and you want to own your real estate. Let's say you're on your third expansion, but you haven't looked at doing cost segregation on the second or the first expansion at that point in time. If they've been placed in service over, let's just call it a three, four, five-year period in this example. Well, we can go back and claim some of these deductions, and we don't have to amend returns. Working alongside DMJPS, there's various accounting forms that could be filed to speed up that deduction and take it on your current year tax return. And so it creates planning opportunities and cash flow management for various practices because you can go back and perform a study. You don't always have to do it the year that you place it in service or the year that you buy it. And so, like I said, that third bullet point right here is often an overlooked area. And I wanted to provide a couple of examples because I thought you know talking through stories and specific projects can be a good opportunity to just shed some light to what we're talking about here. And so this was a building, a surgery center that actually was acquired in 21. So it was what we call a look back study when we start talking about depreciation schedules and buildings that have already been placed in service, and it was also renovated for a healthy amount. And so you look at a total total basis amount, you're probably pushing close to let's call it 7 million, right? 7.1 million in those years. And so we were able to move 30% of that into a shorter life. Okay. So the cash flow amount over the first year was a little over a million dollars on about a $7 million investment over that period of time. And then when you look at the lifetime of that study and speeding the deductions up, it saves them about $685,000 over the life of the building, assuming it's depreciated all over 39 years. And the one key part here, which we'll talk about again, is bonus depreciation. They were able to take 100% bonus depreciation on this specific property and offset over $1.25 million in that example. So it is a very powerful planning tool when you start looking at buildings that are placed in service and anything real estate driven that you're buying, renovate, or building. Switching gears to another example is on a medical office building. It was acquired in the same year in 25 for about 1.5 million, renovated for about $200,000 to build out office spaces and lab spaces that were in there. And in this example, the same thing applied. Because if they're able to front load some of these things, take deductions, they can use some of that money for other reinvestment or whatever that situation might be from a business perspective. And so a lot of switching gears to here, guys, to the One Big Beautiful Bill. A lot of people have heard about the One Big Beautiful Bill and what that means to various business owners across the country. But I really want to kind of walk you through a timeline because there have been so many pieces that have changed from a tax law perspective. We had the Tax Cuts and Jobs Act, and as it relates, you'll see all this terminology on here because tax people like to talk in numbers and letters. But when we look at this, is the the essence of this is when the Tax Cuts and Jobs Act was passed, it opened up our opportunity to take bonus on acquired properties. So you look at that after September 27, 2017, you might have assets that are already placed in service over the last couple of years. Well, those, even though we go back, we still are eligible for bonus depreciation in those years. And so that is one of the key parts out of the Tax Cuts and Jobs Act from a timeline perspective, is we're able to take bonus on acquired property, which is crucial for healthcare owners of real estate. Second to that, now we switch into about a year in to date on the one big beautiful bill. And so now we're reinstated at 100% bonus depreciation moving forward, which is really key. It creates certainty around planning. You know some of the cash flow perspectives when you look at acquiring real estate, buying equipment, right? A lot of these things apply when you start looking at the landscape of the real estate community, but it creates certainty right now around building buildings or buying properties. Because when you look at the financial forecasts over the next couple of years and you say, hey, I want to add two locations. Do I want to lease? Do I want to buy? Do I want to build? All of those models can be can come to light, but they also provide different deductions coming back and how much you can take. And so working alongside DMG DMJPS to make sure, okay, yes, from a tax-lepan perspective, we have all these deductions, but how does it fit your business needs? Because bonus is certain for now, right? So now that helps crucially when you sit there and do tax planning. And so those are the biggest changes when we look through the one big beautiful bill is going back to the Tax Cuts and Jobs Act on acquired property. Okay, that's the first key piece. And then the second key piece is we have certainty right now when it looks at 100% bonus depreciation moving forward. Those are two important pieces because it just helps manage your cash, it helps understand kind of where the business is heading, but it also understands some of the planning opportunities that might make, you know, from a business owner's side to make decisions off of. Because if you look at expanding and growing your practices, yes, you know, tax decisions are crucial to that equation. They don't mean everything when it comes to those equations, but in in certain cases where you have leased property and you have a lesser opportunity to take a deduction than actually owning real estate, that can