As practices grow, one of the most daunting and stressful changes is the need to move or expand to open up more space. Just like buying a new home, the process of moving can be painful and the costs of a new lease or purchase, in addition to any build-out or remodel, are some of the largest one-time expenses a practice will incur.
But for most practices, moves and expansions are key to their sustained, long-term growth and health. If you’re close to a move, here are a few considerations.
When is it time to move?
Beyond your subjective judgment (which shouldn’t be discounted), revenue per square foot is a useful metric to consider. The math is straightforward: divide your annual collected revenue by the size of your office. For instance, a $1MM practice in 2,500 square feet is generating $400 per sq. ft. ($1,000,000 ÷ 2,500 sq. ft. = $400 per sq. ft.).
Like wages, rents vary widely from market to market. So, if you’re paying $40/ft., you’ll HAVE to make do with less space than a practice with $12/ft. rents. (That calculation is the ANNUAL rent ÷ sq. ft.)
Generally speaking, a rural or suburban practice might start thinking of more space once it exceeds $500/sq. ft. A middle-market urban practice might need to grow to $800/sq. ft. before expanding; and a downtown practice in a major metro area almost needs to be at $1,000/sq. ft. just to be profitable, perhaps hitting $1,200 or $1,500 per sq. ft. before expanding.
How much can you afford?
Based on national norms and my own experience, most practices spend between 5% and 8% of their collected gross revenue on occupancy costs (rents, CAM, triple-net, utilities, insurance, etc.).
With the expectation that growth will follow from an expansion (often just a remodel will spur some growth), I’m comfortable with practices spending up to 10% of current revenues on space. Again, for our $1MM example practice, that means the first-year occupancy budget for a new space could be as much as $100,000 per year.
Many owners are surprised at how much of a project you can afford with that kind of budget. A $1MM project, financed 100% over 20 years at 6% interest is $7,164 per month or $85,972 per year. Allocate 2% of that cost to insurance, utilities, etc., and you’re still right at max budget.
How much space should you get?
Short answer: as much as you can afford. The longer answer is, get as much space as you’ll reasonably need for the next 5-10 years. Let your expected patient growth guide you as well. As in all things, patients should dictate your decision-making and investment.
Should you own or rent?
Also, consider the secondary market for your space if you’re buying or building. In some rural markets, the lack of a viable market to sell a building you own ought to influence either how big you build or whether you decide to own or rent at all. Your practice needs a certain amount of space; it’s not necessary to own.
But where it makes sense, owning does have advantages. First off, its far easier (psychologically, that is) to spend money renovating or updating a space you own, rather than improving your landlord’s property. And there are some modest tax benefits to owning your office space. Finally, many practice owners will hold their space for 5-10 years after selling, treating the rent as an ongoing income stream after they sell.
Opportunity and risk
Have care: your rent is something you have to pay regardless of patients, so be prudent when taking on new expenses. But take heart as well. Moving to a new office can have a huge payoff: your office will have an updated look, you’ll likely have more space to see more patients, and – interestingly – your staff will often have a renewed enthusiasm when showing up for work every day.
My best wishes for your continued success.
Nathan Hayes is the Practice Finance Consultant for IDOC. He is a 10-year veteran of the eyecare industry, working at HMI Buying Group and Red Tray, Prima Eye Group from its inception and now IDOC. In his current role, Nathan helps OD practice owners manage their overhead, grow practice revenues and profits, and maximize their personal income, free time, and professional satisfaction. For questions or comments about this article, please contact firstname.lastname@example.org.