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Don't lease your Medical Office Space!

Discussion in 'Finance and Investment' started by Richard B, May 30, 2008.

  1. Richard B

    Richard B Real Estate Developer
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    Found this good article:

    http://www.aafp.org/fpm/20040900/27bigi.html


    Stop renting
    Annette M. Chavez, MD
    Carillon Family Practice, Kettering, Ohio
    Most people don't rent their houses for their whole lives, so why should physicians lease office space for 40 years?
    I was warned not to do it by the administrator of my former group. I was told that I could invest my money in the stock market with greater financial return. I was also told that medical buildings are hard to maintain and sell. But I knew I would spend the rest of my life in Dayton and did not want to lease office space until I retired. I calculated that my four-physician group had spent $450,000 on rent during the seven years we were together and extrapolated future lease costs of $2 million for the remainder of my career if we stayed in the same office.
    So I started my own practice in a brand new building that I own. Because of a covenant not to compete with my former group, I had to move over eight miles away. I drove around my target area until I found a derelict vacant lot where a restaurant had been torn down. I paid $87,000 for 1.3 acres on a hill, engaged an architect and a builder, and secured a construction loan and a line of credit for my operating expenses. My husband and I put down about $90,000 of our own money (saved over the years by living below our means). We did our own landscaping and outfitted our office with equipment obtained at auctions and from hospital surplus. I sewed my own exam room curtains and re-covered my exam room chairs ($10 each). My husband is my office manager and does all the building maintenance, which is minimal as the building is new.
    I now practice in a beautiful new office with the patient flow and staff logistics exactly as I had planned. The area in which I constructed my office has turned around, with new retail shops, housing and physician offices locating in this first-tier suburb of Dayton. We now owe $480,000 on our building and plan on paying it off within 15 years, which will give me the option of practicing part-time at that point. When I decide to retire, I can either sell the building and the practice or lease the office space if I can't find a buyer immediately. For now, I am proud to be the owner of my practice and the building that houses it.
    Take-away lessons
    Most people don't rent their houses for their whole lives, so why should physicians lease office space for 40 years? If you know you are going to stay put, take advantage of the benefits of ownership. You can deduct your mortgage interest while gaining equity and practice rent-free and (eventually) mortgage-free.
     
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  3. Richard B

    Richard B Real Estate Developer
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    I'm curious what others think of this article.
     
  4. The White Coat Investor

    The White Coat Investor AKA ActiveDutyMD
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    If you know you're going to stay put AND you enjoy doing things like sewing your own curtains, I can see the benefits. Not really an issue in my field though. Why, are you looking into developing a niche selling vacant lots to physicians?
     
  5. Richard B

    Richard B Real Estate Developer
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    I believe a commitment to the community you practice in is a very important element to success. It is more than sewing but rather a commitment to doing what you need to do to be a success and provide the type of service to patients they received 50 years ago.

    It is also about the smartest decision you can make regarding retirement.

    I am not trying to get doctors to buy vacant lots from me. I don't own any vacant lots. I instead want to provide an alternative viewpoint to the idea that a house is the first and only real estate you should own as a doctor. In fact, relative to medical office space it is far inferior.
     
  6. The White Coat Investor

    The White Coat Investor AKA ActiveDutyMD
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    1) It's silly to think a physician who is locked in due to an inflexible investment is somehow superior to a community than one who leases his office space.

    2) I'm, for one, am not interested in receiving (or providing) medical care as practiced fifty years ago, before EMS, ultrasound, CT, most antibiotics, laparoscopy, GI scopes etc. You seem to have some bizarre Norman Rockwell nostalgia going on here.