change some of the key pieces to kind of manage are always property taxes and insurance. Those are two really, really high ticket priced items when you start talking about managing properties. And so over the course of time, property taxes as it relates to real property, you've started to see a lot of assessments just continually rise and rise and rise, right? So this is definitely one of the largest line items when you start looking at owners of real estate, especially on the real property side, and various local levels change and they always operate very differently to where you might have certain counties that have various pieces to it that sit there and talk about, okay, my assessment has gone up. Maybe I didn't change much to the property, maybe I changed a few things throughout the years. Um, and now my bill just went up 30%, right? What why, right? Trying to look through some of those pieces. Maybe the tax assessor is just kind of throwing a dart at a dartboard sometimes just to see kind of where those appeal oper or those assessment opportunities are lying. And so it is very crucial to get a process in place when looking at property taxes. If you're paying around $50,000 a year in property taxes, it's worth taking a look at just to make sure that we get an understanding of kind of where your appeals are falling, why they're going up. Is there an area to kind of talk through some of the uh assessments to make sure that we're appealing them when we start going through it? And then there's there's a there's a good opportunity on the real estate side when looking at these, but the last thing you want to do is always just appeal to appeal. And so we want to make sure that when we look at properties, especially with healthcare providers, that we're looking through some of the real estate pieces and where those assessments have fallen. And there's also it's always location driven, and so it's understanding the county and the deadlines and what that might look like because every county is so different in the way that the appeals need to be done. There's there's really two different windows that come into looking at property tax assessments and appeals, is you have this formal appeal window and an informal appeal window. And so the informal appeal window is really where you have more leverage to talk through why the value is at where it's at. Do we need to take a different approach, right? Maybe if it's a multi-tenant space and there's certain situations where individuals are getting hit with a higher tax bill that year on the property tax side, but there could be vacancy in some of those other areas, could which could lend into some of those stories and the narrative to push for a reduction. And so I would always tell people that when you look at an over-assessed building, you're probably looking at about a 10 to 15% reduction in taxes paid. Um, again, going back to the concept of cash is king, cash flow is very important. And so when you look at taking cost irrigation and all these deductions, but you're also looking at various assessments that can go up on the real estate side. Um, any dollar coming back is very, very critical and back in fueling reinvestment. And like I said earlier, too, is property tax and insurance are two big ticket items when you start looking at real estate as a whole. And so managing that process and walking through what that looks like is crucial when evaluating some of these pieces for business owners. The second piece to when looking at property taxes, which doesn't always come into the mix with healthcare providers, it can certainly, depending upon if we're talking about like a hospital in certain situations, is the personal property side. So personal property, again, is very similar to real estate, right? There's a process in evaluating the personal property, et cetera, et cetera. It's part of kind of a filing year over year that individuals have as well as the businesses have. But you know, managing the machinery and equipment that comes in, or when this side, you think of all the equipment on like surgery centers or various healthcare groups that are buying equipment year over year. Yes, you can write those off as they come into service on the depreciation side. So you're getting a deduction there. But we also want to make sure that we're disposing of ones or getting rid of ones that are already on are already on the books. And so there's different valuation methods and reporting requirements that need to be met at the at the at the various levels that you look at on the personal property side. And we often need to make sure that we're reviewing those records to say, okay, are we overvaluing our personal property, which would raise our personal property bills those years, or do we have some ghost assets or obsolete assets that are sitting on the books that we need to get rid of so we're not paying more? And so, again, going back to the concept on the tax side is we we need to be managing our cash flow because cash is king. Again, I can't say it enough. And there are so many opportunities that are sitting out there from a bonus depreciation perspective or a property tax appeal perspective to manage that cash flow. Because if we're able to move some money around and get you and get business owners' cash back in their pocket, that just helps the reinvestment to grow the practice, or even look at it from just a business planning perspective of making various payments, kind of putting debt down or whatever those situations might be based on those parameters. This kind of lends into some some QA. I know. Um, and so I don't know, Christina, if you have a couple questions that we we might need to address before shifting gears into the market conditions with Andrew.

