Turn Occupancy Costs into Retirement Funds

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Physician's Money Digest, June 2007, Volume 14, Issue 6

When Dr. Carl Greek decidedhe was tired of "throwingmoney away" on rent for hismedical offices, he explored purchaseoptions for his Temecula, California-based practice. He soon realized the timeand turmoil entailed in building fromscratch could interfere with running hispractice, and he hit on a unique solutionthat allowed him to purchase the exactspace he wanted in a good locationwithout the costs typically associatedwith a customized build-out.

The solution was to purchase a customsuite in a medical condominiumproject. Without any accelerated payments,the doctor and several fellowphysician purchasers will each own theirsuite when the building is paid off inapproximately 20 years. At that point,the doctors have several options:

•Continue their practice withoutoccupancy costs;

•Retire and create an income streamby leasing the suite;

•Sell the suite and fund retirementwith the proceeds;

•Do a 1031 tax-free exchange foran alternate property.

Leasing costs for medical space of a2000-sq-ft area is conservatively projectedto be at least $2.50/ft, so leasing thecondo suite should provide an incomestream of $5000 monthly or $60,000annually on the unencumbered asset.

Dr. Greek is free from rent increases,enjoys tax advantages, plus his occupancycosts are doing double duty by helpingfund his retirement plan.

During construction, the condo projectis managed by Medical Real EstateDevelopment (MRE), which handles thedetails (eg, locating land, architects, civilengineers, general contractors, financing,or municipal improvement requirements).After build-out, a condo associationis formed among the doctors forongoing management.

Unlike buying from a traditionaldeveloper, the building shell is deliveredto the doctors at cost plus a fixed managementfee using a limited liability companymodel, which in most of MRE's 14projects has been significantly less thanmarket price.

Physician buyers note that unlikeowning a minority interest in a buildingand leasing space, individual suite ownershipin the condo project providesmore liquidity and flexibility.

Ed Anderson and Kelly Combsare principals with MedicalReal Estate Development Company.The Menifee, California-based firm develops medicalcondominium projects for health care professionals. Theauthors welcome questions or comments at 951-723-8366or jdonaldson@mredev.com. For more information, visitwww.medicalrealestatedev.com.