    3) "Best retirement decision?" Sounds like the residential real estate professionals trying to get people to buy bigger houses and take out HELOCs to either buy more property or consume more the last few years. Many people had nearly all their net worth tied up in a home. How's that retirement plan working out for them? If you're going to make a statement like this you'll need to provide some facts (the plural of anecdote is not data BTW) to justify it. I can think of several other decisions that will likely have a greater effect on one's retirement:
    A) Choice of profession
    B) Savings rate, especially when young
    C) Choice of investments
    D) Withdrawal rate from investments
    E) Type of practice
    F) Defined benefit plans
    G) Defined contribution plans

    I mean, are you suggesting that it is a better idea to buy your medical practice than to spend less than you earn? I mean, buying commercial real estate can work out great, but being a landlord is a second job that many physicians aren't interested in, and there is certainly more risk involved in buying than in leasing.

    4) "Far inferior" is a broad, vague, and general term. Inferior in terms of possible income? Inferior in terms of risk:return balance? Inferior in terms of providing shelter? Inferior in terms of flexibility? Inferior in terms of current valuations? Exactly how is residential real estate inferior to commercial? As near as I can tell, things are pretty similar. You buy the property, you pay the expenses, you receive some income on a regular basis, and hopefully at some point you sell it for lots more than you pay for it. Is there some tax avoidance scheme that works with commercial real estate better than residential?

    5) Who exactly has this viewpoint that a house is the only real estate a doctor should own? I'm not sure I've heard that from anyone but you.
     
  7. The White Coat Investor

    The White Coat Investor AKA ActiveDutyMD
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    Duplicate post.
     
    #6 The White Coat Investor, Jul 5, 2008
    Last edited: Jul 5, 2008
  8. The White Coat Investor

    The White Coat Investor AKA ActiveDutyMD
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    And somebody ban this guy. The only point of his post is his signature, which is simply an advertisement for his site. If people aren't willing to register in the top thread on the forum before advertising their wares, they shouldn't be allowed to post.
     
  9. Richard B

    Richard B Real Estate Developer
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    Before I get into your other points, I'm curious if you have your own practice or work for a hospital or group.

    Your response above tells me you work for a hospital or group because you don't seem to have a sense of what it takes to run a succesful business, based on your above statement.

    You are mistaking healthcare technology with taking care of your patients.

    Richard Boureston
    Medical Real Estate Develolper
    Medical Office Space Blog
     
  10. Habeed

    Habeed Membership Revoked
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    Human beings are sophisticated creatures that are also faulty and appear to have built in obsolescence. How are you going to "take care of them" if you don't have high technology to make it happen? The more we push back death, the more sophisticated the tools we need to make the next step.
     
  11. Richard B

    Richard B Real Estate Developer
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    My point is that there is a difference between how the patients were cared for, and what was used to treat them.

    An excellent example of this can be found in a Provincial hospital I visited in Dumaguete, Philippines in the Negros Oriental island.

    There were 250 patients in the hospital, 2 nurses, and 1 doctor. There were patients in the lobby and patients in the hallway. It was shocking.

    The nurses would visit the patients and determine what needed to be done. They would then instruct the patient's family member what prescriptions were required. The family member would walk off the hospital grounds and across the street to the pharmacy, buy the drugs or supplies, and then bring them back. The nurse would then come back around later and administer the drugs or perform the necessary procedure, not surgery but anything that might be technical.

    The patients were still receiving the healthcare technology available but they certainly weren't being cared for the way a private hospital would be able to care for their patients.

    I'm sure someone from the Philippines can confirm what I am saying.

    In the United States, 50 years ago patient care was not driven by insurance companies and based on high-volume models.

    Richard Boureston
     
  12. The White Coat Investor

    The White Coat Investor AKA ActiveDutyMD
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    If you think it is shocking to care for patients in the lobby and the hallways I'd like to invite you to my workplace, where I do that EVERY SINGLE DAY. You haven't lived until you've intubated a patient in the hallway and run a code in the waiting room. :)

    I've practiced in Guatemala without much technology where all I could do was "care" for patients. I sent 4 infants home to die I cared so much. I called a witch doctor consult to get the parents to stay I cared so much. But you know what? Had I been in a modern pediatric hospital with an ICU, none of those kids would have died.

