OCTOBER 19, 2022 (33-MINUTE READ)

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Mike Jorgenson:

On this question of whether to own or lease, the best piece of advice that I'm going to tell you is know your options, so go to the market. The most common question we get is "What is fair market?" And if you don't know the market, then you don't know what is fair, and so you have to look at several options when it comes to real estate purchase or leasing.

Corey Brown:

I'm Corey Brown, and this is Provide's The Path to Owning It podcast, where I sit down with trusted industry experts in Provide's network to give you the tools and advice you need to take your practice ownership dreams into your own hands. From owning your own practice to expanding or improving an existing practice, we'll help pave the way for you to achieve your dental or veterinary career dreams and guide you through all the nuances of the practice ownership journey. Please make sure to follow us on Apple Podcasts, Spotify, or wherever else you listen.

Corey Brown:

On this week's show, we're discussing the pros and cons of owning versus leasing the commercial real estate for a healthcare practice. Today, we are joined by Mike Jorgenson, Regional Director for CARR Healthcare Realty's Southeast Region. In 2016, Mike helped CARR open the Alabama market, and has since helped pioneer many new initiatives. Mike is an authority in the healthcare real estate advisor space, having spoken at several industry events including the Hinman Dental Meeting, Columbia University School of Dentistry, Southern Vet Conference, and many more.

Mike Jorgenson:

Thank you for having me, Corey. This is a great honor. You guys put on a great podcast. I've been listening to a couple of them and appreciate you having me here today.

Corey Brown:

Thank you very much. Today's topic, I'm excited to get into. It's one of those that most providers struggle with at some point in their career, and I'm sure you have heard this question many, many times. "Do I own or lease the commercial real estate for a healthcare practice?" Let's start though, with the owning side. What are some of the main advantages of commercial real estate ownership for a practice owner?

Mike Jorgenson:

That's a great question. That's honestly one that a lot of doctors are pretty familiar with, and I think can be a stumbling block sometimes on this question of whether to own or lease. And the main advantage, it's equity really. You're paying yourself. That's how a lot of doctors say it is. "I'd rather not pay a landlord, I'd rather put that money back into my own pocket." And so, that's probably first and foremost on anybody's list, whether a real estate professional or even all lot of doctors understand that.

Mike Jorgenson:

There are several other benefits, though. One of them is the fact that you really have the benefit of taxes. You can depreciate many more things than you could with just lease hold improvements. You can depreciate that, believe it or not. Your CPA should be working with you on that. But there are several other advantages to ownership and many of them are taxes.

Mike Jorgenson:

And then, we also see a lot of doctors really at the end of the day when they go to sell their practice, many of them, the real estate is worth more than the practice itself, and so the end game on the purchase side can be very favorable if you're able to sell it. Those are three of the main benefits, one being equity, one being taxes, and one being the end game potential of selling the real estate as well.

Corey Brown:

Yeah, that's great advice. Let's go on the flip side of that. What are some of the potential disadvantages or downfalls that you might see in owning your own real estate?

Mike Jorgenson:

I'll start with the end game or the sale of the real estate. I think many times, doctors think that they can just sell the real estate at the same time, but most banks, they get over-leveraged if you tried to purchase the practice and the real estate at the same time. And so, sometimes they end up being a landlord for 2, 3, 5, 7 years. And so, thinking that you can just walk away on day one, it may be feasible, but more often than not, unless they have money sitting aside, which a lot of these guys are a year or two out of school and are still paying off student loans, so they don't have the cash to be able to put down on the real estate, a lot of times they're going to end up leasing. And so, the question is, "Do you have the stomach to be a landlord for a while?" Because if you're hoping to sell both a practice and the real estate at the same time, it usually doesn't end up working that way.

Mike Jorgenson:

The other thing is, and this is maybe a smaller one, but we get this a lot of times when we're at shows and doctors who own their real estate come by and we tell them what we do and they go, "Well, I own my real estate, so what should I be doing?" And the main answer that I give to doctors, we run into it often where doctors are not really keeping up with their real estate. If you buy a building, you build it, 20 years ago in a lease situation, that lease comes up for renewal. A lot of times you're able to get the landlord to help with tenant improvements. And so, it's actually a bit of a trigger to remind the doctor, "Hey, the carpet is 10 years old and I should maybe get some new flooring here."

