Commercial real estate and your practice, part two with Colin Carr
In this part two episode of the EyePod podcast, Colin Carr answers some Q&A with Ophthalmology Times® executive editor David Hutton, diving into commercial real estate and your healthcare practice. From representation to knowing the market, Carr shares his knowledge on ensuring you as a healthcare provider can have the best deal possible — and grow your networth — through your real estate.
This transcript has been ligthly edited for clarity.
How can healthcare providers win against landlords and commercial real estate?
The best way to level the playing field or win in the commercial real estate negotiation is to make sure that you are adequately prepared for the negotiation. And to do that, you want to start with the proper timing. If you have a lease expiring in two years, and you start negotiating with your current landlord, and they know that no matter what you say, you’re on the hook for the next two years, and you have to make that payment, they’re not going to give you some some some favorable deal or involuntarily cut your lease rate for no reason. Conversely, if your lease is expiring in one month, and you haven’t started the process yet, they’re going to assume that you are out of time you missed your window to relocate. And they’re gonna hit you as hard as they can with the highest lease rate, the lowest concessions possible. So step number one is you got to time it properly. If you’re too early, it shows you don’t know what you’re doing; if you’re too late, it shows that you you fell asleep at the wheel, you don’t know what you’re doing. So step one is you need to time it properly.
Step two is you need to hire representation that can help level the playing field. You’re working against typically a professional landlord who negotiates for a living. When you go into that transaction, as a doctor or healthcare provider or an office administrator, they’re going to assume that you don’t know what you’re doing. No matter how clinically savvy you are, no matter how academically intelligent you are, it’s not what you do on a daily basis. And so they’re gonna assume that you don’t know the ins and the outs, they’re not going to treat you the same way. Now, let me be clear about this one, I’m not saying they’re going to be a jerk to you, they can still very well be respectful to you treat you with dignity, but they’re going to show you terms or assume that you don’t know you’re doing. And they’re going to be pushing you towards a deal that someone who’s represented would not accept. And so timing it properly is important, hiring representation is important.
And then we cover this on the former version of our interview, which is they need to go to the market, they need to look at multiple properties, they need to negotiate with multiple landlords or sellers, and they need to know all their options. If they don’t, and they pick just one property, they’re at the mercy of that one landlord, that one seller, and they’re not going to see the best terms. If that landlord knows that you’re out there looking at multiple properties, and they’re competing for your tenancy or your business, they’re going to bring more favorable terms to the table. And that’s going to help you win in the negotiation.
What do these landlords know about negotiating that the healthcare providers really don’t know?
Well, to start with, the landlord knows that it’s going to cost them more money if the tenant moves out of a space or doesn’t do the deal and it says vacant, then if the tenant actually has to move. And this is a really interesting dynamic. A lot of doctors will say what, hey, I don’t I don’t want to move, or it’ll cost me my move. True. But it’ll cost the landlord more money if you vacate that space and they have to sit vacant for six months, 12 months, a year, and then give the next tenant, a building allowance, free rent to build up, free rent once they move in, pay all the fees of the deal. The landlord knows it’s actually going to hurt them more than it hurts the tenant if they have to relocate or find different properties. So when you as a tenant know that the landlord wants you to stay in the property more than you want to stay in the property, it changes the dynamics of the negotiation.
The landlord also knows that if a doctor is not represented, they’re probably not serious about getting the best terms possible. If the doctor is talking to the landlord directly, they probably don’t have a savvy agent helping advise them to protect their interests, they’re probably just winging it. And again, that is the wrong approach.
It’s kind of like this, if you went to court, and you got a judge in front of you, and the other side has has their own counsel and you’re just winging it, you’re not going to have the same level of respect. They’re gonna assume that you you obviously don’t care, or you’re not taking this seriously, because if you did, you would have someone on your side protecting you or helping in the process, same thing. IRS says, “Hey, we’re gonna audit you.” If you don’t get to get a tax advisor involved or a tax attorney, you probably don’t care what the outcome is and just you know, winging it may or may not work for you — it’s probably not gonna work out for you the way that you want to.
When it comes down to the lease, in advance of a sale or transaction, what should a healthcare provider know to be prepared?
So if you’re gonna sell your practice, or you’re going to transition out of your practice, you want to know, if you own the real estate, what the real estate’s worth, and what a fair market lease would be if you decide to keep the real estate and lease it back to that practice, or if you’re going to sell the real estate with the practice, you need to know what that real estate is worth.