SPEAKER_02 20:08

Yeah, Mike, one question. Um, once a practice decides to purchase a building, are there any additional tax planning opportunities that physician owners often overlook?

SPEAKER_03 20:24

So it's a great question. So I would I would sit here and say yes, because there are some overlooked opportunities potentially when you look at buying a building. So you buy a building, right? We talk through cost irrigation and property tax appeal. Most times people think that cost surrogation is like a one and done. And so they discount some of the renovations that could be going into the building down the road. And then that is one key piece because you know, if you go in and buy a building and take a cost seg on the initial purchase, yes, you're getting this deduction opportunity, but there's also renovations down the road that you might have an upfit, uh, you might have just kind of like a facelift on the property. And so there's one piece of tax law that I did not talk about here, which is called qualified improvement property, which is basically any interior renovations to a building already has a 15-year life bonus eligible. So you might perform a cost irrigation study on the initial purchase. You might not need something formally done on the second renovation because of QIP. Um, we just need to look through the costs and work with DMJPS to make sure that it aligns. But you could have multiple deductions that come into play over that period of time as long as you understand what those renovations look like and the cash flow management looks like.

SPEAKER_00 21:45

I am Andrew Riley. With me today, I've got Stephanie Daniels and Alison Burrell on our team, and I'm going to discuss real estate strategy for your healthcare practices. Uh Car is a nationwide uh brokerage. Firm that exclusively represents healthcare practices and providers. The impetus of Carr was 17 or 18 years ago, Colin Carr, our founder in Denver, actually represented the other side. He represented the landlords and asset managers of the transaction. And consistently, he found that healthcare providers on the other side of the transaction were unrepresented. They were unrepresented and therefore didn't know market conditions and didn't know potential concessions that they could get. So Collins saw an opportunity to represent the unrepresented in healthcare providers and practitioners. Still today, the data says that 19 out of 20 healthcare providers and practices are unrepresented in any real estate transaction. So we are a firm, like I said, nationwide, but a little bit different than a lot of brokerages out there. We are tenant buyer exclusive. So we don't uh represent the landlord, we don't represent the seller. And that makes us really unbiased approach, uh true fiduciary duty when it comes to representing the client uh or the the healthcare practice. Like I said, healthcare focused, there's many commercial brokers out there, but they don't necessarily, by and large, they don't necessarily have a niche. Uh, we are specialized uh in healthcare. That's our bread and butter. So we have a national platform, which we'll kind of get to, uh, doing a lot of the early data dive as far as demographics and insights to form a complete market analysis when looking at uh prospective spaces for practices. But we also have the local expertise. Our team is based in North Carolina and knows the market inside and out. So ultimately, uh when we look to either get a practice into a lease space or a purchase space, we're looking at uh making informed real estate uh decisions and also and ultimately driving profitability, right? So, why does real estate matter? Uh patient access. Uh in this, we can talk about the micro in sort of uh ingress-egress of the location, how easy is it to get in and out, uh, the parking. Um, you know, that's that's a big thing. When when you have patients going to your practice, you don't want them circling around the parking lot for 20 minutes, right? That's a huge turnoff. That that could be then going next door to uh the other provider because they're turned off on that experience, right? Uh also it it relates to the macro in how accessible is it in terms of is it right off of highway? Uh are you doing a bunch of U-turns before coming into the practice? Uh so it goes both micro and macro. How easy is it to recruit both staff and providers to that location? You know, for for Riley, for Charlotte, this might, depending on uh the submarket, might not be that big of an issue, but maybe when you get to some rural areas, there could be a struggle that you have to take into place or uh consider when looking at real estate. And then operational efficiency. How does your clinic flow? Are your patients bumping into each other? Is there a huge backlog of patients at the front desk uh waiting to be seen? You know, is that line six, seven deep instead of having multiple front desk personnel? Do you have growth potential at the current location? Is there space to add providers, to add associates or staff members with the square footage? And then ultimately, uh you know, real