Optometric Management Tip # 112 - Wednesday, March 10, 2004
Owning Your Office Building
If you own your own practice, and unless youíre nearing retirement, ownership of the office building that you work in is one of the best investments you can make.
First of all, real estate in general is a very good investment, because it usually appreciates in value over time, and there are some excellent tax benefits. The problems of being a landlord and finding good tenants may be the biggest obstacles in commercial real estate, but that is completely alleviated in the specific instance of owning your office building, because youíll always have an excellent tenant Ė yourself! This tenant, an optometrist, is willing to sign a long-term lease, always pays the rent on time, takes good care of the facility, does not complain much, and youíll probably find him or her to be a very nice person!
The optometrist, in turn, generally finds the landlord (still you) to also be a great person to do business with. While the rent may seem a little on the high side, the landlord generally agrees with any ides the optometrist-tenant has, such as signage, landscaping, hours of operation, parking, remodeling, etc. And, if something changes in the practice or in the optometristís personal life, the landlord can be very flexible and understanding with the terms of the lease.
You probably always knew you would own your own home after you got out of college, and not rent an apartment. All renters realize that their monthly rent checks could just as easily be mortgage payments, and if they were, the renter would be earning more equity in the real estate with each passing month. When it comes time to move, the house is sold and some net profit is usually earned. There are also some nice tax benefits available to home owners. Itís really the same philosophy with your office building.
If this idea appeals to you, you should discuss it with your CPA first. The usual scenario for professionals who own their own building is to own the property personally, and lease it to their professional optometric corporation. You actually will sign a lease with yourself, and the rent will be based on the going rent for commercial property in your geographic area. Itís common to make this a triple net lease Ė which means the tenant is responsible for real estate taxes, insurance on the building and all building maintenance Ė in addition to the rent. These become business expenses for the optometric corporation. As long as the rent payment is more than the mortgage payment, you the landlord will earn positive cash flow every month.
Itís best to think of the ownership of an optometric office building as a separate asset and financial transaction from the practice. You could buy (or sell) them both together, but you certainly donít have to. The appraised value for the building would be done by a real estate appraiser, while the appraised value of the practice would be done by a practice consultant or CPA. A retiring OD who owns his or her building could sell the practice to a new doctor, but retain ownership of the building and continue to collect rent well into retirement. The new doctor also becomes a logical future buyer for the building, eventually.
There are many ways to acquire and use the real estate. You may want to buy a vacant lot in the commercial district of town, seek an architect, and design and build your own building. You may find a better deal by buying an existing building and remodeling for your needs. There are condominium medical complexes, strip malls and free standing buildings. Even homes can be converted to office space if the zoning will allow it (but make sure you can have adequate parking for future growth). You may want to make the entire office building into a clinic for your practice only and enjoy the entire identity, or only use part of the building yourself and rent the rest out to other professionals.
Best wishes for continued success,
Neil B. Gailmard, OD, MBA, FAAO
Chief Optometric Editor, Optometric Management