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Jerry Vaughan, Colliers Turley Martin Tucker Healthcare Services Broker

More Physicians Own their Office Space

Remember when you were finally out on your own, renting your first apartment? Remember your parents’ admonishments to, as quickly as possible, buy your first home and stop "throwing your money down the drain" by renting? According to some commercial real estate experts, if you’re a physician leasing office space, that admonishment still applies.

Enter the trend of medical condominiums, offering doctors and medical groups ownership strategies that would make any parent proud. "I’m getting more calls from physician groups exploring those avenues. Yes, it’s on the radar," said Jerry Vaughan, healthcare services broker for Colliers Turley Martin Tucker (CTMT). "It’s a growing trend nationwide."

Medical News Inc. talked to three brokers who specialize in healthcare space in large markets east of the Mississippi River. All agree that office ownership, which can take many forms, affords physicians a smart alternative to leasing–and perhaps even a revenue stream.

"What I’ve found out is a lot of the younger partners are educated now enough to know they may need to look at owning versus leasing for a long-term benefit as far as building equity in their practice," said Vaughan, who works in the Nashville market. There, he’s currently involved in two medical condo projects and is guiding a Gallatin, Tenn., physician group that is constructing its own building with plans to lease half the office space to doctors not in the group. "They can create a positive cash flow by multi-tenanting their building," he said. "It won’t be just their practice, and the physician group becomes the landlord of the building."

Vaughan estimated the price for basic shell space for a medical condo is about $200 or more per square foot in the Nashville market. "That doesn’t include a build-out by any means," he added, noting that his CTMT colleagues in the Los Angeles market are selling medical condos at $600 to $700 a square foot.

Another trend Vaughan is witnessing is called satelliting, with physicians locating in outlying areas not in close proximity to a hospital. "With physician groups in this decade, they’re having to take their practices to the patients. It’s a convenience factor for the patients," he said.

That movement is also prevalent in the Chicago area, according to Patrice Oster-Marks, vice president at National Realty Network in Barrington, Ill. "Most of my clients do like to be within a couple of miles of a hospital. However, having said that, I have other clients who really don’t care. It depends on the type of specialties they have, and they just want to go someplace that’s not served," she said.

Marks acknowledged that medical condo sales have slowed because of the weak economy. "This year, part of the problem with the office condos … the appraisers haven’t been appraising the condos out at great pricing, which makes it difficult for the doctors to get the mortgages," she said, adding, "Real estate in general has its ebbs and flows."

Nonetheless, recommending ownership versus leasing is something Marks is comfortable doing. "If a doctor wants to retire, having a piece of real estate, of course, is going to be advantageous in selling their business. They’re selling not only their business but the location, and their patients will continue to go there, most likely, because they know where it is and there’s a comfort zone." In Chicagoland, medical condo prices vary widely, from $80 per square foot for a shell to $175 or more for built-out units, she said.

Marks has represented physicians buying into a building as partners – and then not occupying any of the space. "This is just as an investment, a way to supplement some of the loss of income that they are facing today," she said.

Another option is a medical group that buys a building and then provides all the back-office services, such as billing, for the owners of the individual condos. Those owners have their own private practices and pay a monthly fee for services, maintenance and common areas. "Then they just concentrate on whatever their specialty is," Marks said. "I would like to see that one as a wave of the future. That one to me has so many possibilities."

Jonathan M. Glick, senior vice president of New Jersey-based Sheldon Gross Realty, champions yet another option for physicians, one that is a type of equity participation not requiring the upfront financial commitment of outright ownership. "This is a little bit different formula with many advantages for a doctor," he said. The physicians actually lease, but are offered equity interests for filling the space long-term. If the appreciated building is eventually sold or its mortgage refinanced, they are entitled to a piece of that cash return based on their status as great tenants.

"What happens is the doctor is paying a standard rate, say $21 (per square foot), and gets a nice running start with money to build out the space (from the owner/developer). He’s there, and when the building fills up, he gets a good 12-13 percent return on his investment in his equity portion of the building," Glick explained.

Asked if he had any advice for physicians, Glick said, "Doctors all think they can do everything themselves, and they shouldn’t. They’re smart, they’re educated and they can put people back together, but when it comes to office space, you should let a professional do it."

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