business advice

[GoBeers]

Hello all,

Please pardon my naivete. I have come across an opportunity to purchase a medial building as the current owners are looking to sell and they are asking their tenants for first dibs. It would be a large building with multiple offices currently being rented to various medical providers and large parking lot.

I'm only one year out so I am heavily inundated with student debt still.

I would be purchasing this property along with other physicians in the practice that I work for.

What would I be looking for when evaluating this opportunity?
I've never been in such a position and have no idea what to expect or analyze.

Obviously things to consider would be cost of purchasing loan (principal and interest), water, plumbing, garbage, structural maintenance, insurance, but also internet? cable? office supplies? Other then my experience with home ownership, what else would I be worried about? Would rent collected from office tenants be the only cash flow to cover all these expenses? Do some of these expenses (internet, electric, water, etc) be the responsibility of each tenant separately?

It's located in a major suburb in a major county on the west coast.

Thank you for all your insight and suggestions.

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[Agast]

Have you discussed these questions with the other physicians in your practice? If no one has familiarity with commercial building management y’all need to get on the same page.

The building needs professional appraisal. The valuation includes the property value itself and the rents collected. The appraiser should comment on what the capitalization rate is, that tells you the ratio between the income generated yearly compared to market value. I believe at least 7% is standard for a good investment, less than that is not ideal.

Your current leases are probably triple net leases meaning you’re already footing the bill for maintenance and utilities by paying more rent. If not, once you buy the building you will probably want the tenants converted to triple net leases.

Another thing to consider when you’re purchasing as a group, what to do when someone retires or leaves. Our building is owned by an LLP and when you “buy in” you are buying shares from the LLP. When you retire/leave the practice, the shares are sold back to the LLP and the members purchase the shares back and this continues until we decide just to sell the building. The rule we have is that if you’re no longer part of the group you cannot continue ownership. This prevents people from moving to another state while collecting rent or trying to transfer shares to their kids. We had some major drama when the founder/managing partner passed away and we discovered he did some fancy footwork to have his trophy wife maintain management of the LLP and to continue to collect management fees while we did all the actual work. We got lawyers involved and she only backed down because she was emotionally fragile, sold the shares like she was supposed to.

You will need a lawyer to draft the rules/bylaws/expectations for such an arrangement and how to pick a managing partner, and you will need to hire a building manager to deal with the day to day break downs.

 

[GoBeers]

Have you discussed these questions with the other physicians in your practice? If no one has familiarity with commercial building management y’all need to get on the same page.

The building needs professional appraisal. The valuation includes the property value itself and the rents collected. The appraiser should comment on what the capitalization rate is, that tells you the ratio between the income generated yearly compared to market value. I believe at least 7% is standard for a good investment, less than that is not ideal.

Your current leases are probably triple net leases meaning you’re already footing the bill for maintenance and utilities by paying more rent. If not, once you buy the building you will probably want the tenants converted to triple net leases.

Another thing to consider when you’re purchasing as a group, what to do when someone retires or leaves. Our building is owned by an LLP and when you “buy in” you are buying shares from the LLP. When you retire/leave the practice, the shares are sold back to the LLP and the members purchase the shares back and this continues until we decide just to sell the building. The rule we have is that if you’re no longer part of the group you cannot continue ownership. This prevents people from moving to another state while collecting rent or trying to transfer shares to their kids. We had some major drama when the founder/managing partner passed away and we discovered he did some fancy footwork to have his trophy wife maintain management of the LLP and to continue to collect management fees while we did all the actual work. We got lawyers involved and she only backed down because she was emotionally fragile, sold the shares like she was supposed to.

You will need a lawyer to draft the rules/bylaws/expectations for such an arrangement and how to pick a managing partner, and you will need to hire a building manager to deal with the day to day break downs.

Thank you.
That was very helpful and gives me some direction to start.

This opportunity was presented to me today so I haven't really thought the logistics and SDN was the first place I thought to briefly ask given the experiences of our collective.

What are the chances I can even get a loan? Between buying a new home, student loans, is it even possible for me to get one?

 

[Agast]

Thank you.
That was very helpful and gives me some direction to start.

This opportunity was presented to me today so I haven't really thought the logistics and SDN was the first place I thought to briefly ask given the experiences of our collective.

What are the chances I can even get a loan? Between buying a new home, student loans, is it even possible for me to get one?

Re: loan

So this is tricky because most likely you guys are looking at millions. Major county in a major suburb on the West Coast sounds HCOL. I don’t know how big your building is but if you have several groups working in the building I’d guess around $8+ million and it would be more except commercial real estate took a hit during COVID, at least in my area. The LLC/LLP would have to apply for the loan and I’m not sure how commercial loans are structured but there is still a down payment expectation. Our practice has a strong long-standing relationship with one of the banks so that’s where I go every time I need to borrow money for something practice-related.

Banks will look at your debt to income ratio. If you just treated yourself to a nice home at the top of your income potential it will be much harder for you to qualify for a huge loan. When I bought my shares we structured it so that the all rental income goes towards paying back the partners for the next 10 years and then I owe a balloon payment, but by then the idea is I have the cash on hand to do that or the ability to qualify for another loan. Or we sell the building before that and my take home subtracts the amount still owed.

In order for this to work, your group needs to be roughly the same age cohort. If one guy plans on retiring in 3 years it will be a PITA to buy him out while you’re still paying loans to the bank.

The building can be depreciated over 29 years and that can come out of the income earned. I’m not as clear on how to bank the losses but I think only the LLC/LLP can use the tax advantages, you can’t do it personally. Our CFO is also our building manager so she keeps track of all that for us…

 

[cowboydoc]

Great advice by Agast. Also, make sure you plan to stay with this group. Most docs don’t last more than a couple years at their first job. You are now “dating.” If you buy in to RE with the group, it’s much more like a marriage, or at least living together. Honestly assess this before delving into the details.

I’d be leery of commercial office building investment right now unless it is heavily medical. YMMV on that.

 

[drusso]

Hello all,

Please pardon my naivete. I have come across an opportunity to purchase a medial building as the current owners are looking to sell and they are asking their tenants for first dibs. It would be a large building with multiple offices currently being rented to various medical providers and large parking lot.

I'm only one year out so I am heavily inundated with student debt still.

I would be purchasing this property along with other physicians in the practice that I work for.

What would I be looking for when evaluating this opportunity?
I've never been in such a position and have no idea what to expect or analyze.

Obviously things to consider would be cost of purchasing loan (principal and interest), water, plumbing, garbage, structural maintenance, insurance, but also internet? cable? office supplies? Other then my experience with home ownership, what else would I be worried about? Would rent collected from office tenants be the only cash flow to cover all these expenses? Do some of these expenses (internet, electric, water, etc) be the responsibility of each tenant separately?

It's located in a major suburb in a major county on the west coast.

Thank you for all your insight and suggestions.

Real estate is a wonderful way to build wealth and secure your future as an independent physician. If the numbers pencil, embrace it wholeheartedly and don't look back.

 

[pmrmd]

Agast gave great advice. Real estate is almost always great, but this one is tough, and if I couldn’t get it myself I’d think twice with all the legalities involving people you are just joining.

 

[BobBarker]

Thanks ScottGPT!