Mike Jorgenson:

I actually ran into that with a doctor. And we walked into the office, and it was a beautiful building, great location, but when we walked in you could see the wood paneling from the eighties and the carpet and it was really not good. And I said, "Doc, when's the last time you changed your carpet?" And he said, "Well, I haven't. We built it in 1990 and the carpet hasn't really needed it." And I don't think doctors realize that you come into that office every day, it's like your hair growing. Your hair grows daily and you don't really notice it. And then, somebody that you haven't seen in six or eight months goes, "Man, your hair's getting long," and it's just happening little by little. And so, your patients only come in every six months. And so, keeping up with the real estate when you own it, I see as a bit of a challenge for some of these doctors.

Mike Jorgenson:

And then, maybe the last thing that I would note in terms of the downsides of ownership is the permanence, more often than not, of that decision. You can obviously relocate if you need to, but a lot of times, there's a big disadvantage to that because you're not likely going to go far. If you're relocating out of a purchase, it's because there's a better spot that you'd like to be in and then you don't necessarily want to sell that to another dentist. Maybe you can find a specialist to occupy it, but the flexibility of ownership is a little bit less.

Mike Jorgenson:

And so, if there's a reason to be in that spot, I'll give you one example that we've seen. A pediatric dentist went next to a school that was well populated and placed himself right there. Big beautiful building, nasty old school, but all of the patients were coming in daily. He was right on the corner. What he didn't realize is that a couple years later they were planning on building a new school down the street and sending half of the students down the street and another half down to another school because they were overpopulated. And so, now it's this massive building that doesn't have much use to him, when down the street there's a Publix and a beautiful shopping center right next to a beautiful new school where he could wait out the three or five years left on his lease and go relocate into that next one.

Corey Brown:

Yeah. And that brings up another good question that we hear a lot. "Does your opinion of ownership change whether this is a primary location for the doctor versus a secondary or maybe a satellite office?"

Mike Jorgenson:

It depends on the goals. And you're going to hear me say it depends more than you're going to like, because every situation is different. So the reason it depends is because what are you trying to do with your real estate? Are you going to end up in just two locations? If so, maybe owning the real estate would be good. But if the goal is to expand beyond that, and I'll hit on it a little bit more when we get into the benefits of leasing, but if your goal is really just profitability, a lot of times real estate ownership is not the best bet.

Mike Jorgenson:

Many of the DSOs and the groups that are larger that are really trying to grow into more of an organization, they're not necessarily owning that real estate as much because they would rather spend that money and have that liquidity to open up more practices. And the profitability of a dental or a veterinary practice is much higher than the profitability of real estate. Real estate, in terms of cap rates, is what many real estate investors are looking at. A good cap rate on real estate, really on the high end, unless you're in a not great market, is 10-12%, whereas the profitability of a dental or a vet practice can exceed 30% pretty easily.

Corey Brown:

So let's talk about who that great candidate would be for someone who does want to own their own commercial real estate. What do they look like?

Mike Jorgenson:

That person is likely going to just have the desire to really own a practice and not necessarily looking to relocate often. They would be somebody who has some cash and/or equity. That's one thing a lot of doctors don't realize is, a bank like Provide can get you potentially 100% financing by utilizing some of the leverage within the practice. If you've owned a practice and it's producing well and you don't have a lot of debt on it, there's a lot of times where you don't have to bring a lot of cash to the table potentially. If you don't have a lot of leverage within your practice or if you're over-leveraged rather, then having cash is a requirement.

Mike Jorgenson:

Another thing is, can you afford it? That's one of the main things that we look at is not only can you afford the down payment, but can you afford the price to buy the real estate? And you've got to look at not even just, "What's my note on the real estate?" You've got to look at some of those other expenses as well. And so, that's one thing that we're looking at often is, what are some of the ancillary costs that we need to be considering? And usually that's going to be a doctor who says, "I really like this market." I've talked to many of them. They say, "I want to be in this market forever. I don't want to be a six location giant. I would just like to be here." In that case, a lot of times it does make sense.

Mike Jorgenson:

And again, there will be times where it doesn't. One of the things that we really caution against with practice ownership is doctors thinking that, "I have to own the practice real estate," where they think, "Because I have to own my house, I should own the real estate as well."

Mike Jorgenson:

We have seen it where doctors are reaching for ownership when they otherwise would be better off leasing a space because their ability to be profitable within a location. They can be on Main and Main in a lease situation and they might not be able to afford that real estate, so they go a couple blocks off. If you are a doctor who is really looking for eyeballs and is getting walk-ins potentially from patients, then getting off of that main street may not be best for you. And so, our agents always say, "You've got to put the practice first." And as long as it makes sense for the practice, then a lot of times real estate ownership can make a lot of sense.