A lot of healthcare providers will let a practice broker do that valuation, that practice broker may or may not know the value of real estate. So it’s important to get a third party person who only does real estate to tell you what the real estate’s worth, if you’re going to sell or lease it. Conversely, if you are leasing the real estate yourself from a third party landlord, you need to know do you have a good lease or a bad lease. If you go to sell your practice, and you’ve got a bad lease, that’s going to impact the value of your practice; if you have a phenomenal lease, that’s going to also impact the value of your practice.
And so what’s very common is people time up when their leases expiring — or about to expire — with when they want to sell their practice. And if there’s the ability to renegotiate that lease, and let’s say reduce the lease rate by a few dollars per square foot, or get the landlord to put money into the space to renovate, that’s going to make your practice more desirable from a sale perspective, and that might actually free up more cash flow to give you a higher level of earnings to give you a higher multiplier when you sell the practice. And so if you have a lease that you can renegotiate it, and you can renegotiate it before you sell the practice, you might be able to increase your your earnings or your spread, or your profitability and make your practice sales price higher by a significant amount of money.
If you’re if you’re saving on a multiplier of EBITA, or another valuation of profitability, if you increase your profitability per year by 20, 30, $40,000, because of a better lease, and then you renovated the space as well, you might be able to sell that practice for an extra 100, $200,000 depending on how it’s valued. So make sure you’re not losing money because you don’t understand your current lease value or your current property sale value.
How can a healthcare provider actually use commercial real estate to make money for them, maybe increase their net worth by seven figures?
So if you are in a market that has options available for you to either purchase commercial real estate, or for you to buy a piece of land and develop your own property, and you look at the fact that you’re going to make a payment one way or the other, you’re either going to lease for the next 20, 30 years, or maybe you have 10 years left or what have you, or you’re going to purchase and you’re gonna make a mortgage payment.
If every month you stroke a check or push a button online, and you’re either paying a landlord or paying a mortgage company, if every month you’re paying down principal and an ownership scenario by 3,000 a month, 5,000 a month, 8,000 a month, whatever it is, and then you also have the benefits of things like appreciation, huge tax deductions, like depreciation, etc. And an ownership scenario, it’s very easy to pick up 30, $40,000 per year in tax deductions, it’s very easy to pick up 30, 40, $50,000 per year, in principle, pay down and then pick up even more money and appreciation. And you start adding those costs up over over a 10, 15 year, 20 year period of time. And it’s very easy to get to a million to $3 million of net benefit to yourself, you get combination of of increased value principle, pay down tax deductions, and then you go to sell that practice and the property, you get 10 years from now, 20 years from now, it’s very common for that real estate to be worth well over a million dollars, it’s very common for you to pay it off over a 15, 20 year period of time.
Residential people, you know, pull the equity out constantly, you get little equity, you pull it out, you do these 30year, 35 year notes; commercial real estate, you’re doing 15, 20 year notes, and you’re not refinancing very often. So if after 20 years of owning a building, it’s paid off free and clear, it’s worth a million half, $2 million, and you picked up you know a million dollars in tax deductions, real estate is a very tangible and easy way to change your financial perspective by again by hundreds of 1000s at the minimum, but typically you’re changing it by a million, $2 million.
Some healthcare providers may think it’s okay to go in with their lawyer is that a good idea?
It is a good idea to have a lawyer to review the legal documents, it is not a good idea to have a lawyer negotiate economic terms for you.
It’s the same thing we were talking about. You know, you have an attorney that specializes in reviewing contracts, reviewing legal documents, the landlord knows they don’t know the market; they’re not a market expert, they’re not beating the streets every day talking to landlords, sellers, owners, listing brokers. And so they’re just basically guessing. They’re going to try to get an online database, guess the values, and so when you have an attorney negotiating economic terms, there’s a couple things working against you.
Number one is the doctor, healthcare provider, you’re paying somebody 300, $405 per hour to do what an agent or advisor would do for you for free. So number one, you’re paying someone when you shouldn’t be paying them.
Number two, they’re not an expert in that area, and the landlord knows that as well. So you’re back to the idea of doing something without the expertise that you need. And then ultimately, again, are they going to spend a 30, 40, 50 hours of time to get the deal done the way it’s supposed to be done? Not unless they charge you $30,000. So, do you want to pay someone $30,000 in attorneys fees to do what an agent would do for you for free? And then it gives you much better terms and results? The answer’s no.