    And to answer your question, my specialty doesn't lend itself to buying my own office space, so it is really a theoretical discussion for me. But if you're not interested in a theoretical discussion, well, that's fine. I assume you're not since you didn't answer any of the questions put to you. But my assumption after your initial post was that you wanted to discuss this stuff:

    P.S. You still doing CrossFit?
     
  13. Richard B

    Richard B Real Estate Developer
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    ActiveDutyMD wrote:
    1) It's silly to think a physician who is locked in due to an inflexible investment is somehow superior to a community than one who leases his office space.

    Richard Boureston replies:
    A physician who has made a investment in his community and is dedicated to successfully caring for the community both through health care and supporting the events and people important to the community is superior to someone who leases space and is self-serving, uninterested in bringing value to the community.

    Buying real estate is only as inflexible as your imagination is dull.

    ActiveDutyMD wrote:

    2) I'm, for one, am not interested in receiving (or providing) medical care as practiced fifty years ago, before EMS, ultrasound, CT, most antibiotics, laparoscopy, GI scopes etc. You seem to have some bizarre Norman Rockwell nostalgia going on here.

    Richard Boureston replies:

    I have already addressed this issue in my previous posts.

    ActiveDutyMD wrote:

    3) "Best retirement decision?" Sounds like the residential real estate professionals trying to get people to buy bigger houses and take out HELOCs to either buy more property or consume more the last few years. Many people had nearly all their net worth tied up in a home.

    Richard Boureston replies:

    I understand that most doctors only have experience with buying and selling homes. However, comparing a home to medical office space is like comparing a go-cart to an F1. Yes they have similarities but their differences are far more defining.

    For instance, if you read this article you will begin to understand the differences.

    This quote from the article in particular is representative of most of the country:

    "Practically every broker contacted by the Herald-Tribune said that users of medical office space are about the only businesses that are still expanding.
    'Over the last few months, I've seen a flurry of activity,' said Diane Lawson, a commercial agent with Abbey Realty in Sarasota. 'A growing health care company filled 4,000 square feet. A doctor took 5,000. It's been mostly in health care.'"

    ActiveDutyMD wrote:

    I mean, are you suggesting that it is a better idea to buy your medical practice than to spend less than you earn? I mean, buying commercial real estate can work out great, but being a landlord is a second job that many physicians aren't interested in, and there is certainly more risk involved in buying than in leasing.

    Richard Boureston replies:

    I'm not sure where I suggested to buy a medical practice instead of establishing a budget and functioning within it. You will have to show me where I suggested that.

    What if the landlord and the tenant are the same thing? Or what if it is a condo that is manage by a professional property manager?

    ActiveDutyMD wrote:
    4) "Far inferior" is a broad, vague, and general term. Inferior in terms of possible income? Inferior in terms of risk:return balance? Inferior in terms of providing shelter? Inferior in terms of flexibility? Inferior in terms of current valuations? Exactly how is residential real estate inferior to commercial? As near as I can tell, things are pretty similar. You buy the property, you pay the expenses, you receive some income on a regular basis, and hopefully at some point you sell it for lots more than you pay for it. Is there some tax avoidance scheme that works with commercial real estate better than residential?

    Richard Boureston replies:

    No. Income producing Real Estate is viewed the same by the IRS whether it is commercial or residential. The benefit becomes obvious when you digest the information in the articles, and others like it, that I linked to.

    ActiveDutyMD wrote:
    5) Who exactly has this viewpoint that a house is the only real estate a doctor should own? I'm not sure I've heard that from anyone but you.

    Richard Boureston replies:

    Look at the posts in the Financial section of this forum alone. Not to mention the many doctors I have spoken with. The post on this forum are mostly about 401K plans and down payments on houses. How many are asking questions about investing in medical office space?

    Thanks for your questions.

    Richard Boureston
    Medical Real Estate Developer
    Medical Office Space
     
  14. LADoc00

    LADoc00 There is no substitute for victory.
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    A vast majority of the new MDs where I am do NOT have the option to simply build an office. Space is such an utter premium especially around medical districts, it can go for outrageous sums per SF.