Corey Brown:

That's great advice. Let's say that we've decided we've put the practice first and everything looks good. What are the steps I should take then to pursue owning this commercial real estate?

Mike Jorgenson:

The first step I would say is ensuring that you've got financing, because you don't want to hit the market before you know what you can get. And so, really all of this comes down to getting your team together. And our first recommendation is usually to reach out on financing, to ensure that we know that you're able to do this, whether by bringing cash to the table or with some practice equity that you've got built up already.

Mike Jorgenson:

Another person that you're going to need within that transaction is obviously a real estate agent. You want to find somebody that can help you with that. One thing that I would note with this is we see a lot of doctors taking a DIY approach to real estate, saying, "I know where I want to be." And that is very common honestly, even among our clients. The majority of our clients come to us with a location already.

Mike Jorgenson:

The reason that they engage us is to ensure that they get the best possible deal on that location and they're not missing potential pitfalls. And so, as a buyer or a tenant in real estate, you shouldn't be paying for your representation. It's much like in residential real estate, where when you go to buy a house, the seller actually ends up paying the fees for that transaction. They pay for their agent and for your agent. And so, when you come unrepresented, a lot of times savvy doctors say, "You know what? I know how this works. Just cut 3% off the deal and then we can call it good because I'm not coming with representation."

Mike Jorgenson:

Most of the time, the seller or the landlord is going to say, "That's awesome. I will cut that out for you right now. Let's sign this today." And then they're still going to end up paying their agent 6% likely on that deal. And it's different per market. Some markets do it on a per square foot basis. The point is, a lot of times they are going to still end up paying that fee because it was set aside from the beginning of the deal, and that agent oftentimes ends up getting both sides of the commission and they're working against you.

Mike Jorgenson:

But the craziest thing to me is that these sellers and these landlords, they do this dozens or even hundreds of times in their career and they still have representation. And so, when a doctor comes to the table without representation, it doesn't oftentimes make sense. So all of that to say you need to make sure you have a team. You want to make sure you engage your equipment supplier. They're going to play a very important role here. You need to make sure you engage your architect and/or contractor, really engaging that team and asking a lot of questions.

Mike Jorgenson:

These guys are doing this daily. You might do this two or three times in your career, where that equipment supplier has done this eight or nine times this year. And so, asking questions to every one of those people is really going to give you insight into what the market really looks like.

Mike Jorgenson:

You're also going to likely need an attorney whether, in a lease or a purchase situation, a real estate attorney is going to be important. Your real estate agent might be able to help draft that contract, but in a purchase situation you're going to want to make sure that they're looking over title, that they're looking over the survey, And that you have somebody from a legal perspective that's protecting you within this transaction. And it's not your brother-in-law who's a divorce attorney. Just because they're an attorney doesn't mean that they should be helping you look over title and some of these other issues. There are a lot of times where engaging a generalist really in this type of a situation can come back to bite you in the butt. And so, those are a couple of them.

Mike Jorgenson:

CPA, financial planner, there are many positions that you want to make sure, and with the vet and dental industry, both most of those industries have people who are specific to those industries, and engaging a specialist is really going to go a long way.

Corey Brown:

As a past real estate agent myself, I totally understand the concept of people wanting to do it themselves or thinking that maybe their father knows better than you do or something of that case, so you might as well use the tools that are there for you. Absolutely. So let's say that I purchase the home for my healthcare practice, but I have more space than I need. Is it common practice or a good idea to become a landlord yourself and kind of rent out that unused space to other tenants? Have you seen that happen successfully?

Mike Jorgenson:

Absolutely. I am going to give you another, "it depends" here. What we're mainly looking at is the market, so does the market bear having extra space that can be leased out? And so, first caution that I would give, and a lot of times it can be easy for us to be very optimistic and just assume that there's going to be income there. There are horror stories from back in 2008 where doctors bit off more than they could chew, and assuming that they could lease out the rest of that space and then foreclosing. I've worked with doctors who didn't have representation back in '08, built more than they needed, and then had to foreclose. And finding other space beyond that is really hard when you have a bankruptcy on your record. And so, what I always suggest for clients is assume nothing, assume zero. And if your practice and your income itself can float that, then it makes sense to look at, "Should we look at having other space?"

