Own your office? What to consider

December 16, 2005

It's your workspace. Should it be part of your portfolio, too?

Do you currently rent your medical office? Are you thinking about buying or building your own? Do you see it as an asset as well as a practical solution for your need for office space? We asked a broad spectrum of experts what advice they give doctors who are considering a purchase.

To Atlanta healthcare architect Richard Haines Jr., the decision to rent or buy boils down to two questions: Do you need specific space in a specific location? And, if so, how do you best meet these needs? "The most important thing," Haines says, "is to get the correct space that helps you be efficient and serves your patients well. Poorly organized and designed space is a bad investment, regardless of its cost and whether or not you own it."

Ownership has its benefits

"While real estate has done tremendously as an investment in the past four years, there's no unique advantage that medical real estate has over other forms of real estate," says healthcare attorney David J. Schiller, of Norristown, PA. "The control that owning the practice gives you is the most important issue." Renting, he says, can be disruptive to your practice. For instance, the property could be sold, and the next landlord may have a different style or attitude toward his responsibilities. He may raise your rent to intolerable levels when your lease is up, or he may throw you out. "If you get tossed out, you lose the improvements you've put in, whether you've paid for them yourself or they've been reflected in your rent," warns Schiller. Financial planner Craig E. Carnick of Colorado Springs says that one way to avoid this possibility is to make sure during negotiations for the original lease that an option or series of options to renew at market rates is also included.

Schiller offers the reminder that stability is important in building a practice. And if you own the building where you have your practice, you know you have a steady tenant.

In addition, your equity may appreciate sharply, as Azar A. Korbey, a family physician in Salem, NH, happily discovered with the building he purchased in 2001 to house his practice. His area is a hot real estate market and that has extended to his medical building, which he estimates has doubled in value.

Owning your office space will also lower your practice's tax bill to a certain degree because you'll be able to write off interest, property taxes, and, if you purchase a condominium, condo expenses such as management fees and maintenance expenses. If you have to spend for major improvements, those are capitalized, and depreciated.

Another way to reduce your tax bill is to pay yourself rent. Many doctors who own their building do so through a real estate partnership, corporation, limited liability company, limited liability partnership, or family trust that's separate from their medical practice. Scroggins recommends that doctors own real estate in an LLC. He notes, "It provides liability protection that the partnership or proprietorship can't." Cutting a monthly rent check to the real estate entity reduces your income from your practice-and, consequently, your personal income tax. Yes, this maneuver increases your profit from the real estate entity, but partnership income isn't subject to payroll taxes, such as those for Social Security and Medicare. Moreover, depreciation will shelter some income from tax.