Should a Medical Practice Buy Its Building?

An owner-user gets control: no landlord's consent for clinical changes, no renewal negotiation, and a say in what happens to the building. In exchange, the practice ties up capital, takes on property risk and gives up the ease of leaving. Ownership gains are not guaranteed. A building can lose value, and a special-purpose clinic can be hard to resell or re-let. A lease has its own costs and limits, but it lets someone else carry those risks.

Treat these as separate decisions: whether the practice needs this location for a long time, whether these particular owners want to be in real estate together, and whether this building is the right one at this price. A strong yes to one does not answer the others. Ask your CPA to run the numbers both ways, since the tax and cash flow picture depends on the practice's own situation.

These are questions, not rules. Answer them honestly with your partners.

• ✓Are we confident this patient and referral geography will still serve us when the loan is paid down?
• ✓Is our specialty's space need stable, or could technology, staffing or a merger change it?
• ✓Are there partners who want to own, and do younger physicians want to buy in?
• ✓Could we sell the practice in the next several years, and how would a buyer view the building?
• ✓Would the capital be better used for equipment, staff or a new site?
• ✓Can the building carry a clinical build-out, including plumbing, power and shielding, at a price we can justify?
• ✓Who will handle maintenance, tenants, insurance and capital repairs?
• ✓If we outgrow it, could we realistically sell or lease it to another provider?

Buying may fit a mature specialty with long-term partners, heavy fixed equipment and a location patients already know. Leasing may fit a growing group, a practice near a sale or a retirement, or one still testing a market. Neither is a universal answer. A practice can also lease now and revisit the question, or buy and later sell through a sale-leaseback, which is covered in a separate guide.

Practices often hold real estate in a separate company that leases the building to the practice. It can suit liability planning and let some partners own while others do not, but it turns partners into each other's landlord and tenant. Our sale-leaseback guide for medical and dental practices covers how those two groups drift apart over time. If you are starting fresh, write the exit into the documents now.

• Who may own, and whether ownership must track the practice.
• What happens on a partner's retirement, death, disability or departure, including how the interest is valued and funded.
• How rent is set and changed, and who decides when owners and tenants disagree.
• How capital calls and major repairs are paid, and what happens if an owner cannot pay.
• Who may force or block a sale of the building.
• Whether the personal guarantees on the building loan are shared, and how they are released.

Your attorney and CPA should draft and review these terms. The lease between your entity and your practice should be a real lease, written and followed, and not a side note.

Physician ownership of the real estate can put financial relationships in place that do not exist with an outside landlord. CMS says a financial relationship under the Stark law can be an ownership or investment interest or a compensation arrangement. OIG describes the Anti-Kickback Statute as prohibiting remuneration to induce or reward referrals of federal program business. The questions become sharper when:

• The owners of the building and the owners of the practice are not the same people in the same shares.
• Space is leased to other providers who refer to, or receive referrals from, the owners.
• Referring physicians or their immediate family members are offered a chance to invest in the building.
• The building houses imaging, lab, physical therapy or other designated health services.
• Rent is adjusted based on how the practice is doing, or is set above or below fair market value.

The rental exception at 42 CFR 411.357(a) and the space rental safe harbor at 42 CFR 1001.952(b) are the usual starting points, with their requirements for a written lease, a one-year term, rent set in advance and fair market value. Bring this up before forming the ownership group, because the structure is hard to change later. The conclusions belong to your healthcare attorney. No broker, lender or accountant can give you that answer, and neither can this guide.

Your lender will ask about the same structure. Conventional loans vary, so ask several lenders. For SBA programs, some rules are written down. The points below come from SBA regulations and can change, so confirm them with an SBA lender.

• Purpose. SBA's 504 program page lists the purchase, construction or renovation of existing buildings or land among eligible uses.
• Occupancy. Under 13 CFR 120.131, for SBA financing of an existing building, the borrower may permanently lease up to 49 percent of the rentable property if it permanently occupies and uses no less than 51 percent. New construction has its own, stricter rule. This matters if you plan to bring in other tenants.
• Separate real estate entity. Under 13 CFR 120.111, an Eligible Passive Company may use loan proceeds to acquire property that it leases to an operating company. The conditions include a written lease subordinate to SBA's lien, an assignment of rents, a limit on rent to the loan payment plus direct holding expenses, a lease term at least equal to the loan term, and the operating company as guarantor or co-borrower.

Notice how that rent limit interacts with the previous section. Ask your healthcare attorney and your lender to look at the rent together, so that the financing structure and the fair market value question do not pull in opposite directions.

A purchase needs the same discipline as a lease search, with more diligence. TAG represents occupiers as buyers, not sellers of investment property, so its job is to find options, test price against the market and negotiate on the buyer's behalf. Rezin Orthopedics & Sports Medicine describes coming to that point with an offer already in hand:

1. Write your clinical program and test it in the building before pricing it.
2. Compare purchase against a lease of comparable space on the same set of assumptions, with your CPA.
3. Check zoning, parking, accessibility and building systems with your architect and engineers. New and altered space has to meet the ADA Standards, and ADA duties apply to owners.
4. Get any existing tenants' leases and exclusives, and check them against your plans.
5. Order environmental, title and physical due diligence through your attorney, and consider what prior users left behind.
6. Get lender terms in writing, and have counsel confirm the ownership structure before closing.