Mike Jorgenson:

Another thing to take into account is when you become a landlord, there are other costs such as paying for a real estate agent. So you need to make sure you have money set aside, unless you just want to let it sit there and put a sign in the window. Somebody might come, but even beyond just commissions, a lot of times you're going to want to have some sort of a tenant improvement allowance.

Mike Jorgenson:

One of the things about both veterinary and dental providers is that they're getting a lot of tenant improvements. They're also the best tenants that there are. So what type of a tenant are you trying to acquire? Because if you're trying to get the best tenants, a lot of times they're going to want to see some concessions. And so, having some ability to float a few months of rent, they may ask for three or four months to build out. They may ask for some free rent beyond that. So there are many considerations, and this is probably the biggest "it depends" of this podcast, because this one has so many different elements that need to be considered before really understanding if it does make sense in their specific situation.

Corey Brown:

Well, thank you for that. Those are all great points that I'm not sure everybody is well aware of. We all have heard about the real estate market today and what that kind of is like. In your opinion, what impact is today's real estate market having on aspiring commercial real estate owners?

Mike Jorgenson:

First and foremost, I think for people who are looking for real estate, the market correcting is not a bad thing actually, because right now even still, the R word is being thrown around a little bit now with a recession potentially coming, and, "What does that mean? Should I be nervous?" If you are a provider, no. If you're looking for real estate, no. The market being less tight is actually a good thing for people who are looking to lease or purchase real estate.

Mike Jorgenson:

Now, interest rates, that's another thing where we get a lot of clients going, "Man, the interest rates are so high." I would caution against that as well, especially still today. Who knows what it'll be in six months, but right now, interest rates, even in the fives, seven or eight years ago, we were in the exact same spot. I think we got spoiled by some of the initiatives that were taken by, really, the federal government over the last couple years due to Covid, where interest rates were at historic lows. And I don't know that we'll see them that low again. I hope I'm wrong about that.

Mike Jorgenson:

But honestly, the interest rates today are still historically pretty average. And so, I would caution against people getting too nervous to do a project because the downside might be you continue to associate. You would be better off to pay a little bit more for the real estate today, to pay a little bit higher interest rate, and to go start your own practice than you would be to stay associating because you're nervous about what's going to happen. Worst case scenario, you pay a little bit more in market now. It might correct a little bit, but it always comes back. We have come well above what the 2009 recession did in commercial real estate. It is well over that today, so that'll likely correct sooner than you would think. And if you pay a higher interest rate, then refinance in three years.

Mike Jorgenson:

So I would caution against any concern with the market for two reasons. Number one, as a buyer or a tenant, a market correction is a good thing because you have more inventory. Landlords are getting more aggressive and sellers are getting more aggressive to sell their real estate. Number two, you are in with a dentist and a veterinarian specifically, those are the top two most secure loans that a bank can make. And even in a recession, people are still going to have cavities. Even in a recession, Fluffy is still going to break his leg. And so, they're going to still need your services regardless of what the market looks like for the next two or three years. So I would say, "Have confidence in where you're at, have confidence in the fact that as a veterinary and dental buyer, no matter what happens with the market, you're in a good place."

Corey Brown:

How would your opinion change when we're talking about existing commercial real estate owners in today's market? How does that impact them?

Mike Jorgenson:

For the majority of them, it's really not going to affect them, because ownership is a long-term play. And so again, as I alluded to before, even amongst Covid, we expected a lot more of a downturn in the market than we saw. And I think landlords just realized that we're not going to stretch for the next 5, 10, 15 years to snag a deal today if the market is going to correct. And so, we saw landlords sitting on vacancies for a long time and sellers sitting on and not doing a fire sale because they knew that this was going to come back. In 2009, that was probably the worst commercial situation that we've seen. And so, we did see a very large softening of the market, and so it created opportunities. But for people who own their real estate and bought a property in 2004, 2009, didn't do anything for them because they sat on it.

Mike Jorgenson:

And so, maybe now today, I would say the people that it probably affects most are those who are looking to retire. And so, in that situation, it might make sense to engage a real estate agent to see what best case scenario is for you, because there are a lot of people... One of the most common calls we get from people who are not doctors is from investors who are looking to buy dental and veterinary real estate in the form of a sale lease back. That doesn't always make sense. Oftentimes, it does not make sense, but there are times where it does make sense. And so, looking at your options and knowing what is available to you, that's one thing that you're going to hear from us as it pertains to real estate often is just look at your options. The worst thing that can happen is you say no to all of them and you stay where you're at right now, but at least you know what's available to you.