    But if you can, of course buy assuming the price is good.
     
  15. Richard B

    Richard B Real Estate Developer
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    You are right that Medical Space is more costly. The main reasons are the parking requirements by the city and the Tenant Improvement allowances contributed by the Owner, in the case of a lease. Of course, what the market is willing to pay also drives the price.

    I can tell you that in many cases the monthly payment on the loan is about the same as a lease. It is worth looking into.

    Richard Boureston
    Medical Real Estate Developer
     
  16. The White Coat Investor

    The White Coat Investor AKA ActiveDutyMD
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    Do you talk to your clients like that in real life? If so I guess it's obvious why you have to trawl (troll?) here for more.

    Uh...no you didn't. Doesn't matter though. Not really important to the discussion. Appealing to some nostalgic Rockwellian sense of "belonging to the community" means little. Why could I not care for the community just as much moving my practice from one rented location to another within my community every 5 years as buying the building I practice in?


    You suggested that buying a medical practice was "about the smartest decision you can make regarding retirement." I'm merely saying it probably isn't even in the top 5 and it is a salesman's tactic to suggest otherwise. Most doctors I know don't even know the difference between an IRA and a variable annuity, are underinsured with respect to their life and ability to earn a living, and have no clue how to plan for retirement.

    Just the one trying to sell it. Most people on this forum are STUDENT doctors of one type or another. Lots of pre-meds, some med students, a few residents, and a handful of staff doctors, usually just a couple of years out of residency. Owning the building you practice in can certainly be a good investment, but it isn't exactly a timely issue for most here. That's why you see questions about 401Ks, mortgages, handling student loans, emergency funds etc.

    So what you're saying is it is so obvious you can't explain it yourself? In my experience, the best investments/financial decisions are the ones I can explain to my kid sister in 30 seconds or less. The more complicated it gets, the more the stock brokers/insurance brokers/realtors make off me.

    So what you're saying is that residential real estate gets better mileage, requires less maintenance, doesn't require specialized driving skills, and can be done relatively easily by a beginner without hiring 5 guys to change the tires and lining up multiple sponsors? I'm not sure that analogy is helping your cause. You can say the same thing about buying stocks (a go-cart) and buying options on margin (an F1.) Sure, one of them is more exciting, more sexy, and makes more noise, but one of them is also more likely to crash into a wall at 200+ mph.


    If there is anything I've learned, it is that brokers make money when I buy and brokers make money when I sell. For instance, in the recent residential real estate boom, the realtors in this area were touting the benefits of buying in right up to (and sometimes even a little after) the time they crashed. Stock brokers sell stocks, financial planners sell mutual funds, insurance salesmen sell insurance, and realtors sell real estate. They're only compensated if they make the sale. How does a survey of realtors prove anything at all objective about real estate? Also, note that this survey attempts to generalize its results from the recent past "it's been mostly in health care" into the future (where we really have no idea what is going to happen.) It is usually a good idea to avoid any area of investing where there has been a "recent flurry of activity."



    What are you trying to get at here? You're asking random questions instead of just explaining yourself. For example, let's try to answer the second one: What if it (whatever it is) is a condo that is manage (d?) by a professional property manager? Well, then I suppose the manager will want about 10% of the rental value of the property as payment for his services.

    Now let's try the first one: What if the landlord and the tenant are the same thing? Well, then I suppose the landlord doesn't have to drive very far to collect the rent.

    Now, let's look at this high quality article you've linked to:

    Here's a quote:

    You seem to have missed this paragraph in your selective quotation. Or perhaps you don't believe that it is possible for a medical building to go down in value, to have a rising vacancy rate, and to get lower rents than expected?

    Here's what another easily googleable article suggests:

    Is this the reason you're coming here looking for buyers?
     