estate is the second largest operational expense next to payroll. So it's a huge deal uh flowing down to the PL and ultimately uh either increasing or decreasing practice value. So the main topic today we're talking about purchase versus lease. This is uh probably one of our biggest questions that we get asked. Should I purchase or should I lease my space? And I would say apples to apples, nine times out of ten, the uh the answer is probably purchase your space if the lending capability is there, if everything else lines up. But nine times out of ten, that's probably not the case that things are apples to apples. So we have to take the whole picture into consideration. So with lease, you have flexibility. Uh, as far as short-term goes, maybe it's better with a startup or uh with a retiring uh practicing that's looking at retiring in uh five to ten years. You have lower upfront investment, uh by and large, you are going to pay uh tenant improvements if you're if you're building out a space for say $200 a square foot and it's 3,000 uh square feet, you're looking at 600k, right? Now, tenant improvement allowance is going to um you know take up a chunk of that, so you're only paying a portion, hopefully, but still you're gonna have to consider that. Easier expansion if you you're currently in say 2,000 square feet and you have some practice growth. In a couple years, you can easily, if you're in a short-term lease, easily expand to uh your square footage, so 3,000, 4,000, etc. And obviously with uh purchase, you have that equity, that wealth creation, uh, greater control long-term to do what you want to do to the space without being behold into the landlord, uh, and ultimately land term uh excuse me, long-term value. So at the end of the day, what we do with our clients, our practices is we evaluate our options. Uh, we look at purchase, we look at lease, uh, we look at the whole scope and see what's out there. So, a big consideration with the purchase versus lease, here's a snapshot of Charlotte, just to give an example. On the left, you'll see the leasehold spaces uh available. This is 2,000 to 4,000 square feet. Your kind of average outpatient clinic. This is availability. There's 600 leasehold spaces in Charlotte available, right? Now, of course, typically you're gonna filter down to a submarket or a certain um certain asset type, but this is just to give a wide uh view of this. On the right hand side, you'll see Charlotte purchase opportunities. Now, there in contrast, only 60 available spaces. So, again, taking apples to apples, this is not really apples to apples. You you might not have that ideal location in the purchase opportunity. So we have to take that as a consideration and look at the whole market. So, how do you ultimately make the best decision for your practice? Will you have similar practice success at a percept perspective, excuse me, lease space versus a purchase space? Is that space on the corner of Main Street with high visibility the same as the space that's um you know off the beam path, but you have the ability to purchase that? We have to evaluate that uh from you know a practice perspective. That's where you let uh you know obviously uh lean on your consultant uh to help you out there. You know, that visibility, what's your marketing spend? Uh are you are are you a practice that is invested heavily in marketing? And it might not matter if you're uh hidden in a medical office building, or do you have referrals, a referral source coming to you where again that visibility, uh that increased signage might not be the biggest deal. And like I said before, we look at a whole range of demographics when prepping a client. This goes from competition, demographics, including income, age range, uh, population growth, patient keep mapping, payer mix. All these we want to take into consideration to find what might be the best location for your practice. So this is a purchase versus lease analysis that we regularly look at with our clients. Um, and this is just to show the financial impact. Obviously, again, you need to lean on your CPA uh for advice here, but this is at a high level, showing you the pre-tax costs. You know, on the left you see 291,000. That's a purchase, it should be labeled here. But on the right, you see $270,000 of pre-tax cost, that's a lease. Ultimately, with the deductions and after uh tax benefits, you know, monthly costs are pretty much equal. So, what do what do the tax implications say about our decision? Does it sway the decision one way or another? We take a look at that every time. So if you lease or if you have a client that leases, do you know your critical lease dates? Uh lease expiration date, pretty self-explanatory, right? When does the lease end? Notice deadline. Uh, typically 90 to 270 days uh before expiration. Uh probably the average is 180 days. If I didn't see 180 days or the landlord pass something off that was longer than under 180 days, I would definitely uh fight for that because obviously you want more time to make that decision in the deadline for actually executing the renewal or the new