You’d rather go with an advisor, who will do it for you for free, who’s going to help you capitalize on the deal. Now, you do need the attorney to review the legal contract. And you should never have a real estate broker offering to give you legal advice, or offering to help you tweak language or draft language. Real estate agents should not practice law. And attorneys should not practice real estate. They’re separate parties; you need both. And if they’re both good, they’ll only operate in their lane. If you asked me to be your attorney, I’m not going to be your attorney. If you ask a good attorney to be a real estate agent, they’re gonna say that’s not what I do. You need both but not either or.
When it comes down to it, how do you choose the best commercial real estate agent?
The best way to choose is to is to do some research. You can talk to, you know, people in your community that you respect; if you’ve got a good CPA, ask them who they know that specializes in healthcare real estate on the tenant-buyer side. Ask your equipment suppliers, ask your technology provider, ask your lender, ask people that you trust that you’ve been working with for a while, who do they respect? Who do they think would be a good fit. And a lot of times you’ll start hearing the same names, you’ll start hearing, hey, this person or this company does a great job. And then you start there, you put out an inquiry, get them on the phone, get them in person, and then you just ask them questions like, you know, what’s your experience working with healthcare providers? What’s your experience working in this part of the market? Do you do more work tenant-buyer side for healthcare providers? Or do you do more work on a landlord and seller side for third party landlords and sellers? And you start getting a feel for who’s got the right game plan, who you trust, and it’s no different than anything else in life, you’re going to know very quickly: I trust this person, or I don’t trust them; I believe this person has my interest in mind, or I don’t, I think they have the expertise or I don’t believe they do. And so if you get up there and talk to a few people, you’ll know very quickly, this is the person I want to work with, or it’s not. And if it’s not, then go on to the next person, there’s too much on the line for you to settle in this transaction. If you don’t trust the person, find somebody else, search online, do your research, do you do your due diligence, but don’t lose 100, $200,000 because you weren’t willing to take 30 minutes to research people and talk them on the phone or meet them in person.
Again, it’s this idea, “Well, you know, I don’t have time,” and my response would be, “So you don’t have 30 minutes or 45 minutes or an hour, and you’re willing to lose $100,000 because of that?” Like if I offered to pay you $100,000 for half an hour of your time, I think you find a way to make time for that $100,000 check. It’s the same amount of money, believe it or not, you just have to do your due diligence.
How much does it cost to hire this expert commercial real estate agent?
Well, that’s the beauty. That’s what I’ve alluded to a little bit here at some of the previous answers. It doesn’t cost a healthcare provider anything to hire a commercial real estate agent. And that’s because commissions and commercial real estate are paid, just like they are in residential. And that’s why the landlord or the seller — so if you’re going to sell your house in residential, you hire a listing agent as your advisor, your agent, and you would have a commission agreement for that transaction. And it would be built for two people; it’d be built for your agent, and it would be built for the buyer’s agent. And if the buyer shows up without an agent, that listing agent gets a double commission.
So this is not a for-sale-by-owner scenario. This is where a lot of healthcare providers get confused. They think, well, if I don’t hire an agent, I’m going to save money. And the reality is you’re not the one paying the commission. So there’s no money for you to save in this because you didn’t determine the commission structure and you’re not paying it. If you own the property and you wanted to sell it yourself or lease yourself, sure, you could save one half of the commission. But in a scenario, if you’re a doctor or healthcare provider, and you’re a tenant or a buyer, that commission is being paid by the landlord or the seller, it’s going to get paid either a double commission to the listing agent, or it’ll be slipped from the listing agent and then your agent, your representative. So there’s no money to be saved by not hiring an agent. So the question is, well, why would I hire someone? And the answer is because you’re too busy to hire someone, you don’t know how the games played, or you just you just get frustrated and say “I’m just going to sign whenever they put in front of me.”
Again, all those are bad game plans. But long story short, it’s free to hire an agent as a tenant or a buyer’s agent, you should always have representation, and they’re going to take a fee out of the owners proceeds or the listing agent’s portion, so it’s not going to cost you as a doctor or healthcare provider anything.
Do you have a website people can visit, f they want to get more information about you?
I do, yep. Best way to get a hold of us is our website. It’s CARR.US. Upper right hand corner of our website, you can click the “Find an agent,” we have agents across the country, we operate at every state across the country, you can click to get a free lease or purchase evaluation if you want to know how your lease compares to the current market, if you want to know what it would cost to own and what your options are in your immediate area. We’ll do all those things upfront for you, as well just to give you initial information to help you make this decision.
And then ultimately, we also have hundreds of educational resources. We have a glossary, FAQ, we’ve got hundreds of videos.
If you want to get educated on healthcare real estate, we have more information than you could ever possibly get through. But we will help get you educated so that you can make the best decision possible for your practice, for your future and for your financials.