  17. Richard B

    Richard B Real Estate Developer
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    ActiveDutyMD:

    My comment about imagination being dull wasn't directed at you but rather a general statement that if someone thinks of owning real estate as an inflexible investment then they aren't using their imagination.

    After reading it again I can see how you would think I was commenting on your imagination and so I can understand why you read it that way.

    I have no idea who you are, you don't say your name, and even if I knew your name it wouldn't help me know you as a person.

    All that being said, you appear rather hostile and uninterested in understanding what I am talking about. Your willingness to lump commercial real estate all together and then comment on its viability belies your lack of knowledge.

    Let's be clear: I am not looking for buyers. I have nothing to sell to anyone here. You are dead wrong in your assumptions of me.

    What am I doing on this board? Trying to give people other ideas on how to run their practice and invest their money.

    As you have said:
    I want to have them thinking about this BEFORE they make a decision to lease space. What good does this information do if they have already committed to a 5 or 10 year lease?

    Honestly it seems like you are more interested putting me in my place than learning anything from my perspective. Because of that, unless you correct my understanding, I've said what I have to say and don't see any benefit to continue this conversation with you.

    Richard Boureston
    Medical Real Estate Developer
     
  18. The White Coat Investor

    The White Coat Investor AKA ActiveDutyMD
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    Would you think it odd if I were hanging around a plumber's forum trying to talk the participants into going to the emergency department more often because, hey, plumbers need to be healthy too? And a healthy plumber is the best kind of plumber there is. You have to expect a certain amount of incredulity given your background and approach to your first few posts here. Don't take it too personally as most people who begin here as you do don't last even 10 posts before they fade off into the woodwork to advertise somewhere else. If you think I'm being hostile to you, you should see what I do to the pharmaceutical reps, or heaven forbid the military recruiters who wander in here. You want to have them thinking about buying office space? Why would that be? Probably for the same reason I want those plumbers thinking they might be having a heart attack when they have chest pain. I mean, come on, not only do you give your full name (google me please), but you describe yourself as a "medical" real estate professional (PM me please), and you even link to your blog in your signature (come, give me business.) To make it worse, you violate forum rules by not registering yourself in the first sticky on the page titled "Avoid Banning, Post Corporate Affiliations here." I'm surprised they haven't banned you yet. What would you think if you were a medical student reading along? If you had half a brain at all you'd be saying to yourself, "Self, what is this guy trying to sell me?"

    At any rate, I'm still waiting for you to explain WHY investing in medical office buildings is such a great investment that many/most doctors should be doing it. Let me see if I can make part of your argument for me, and you can fill in the rest:

    Pros:
    1) When you quit practicing, you have an asset to sell off to help fund your retirement. Hopefully it is worth sufficiently more than what you paid for it that it was a good use of your money. Alternatively, you can continue to rent it out and live off the income. Rents tend to increase over time as inflation goes up.

    2) Since you're running a business, you have additional business expenses to write off.

    3) You don't have to pay rent on leased space. The longer you own the property, the cheaper your mortgage looks compared to renting a comparable place.

    4) You might get to feel that you are more rooted in the community.

    5) You can redecorate however you want.

    Cons:
    1) More risk. Real estate prices rise, but they also fall. Over the long term real estate tends to barely edge out inflation. There is also risk of extended vacancy, risk of the building becoming less desirable to future buyers, and risk of damage to the building (or the costs of insuring against that damage.)

    2) Additional business deductions mean additional business expenses. Just like having to fork out for a new fridge when you own a home, you have to fork out to resurface the parking lot when you own the medical building.

    3) Instead of paying rent, you pay interest on your loan.

    4) Less flexibility. It is harder to get up and go when you have a building to sell.

    5) Less diversification. You have much of your net worth tied up in a single, undiversified real estate investment. If your area becomes the next Detroit, you could really take a big hit.

    6) Landlording is a second job. You either do it yourself, or you have to pay someone else to do it. If there is one thing most physicians DON'T want, it's another job, especially one that pays less per hour than they can make practicing their chosen profession.