lease, depending on the situation. So ultimately, we what we're we're getting at here is the more time you have, the more leverage or what we call posture you have in an in the lease negotiation or purchase negotiation. So you need to plan early to evaluate your options and assess the market. You know, medical build-outs alone conservatively take five to eight months. If you're looking at a lease renewal, you want to plan 12 to 18 months ahead of time. And the worst thing that you could do is wait because the landlord's just gonna burn out the clock and give you a uh unfavorable lease term, you know, a month or two out from your expiration. And then uh you really have no option but to sign. New construction timeline, two years minimum, uh, you know, two years to two and a half plus uh for permitting plans, design, uh going through red tape, depending on the jurisdiction. Uh, it's it's a lengthy process, so you want to be prepared. So if you're unrepresented, you would think that the base rate is the most important thing. And while it is certainly important, it's not the only negotiating point that you want to take into account. So we look at obviously tenant improvement allowance. Again, if you're building out a space, it's gonna be rare that you're a specialty moving into the same second gen uh specialty space. Uh you know, it's it's gonna be rare that that's that perfect space. Generally speaking, uh, if you do go into second general, second generation medical space, you're gonna be doing some renovation. But if you're a cold dark shell, meaning the blank blank slate, you have to do electrical, HVAC, plumbing, etc., for a medical space, you're looking at 200 plus per square foot, that's a lot of money. You want the landlord to be on the hook for that because you are investing in their space, right? Free rent, free rent uh is something that the landlord is often willing to uh give. It doesn't at the end of the day affect their building valuation because they're looking at numbers, net operating income at the end of the period, which isn't affected by the beginning of the period. So uh we'd love it for to be true free rent to be within that say 10-year period. Oftentimes it's a baited rent, it's gonna be added on. So there'll be, for instance, if you have three months of baited rent, it would be three months within a 10-year and three-month period. So you're getting the three months free on the front end, but it's within a 10-year, three-month period. Build-out period, you never want to pay for rent in the build-out period. Uh, that should be a given. Uh, you're building out the period, there's no need for uh a tenant healthcare practice to uh pay for that. Controllable expenses. Uh, we want, generally speaking, a cap on all controllable expenses. This is anything from common area maintenance, um, landscaping, repairs, things of that nature. Non-controllable would be your your taxes, your insurance that the landlord is is, depending on the lease, is paying or not paying. Exclusivity. Um this depends on the landlord and negotiation, but if you're a specialty practice, uh, this is probably going to be important. You don't want that other specialty practice coming in next door and setting up their practice as well and potentially taking away patients. Assignment, this is vital. Uh, if you're going to sell your practice in the future, uh, you want uh assignability uh for the lease so that the new practice owner can readily take that lease over a little bit before, but uh you don't want patients uh struggling to find your place. Uh I've come up against that uh a few times in just my travels, uh, a location that's very hard to find by Google, by Waze, etc. Um, it's convenience, right? Doesn't always have to be uh first floor. Um, obviously, if it's not, it has to have you know ADA compliance, elevator, etc. But um to have signage, to have uh the ability to easily get to that location is obviously important. Staff recruitment and retention again touched on this a little bit. Uh, you want to be able to easily get uh staff and be able to retain them. Like what what is that what does that look like in terms of XYZ location, right? Um it's going to, of course, be different in different markets, so I don't want to paint a broad brush, but uh you want the location and the area to be attractive. Uh visibility and accessibility. Um again, does that matter to your practice? It may, it may not. It depends on how uh how you see your practice and how you see your growth and the specialty uh there. Parking, uh parking is huge, uh obviously for for most, if not all, uh healthcare practices. We'd like to see at least four spots for a thousand um thousand square feet. So that'd be obviously if you're talking about uh a 10,000 square foot uh medical office building, 40 spots. Um, you know, I've again I've dealt with situations, uh been at medical office buildings where it's it's truly a hassle to get a parking spot. And what does that do to your patient base? Um without patients, obviously the the revenue decreases. Uh competition and paramex, we look at the