Who Owns the Building?

Physician's Money Digest, September15 2003, Volume 10, Issue 17

Are you adding a new partner toyour practice? If so, that physicianwill often take on a stakein ownership of your office building.But what's the best way to go aboutpurchasing the real estate? The goodnews is that, all in all, the process of realestate transactions for medical practicesacross the nation hasn't been alteredmuch in the past several years.

Private Practice Success.

Jeffrey B. Sansweet, JD, LLM, a partnerin the health law firm of Kalogredis,Sansweet, Dearden, and Burke (www.ksdbhealthlaw.com), recently discussedthe matter with Here's a quick summary of tips:

1. Separate the transactions—Dueto taxes and liability, view thepractice and real estate buy-ins as 2 distinct,separate matters. To add a physicianto the practice, the new partnershould make a stock purchase for theirportion of the hard assets. Additionally,allotting the new partner a reducedsalary for 3 to 5 years helps address thenew doctor's initial lesser "value" to thepractice's existing patients.

2. Refinance the mortgage—Themost common approach to buyinginto the real estate aspect is to refinancethe existing mortgage, addingthe new physician, and strive for nearly100% financing. In this way, existingowners can then benefit from mortgageproceeds, while the new partner neednot put down too much money. And ifinterest rates are low—as they currentlyare—terms can be shortened to gainequity more quickly.

3. Finance a buy-in—Another approachmakes sense if interestrates are high or if the practice has refinancedrecently. In this case, the newpartner would be included on the mortgageas a guarantor and would paytheir portion of the equity to the currentowners over time, with interest.

4. Make a lump-sum payment—Every once in a while, a new partneris asked to come up with a lump-sumpayment to pay their share of theequity for the buy-in just mentioned.For this situation, the existing ownersmay help arrange financing with thepractice's bank—going as far as guaranteeingthe loan.

5. Set the price—Typically, the 2 parties—the existing owners and thenew physician—each obtain an appraisal.The price is then determined byaveraging the 2 appraisals. For gapsbetween appraisals greater than 10%, athird appraiser is necessary to averagein and determine the price.

6. Get it in writing—Ensure that anychanges are included in the partnershipagreement. Remember to considerfuture buy-out issues.

7. Make landlord policies—If just 1physician acts as landlord in a partnership,then a written lease should exist,as well as a means of establishing "fairmarket rent." On the tenant end, a physicianshould obtain a long-term lease (orseries of renewable short-term ones),purchase option, and right of firstrefusal. However, purchase obligationsshould be avoided. In regard to the purchaseoption, it is better to set the priceat the time of the actual transaction,rather than projecting a price for thefuture. Both parties can instead agree towhat method they will use in determiningthe price when and if the time comes.