Corey Brown:

Great advice, Mike. We've talked a lot about pros and cons of owning the home for your healthcare practice, but after the break I'd like to hear your thoughts on what leasing your real estate means for our listeners. More with Mike after the short break.

Corey Brown:

I'm Cory Brown, and this Provide's The Path to Owning It podcast. We're back with Mike Jorgenson, Regional Director for CARR Healthcare Realty. Mike, I'd like to shift our focus to those who are considering leasing their office space and what advice you have for them.

Mike Jorgenson:

Some of the main advantages of leasing would be the fact that the landlord is oftentimes going to help with several of the costs that you might incur. So as long as you have a well-negotiated deal, you should be getting a pretty sizable tenant improvement allowance package. If not that, you should be getting it somewhere else such as free rent or some other concessions, lower rate.

Mike Jorgenson:

But the truth of the matter is, a lot of times landlords, they're willing to invest into their property to ensure that they're getting the best possible tenants. And so, when you're taking out a loan of 5, 6, even $700,000, a healthy portion of that is actually going back into their property. And a lot of times if we're able to get the landlord to come to the table and ensure that they are giving a healthy tenant improvement allowance, then that frees up that capital to potentially put it in a different place.

Mike Jorgenson:

I had one client, we got them $120,000 build out allowance and, "They said that allowed me to get a CEREC," which is a dream of theirs. And so, you can potentially use that elsewhere, not necessarily everywhere else, but your bank will allow you sometimes to use that somewhere else within the transaction.

Mike Jorgenson:

One other advantage of leasing your space is that you're not having to use capital and sinking it into a piece of real estate for the next 10, 15, even 25 years, because that money sits there until you either refinance or sell that real estate. And so, if your goal is to own multiple practices, I alluded to it before, a lot of times it makes more sense to lease because you get that input from the landlord and you're not having to spend that capital yourself.

Corey Brown:

Mike, you mentioned tenant improvement packages and how they sweeten the deal for a lessee. What do those typically look like and are they common?

Mike Jorgenson:

That's a great question. So the doctors, again, they're going to be investing a tremendous amount of money with a couple of the buildouts that we're talking. Healthcare buildouts are two to three, even four times more expensive than some of the traditional build outs. And so, that means that you are investing more money into their space, which is equity for them.

Mike Jorgenson:

And so, what we would expect from a landlord would be for them to participate in that. And to attract a tenant like yourself, they need to come to the table with healthy concessions. And one of the best ways to do that is by ensuring that you have options. You don't know what market is if you're not looking at several different options in terms of real estate. And so, when you take a dentist or a veterinarian, somebody who has the lowest default rate, to the market and say, "Hey, if you want to land this tenant, you need to ensure that you put a good deal in front of us, and here's what we would like to see in terms of tenant improvements." A lot of times you can get that landlord to come to the table with that.

Mike Jorgenson:

One other point on that, a lot of times doctors get so hooked up on rate that they miss other opportunities. So we see it with lenders all the time. I'm sure you guys run into that often, where they say, "Well, this bank has a lower rate." Yeah, but have you seen their term and it's an adjustable rate and several other factors." Same thing happens with real estate, is they potentially fall so in love with the property because it has such a low rate and they miss out on some of these other benefits that are actually going to free up that loan.

Mike Jorgenson:

And what I always say is that loan is the most important thing that we're looking at here. We need to preserve that money as much as possible. And so, you might end up paying a little bit higher rate, but if the landlord is offsetting it with tenant improvement allowance, especially, then that's allowing you to not only save on that loan and be able to put it elsewhere, maybe marketing or something else, but it's also allowing you, when you pay it to the landlord, that's a line item deduction. Whereas in a loan, you're only able to write off the interest there. And so, there are even some tax benefits to paying a little bit higher rate but also getting some concessions that more than offset that rate.

Corey Brown:

Yeah, very important point there. Let's talk a little bit about disadvantages to leasing. What would you advise there?

Mike Jorgenson:

Some of the disadvantages, just dealing with landlords. And that's one thing that a lot of clients miss is that just because the landlord is asking for more doesn't mean they're a bad person. You would do the same if you were selling your house. You want more, buyer wants to pay less, and so there's another party that you kind of have to go to for permission in some cases like if you want to build out.