competition. Um, where are they located uh within a one, three, five mile radius, um both for expansion locations, new locations, relocations. We can look at all that. And then, of course, the paramex. What does that look like from a commercial standpoint? Space planning. Um, oftentimes I'll go into an office and I'll see you know 20, 25 seats in a waiting room, and there's one, maybe two people sitting down. That's a that's a huge potential waste of space, depending on if that's true throughout the day. Obviously, there's ebbs and flows, but if you're not maximizing your space capacity for uh for the practice, you're ultimately wasting dollars, you're paying your rent or your mortgage based on a per square foot basis. So uh you have to look at that. Underutilized exam rooms. If you have 10 exam rooms and you're only only using six, there might be a problem there. Of course, if you're looking to the future, future provider, future staff, that could be a different story, but it's what does your efficiency look like? Um, and then you know, poor workflow design, are patients, are staff running into each other? Is there a good flow? Are staff able to easily access what they need to access? That could be a time is money thing. If you're if your staff is doing, you know, taking five minutes to get uh some supplies that aren't easily accessible, that's money at the end of the day. That's not able to turn over those patients uh more frequently. And then no future growth capacity, what does that look like when you want to uh bring on an associate, right? So some some hidden costs, the the cost of a bad location. You know, if if your staff comes in, if your your associates come in and it's just not appealing to work in each and every day, you've got uh poor uh a poor design or antiquated um antiquated design, uh it's it's tough to retain that stuff, right? Uh, versus you have a brand new space, um, it increases morale, uh patients want to be there. Um, it's a completely different vibe than the former. So the the poor workflow and operational inefficiency we touched on, difficult expansion or growth. Um, and then ultimately this gets down to you know, again, patients aren't coming in the door, reduce practice value because you're spending money, but the patients aren't coming in. So a couple of trends that we're seeing in the market. Uh Raleigh and in Charlotte Metros are some of the fastest growing uh markets in the southeast. Uh, medical office vacancy is around 7% right now. You compare that to traditional uh traditional office vacancy are between 11 and 12 percent. Um so medical office building, the takeaway here is that medical office building is highly competitive, and that means that uh rental rates are going up, increasingly going up month to month. Um, and again, demand is supported by people moving here, aging population. A couple more trends, uh PE investment, et cetera, and growth. You've got a lot of groups coming in. Uh, of course, we know about the hospital systems, uh, construction costs, you know, with geopolitical events, etc. Um, what I'll say about that is is if you start a project, say a ground up construction day one, and your GC gives you a cost, if they're within 10 to 15 percent at the end of the day, that's very good. So you need to be able to have a variability there that you need to go through plans, a lot of steps, due diligence before you can really get a finite handle on cost. Um, so a lot of you know, we'll throw out numbers. Um, we like to be conservative, uh, you know, first and foremost, but it is a situation where there is variability in construction costs, and you need to be prepared for that. Land costs remain elevated as well. Back to my inventory slide with decreased inventory of buildings, land. If you can find a piece of land, and that can be hard as well, but there's opportunity potentially, depending where you are, for a land purchase if you want to own. So increased rates for uh leasehold space. We're seeing, you know. So 30s at least for highly sought after, you know, Class A medical office building, retail, medal, you know, 40 plus in Wake County, uh 60 plus in Mecklenburg. You know, if you signed on during uh COVID, all those landlords are trying to get trying to get uh tenants into their space. So don't be surprised if you did if you signed on during 2020, 2021 on a five-year lease, there could be a dramatic increase in your rental rate come renewal time. Uh, you need to be prepared for that. So, questions to ask your practice or client. We talked about it. When does our lease expire? Is it still the right location? Can we recruit staff? Is the pair mix supportive for what we're doing? Can we grow? Can we expand? Uh again, lease versus own. Should we own? Uh, are we planning early enough? If you're not planning at minimum 12 months early, you're not planning early enough. So, again, start early, always be talking with internal and external teams. Understand your practice goals and how these align with real estate and absolutely have a strategy with your teams. Uh, don't leave it to chance. Chance is not a strategy.