Mike Jorgenson:

Another thing is, most of those costs are pushed through anyways, not even just that you are paying the landlord or you're helping him offset his mortgage, but he's pushing through a lot of those expenses like the taxes and the insurance and the maintenance. A lot of times, you're paying those directly anyways. And so, there are a couple disadvantages when it comes to leasing, for sure.

Corey Brown:

Who would be a good candidate for leasing the space for their healthcare practice as opposed to owning?

Mike Jorgenson:

A lot of times, first-time practice owners are likely going to be leasing. If you're starting a practice, back in the day you might used to be able to get a loan to do a real estate purchase as well as practice purchase. Since 2017, we haven't seen that very much at all.

Mike Jorgenson:

So first-time practice owners, whether starting or acquiring, again, even if you're buying a practice, they're usually doing it based off of a percentage of that practice, and it doesn't leave enough in leverage within the practice to set it off against the real estate. So in both situations, if you're a first-time practice owner, a lot of times it does make more sense to lease.

Mike Jorgenson:

If your goal is strictly profitability, and you're intending to continue to grow your dental practice into several locations, leasing a lot of times makes the most sense. And then, if you are in a market that is too expensive to own, we run into that a lot. And there are even some markets that are more rural, you're either going ground up or you are stuck with what the market will give you. And so, it's market dependent whether or not you can afford to even own real estate and if you have the down payment as well. So those are a couple of the considerations.

Corey Brown:

Let's say that I've decided to lease the office space for my practice. What are the steps I should take as a doctor in order to do that?

Mike Jorgenson:

This will be an easy one, because they're very much the same as purchasing real estate because you want to make sure that you're surrounded by a team that can help. So engaging that equipment supplier, that attorney, the lender, first and foremost. A lot of those positions, they're the same positions whether you are looking to lease or purchase real estate.

Mike Jorgenson:

And again, as I alluded to a minute ago, you want to make sure that you're looking at the full market. If your agent is just showing you one property, I would probably run. The most common question we get is, "What is fair market?" And if you don't know the market then you don't know what is fair. And so, you have to look at several options when it comes to real estate purchase or leasing.

Corey Brown:

Yeah. That's another great piece of advice. Let's talk about some common mistakes that lessees make. What do you see, normally?

Mike Jorgenson:

I alluded to it before with the DIY approach, doctors trying to save money or not spend money by not having representation. Another common one we see is working with a residential agent. Especially in a lease scenario, there are so many differences. When it comes to commercial real estate, they don't see things like tenant improvement allowance and free rent, and they don't really even ever deal in leases in general.

Mike Jorgenson:

For people who are currently leasing, by far the most common mistake that we see is they don't engage somebody to help them with the lease renewal. That's the most common transaction that anybody is going to be in. And you have a right at the end of that lease to ensure that you are getting a fair deal. And the only way to do that is by looking at market. And so, what I would suggest is if you're in a lease, get that lease in the hands of a real estate professional to make sure that you know when that end date is, so that in that end date a year out, maybe two years out, depending on what you would like to do, you can look at the market and go back to your landlord even if you want to stay, go back to your landlord and ensure that you're getting the best possible deal.

Corey Brown:

Let's talk about triple net leases and how they affect the lessee. Is this a common occurrence that you see?

Mike Jorgenson:

Yeah, especially in retail-type settings, you run into a lot of triple nets. That whole idea of triple net versus full service versus modified gross, those are the main three types of leases that you're going to run into. Full service means that it's all built into that number. Modified gross means some of them are, some of them aren't. Triple net means none of them are built in. And so, when I say none of them, that means taxes, insurance, and common area maintenance. Those are the three nets that would not be included in your rates. So if a landlord says, "This is $25 triple net," your question needs to be, "What are the triple net costs?" Because it might be another $4.50 cents.

Mike Jorgenson:

In a full service situation, another common thing that we see missed is doctors thinking full service means, "I don't ever have to pay for anything else." In a full service situation, a lot of times you're going to run into something called an expense stop or a base year. And in both of those situations, at the end of the year, the landlord is going to reconcile their expenses and if there is excess on top of that, they're going to come back and charge you anyways.

Mike Jorgenson:

And so, a lot of times triple net makes the most sense because in a full service or a modified gross, if the expenses go up, you still pay for it. If they go down, the landlord gets to pocket the difference. In a triple net lease, if expenses go up, you pay for it, and then if the expenses go down, they actually give you a credit. And so, triple net is actually not a bad thing. In most situations, a triple net is a good thing because at least if expenses go down, which they never do, but if they did go down, you would at least get a credit on that next statement.

Corey Brown:

Thanks for clearing that up for us. That makes a lot of sense. With the current market conditions, rising rents, construction costs, does leasing still today make sense?

Mike Jorgenson:

It depends, especially in the market that you're in. And so, again, if there's no other option, if you don't have the ability to own real estate, whether because you don't have enough equity or because it's too expensive, then obviously, leasing makes sense. It still makes sense to open up a practice.

Mike Jorgenson:

What we suggest in every situation is looking at the market and if you say, "I want a lease."

Mike Jorgenson:

"That's great. Let's look at ownership just to make sure that it doesn't."

Mike Jorgenson:

And if you say, "I want to buy," then we say, "That's great. Let's at least look at some lease options to make sure that that's not a better option for you." Because if you say, "I can produce $200,000 a year more out of that space" and you're going to save $20,000 a year for purchasing, it doesn't make sense. You should go lease that space. And so, it always depends on what's available to you within the market. And so, that's the importance again of just knowing your market options.

Corey Brown:

Now your answer might be, "it depends" here, but I'm going to ask you anyway. When ultimately evaluating whether to lease or own the real estate for healthcare practice, what's the best piece of advice you can give our listeners who are debating between the two?

Mike Jorgenson:

I'm actually not going to say "it depends" here. The best piece of advice that I'm going to tell you is, "Know your options." So go to the market. Make sure that you've seen both purchase and lease options and that you have somebody who has done this before. I'll give you kind of my quick three step on how to pick an agent. A good situation is to make sure you have a commercial real estate agent. I'm not even promoting CARR here. Make sure you're working with a commercial real estate agent. They know things that residential agents don't.

Mike Jorgenson:

A better situation would be working with a buyer/tenant only agent within your transaction, because they have no conflicts within that transaction. If you work with somebody who has even a single listing in that market, they have a vested interest to get you to go into that space, because oftentimes they get a double commission if they do so. Even if they don't have a listing in that space, they might try to use your deal to lure a landlord by making them feel like they got a good deal. If they can make that landlord feel like they got a good deal, that landlord might have 16 other properties and that would feed their family for all of next year. And so, having somebody who doesn't work with any landlords is the better situation.

Mike Jorgenson:

And then, the best possible situation is a buyer/tenant only, healthcare only agent, who understands your verticals. We run into it a lot of times in vet, where a landlord won't even consider the vet because they don't understand that it's not 1900 anymore and we have things that can help deflect sound and bring smells down and that the vet is more concerned with it than the neighboring tenant is in terms of smells or sounds. And so, having somebody who understands the healthcare industry is very important. And notice I put healthcare after buyer/tenant only. I would rather have a buyer/tenant only who doesn't understand healthcare than a healthcare agent who is not buyer/tenant only.

Corey Brown:

Yeah, that makes perfect sense. Now, for our listeners who would like CARR to help them with their ownership journey, how can they contact you?

Mike Jorgenson:

The best way to do that would be to go to carr.us. That's C-A-R-R.us, and there's a "find and agent" tab there where you can find the agent in your local market. If there's not one in your local market, don't worry. We, as buyer/tenant agents, can oftentimes still help in a way that would be more advantageous than somebody local, because again, you oftentimes know what property you're looking for. So take heart. We can still help. Reach out to the closest agent to your area at carr.us, that's C-A-R-R.us.

Corey Brown:

Awesome. Mike, I really appreciate you taking the time to educate our listeners and helping guide their decision on this kind of age old question of whether to buy or lease, so thank you very much.

Mike Jorgenson:

Absolutely. Thank you.

Corey Brown:

Thank you for joining us for this episode of The Path to Owning It. If you're ready to take your practice ownership dreams into your own hands, be sure to visit getprovide.com to pre-qualify and browse our practice marketplace. Or check out our news page for more helpful resources. The Path to Owning It is brought to you by the team at Provide with production assistance from Sarah Parkey, Cody Changet, and Liv Connaughton. And it's produced by Podcamp Media, branded podcast production for businesses, podcastcampmedia.com. Producer, Dusty Weis, Editor, Larry Kilgore III. For Provide, I'm Corey Brown. Thanks for being on the journey with us.



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