SPEAKER_02 45:25

All right. Thanks, Andrew. Couple more questions. Andrew, this first question is for you. As I am considering next steps, how many options should I evaluate?

SPEAKER_00 45:38

We like to evaluate as many as possible. Uh, we do that on the front end for our clients. We're looking at the market. The worst thing you can do is only have one option. If you have leverage, meaning two or more options, the chances that you're going to get concessions at the end of the day go up. So at minimum, you should have two options.

SPEAKER_02 46:04

Perfect. Thank you. Mike, if you are there, this is a question for you. At what point should we reach out and talk with you when we are considering purchasing a building or doing a renew?

SPEAKER_03 46:20

Yeah, great question. So, similar to Andrew, I would say as early as possible, right? Because there could be certain situations where you could be evaluating multiple practices to buy. And so we could always put numbers together before they close on a deal or close on a building. Sit there and say, hey, option A provides this much of depreciation versus property B. And so how you evaluate that could dictate where you want to go with a practice. And so I always say early on in the process, because we can always ballpark numbers, and then those numbers can always change from the benefit side, just so business owners know what they're getting into.

SPEAKER_02 46:54

Perfect. Okay, Andrew, this question is for you. Many physicians assume ownership is always better, the better long-term financial decision. How does today's interest rate environment play into that? And is this still true, or are you seeing situations where leasing may actually be the stronger strategic choice?

SPEAKER_00 47:16

Yeah, at the end of the day, I think we we as our broker team, we analyze both options and you know, we work closely with our lender partners uh to understand the markets or excuse me, understand the interest rates and then uh look at does it make sense to purchase versus lease? Just put it in the spreadsheet. Let's see what the numbers say. Um because to your point, six percent might be different than seven percent.

SPEAKER_02 47:49

Right. Great question. Okay, Mike, another question for you. Estimated tax savings, are you basing those on assumed tax rates? And are there situations where those tax savings may not come to fruition?

SPEAKER_03 48:06

Yep, great, great question. So we are estimating them based on the building, right? So tax savings is based on the tax rates of the individuals. We usually assume the highest rates 37% or greater when we start talking about tax savings. So those two examples talked about here today were at the highest levels. Um, but you know, you look at a building, you're probably looking at about 20 to 30 percent in the medical office space is bonus eligible that year on the purchase price or what has been constructed that year. And then you can start working your tax benefits to that uh from a tax angle. But usually you come in very conservative on what those look like under promise over deliver when you start working through some of the models.

SPEAKER_02 48:47

All right. Then last question, but it's gonna be for both of you. So, Andrew, I'll ask you first, and you kind of alluded to it a little bit, but what is the biggest mistake that you see independent medical practices making when it comes to real estate strategy?

SPEAKER_00 49:05

Not starting soon enough. Just you need to give yourself time uh to have the right strategy to get your team around you uh to make the real estate transaction successful.

SPEAKER_02 49:18

Great. And then, Mike, same question for you. What do you think is the biggest mistake that they make from a real estate strategy perspective? And you can't use Andrew's answer.

SPEAKER_03 49:27

I'm not going to. I'm gonna play on it. I'm gonna play on it. So it is similar to that, but the biggest mistake we see is when someone's selling a practice and the people coming in to buy it, and so it's considered like an asset acquisition. So they're taking everything, they're owning the real estate, they're owning everything in it, and at the time of closing, they might kind of I would call kind of lock in the personal property at the time of closing. And so if they do that, they might be short sighting their depreciation benefit, and a cost sake study doesn't make sense at that point because they're locking in the values on the personal property when they close on the building, and so they might be misleading money on the table by doing that. So to Andrew's point, the earlier the better, so you can evaluate some of those pieces along the way to make sure you're not short-siding personal property when you close on your buying a practice. We see that all the time because we know how those groups happen. They're always flipping practices at specific times, and the real estate sometimes is part of that. And so that is something to manage.

SPEAKER_02 50:28

Yeah, and I would imagine that would be a good negotiation discussion because I guess if you're the seller, it's a completely different perspective, right?

SPEAKER_03 50:36

Exactly. It's always different depending upon which side of the aisle you're on.

SPEAKER_01 50:41

Thanks for listening to Practice Matters, Executive Insights for Independent Healthcare Groups. We hope today's conversation provided practical takeaways you can apply within your organization to access supporting resources, explore additional healthcare content, or learn more about DMJPS and our healthcare consulting team. Visit DMJPS.com. If you have any questions or would like to connect with our team, email connect at dmjps.com. Thanks for listening, and we'll see you on the next Practice Matters.