    If there is something I'm missing, please let me know. It seems to me that this CAN work out great for some, but should hardly be the default option.
     
    #17 The White Coat Investor, Jul 23, 2008
    Last edited: Jul 23, 2008
  19. The White Coat Investor

    The White Coat Investor AKA ActiveDutyMD
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    That I agree with.
     
  20. OnePercentDev

    OnePercentDev MOB Developer

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    For those who are interested, there are some unique ownership models out there for medical professionals. We use a model where we create an ownership group of preferred equity investors who own a share of the entire MOB. This provides ownership separate from leasing space in the building. The tenants who do lease space also get equity in the amount of 1/2 of the space they lease from the building owners. If the provider decides to leave the space at the end of the lease, they can retain their equity portion or sell out. If they are a preferred equity owner, they can sell out at any time without selling the building. This provides a lot more flexibility in ownership while still retaining equity in a medical office building.

    Just throwing in another idea.
     
  21. The White Coat Investor

    The White Coat Investor AKA ActiveDutyMD
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    Who do they sell out to? How do you make money from the deal?
     
  22. Richard B

    Richard B Real Estate Developer
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    I don't know this guy. But all he is doing is acquiring equity to fund either the construction or acquisition of the project. So instead of going to a typical base of investors, he is going to doctors for the money.

    To answer your question, he makes money on the project itself. The money the doctors put in simply allows him to do the project. If he didn't get the money from the investors then he probably wouldn't be able to do the deal because he doesn't have the money himself.

    Most banks right now are funding 70% Loan-to-Value (LTV) which means you've got to come up with the remaining 30% in either the form of cash or land or some other form of contribution. Additionally, most banks are requiring 50% pre-leasing or pre-sales before they will fund the construction loan. They will give you a short-term land loan but won't fund the construction until you have the precommitments from the tenants or purchasers.

    So the developer is going to make his money on either the cash flow off the project or the sale of the project once he has either condo'd it or filled it up and then sell it on a capitalization rate (cap). The other two places he will make money is the property and asset management fee and/or the Developer overhead fee, which he will get while the project is under construction or while he fills up an existing building.
     
    #21 Richard B, Aug 14, 2008
    Last edited: Aug 14, 2008
  23. OnePercentDev

    OnePercentDev MOB Developer

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    The existing owners group retains first refusal rights in any sale. Otherwise, other investors may want to buy into the cash flow of the building as well. The ownership group gets distributions from the cash flow of the building. There also is a preferred equity group (investors) who invest up front (development costs) and are paid down over 5 years. Then they have no cash in the building after 5 years, but they retain their equity stake and enjoy the cash flow as well.

    Its not for everyone, but I threw it out as another idea to consider.

    There are a lot of creative options that can be worked out as alternatives to owning a building outright.
     
  24. link2swim06

    Physician 10+ Year Member

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    I hope this guy does try to sell his office building soon. I live about 2 miles from where he bought it. He bought it in an area that is falling apart there are tons of vacant office buidlings around there. The only thing he has going for him in the area is that a super walmart was built nearby a few years ago. I don't understand why he is starting a practice in the dayton area. The main employers in the area are laying off and unemployment is high.
     
  25. Richard B

    Richard B Real Estate Developer
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    There are a few things in here that I have a feeling most non-real estate people might not be clear on...

    "First Refusal Rights" - this is pretty self evident but, to be clear, it means that if someone is going to sell their equity position, the other equity holders will have the right to buy the equity position before anyone outside the ownership group can buy it.

    "Preferred Equity Group" - This simply means that after Net operating income (NOI) the interest and taxes will be paid and anything remaining will be used to pay the investors. The investors will get their money before any profit is taken by the developer.

    "They have no cash in the building after 5 years" - This means that the developer has scheduled out in his proforma that will be able to pay both the preferred return (see Preferred equity group) and their initial capital investment back within 5 years.

    "they retain their equity stake and enjoy the cash flow as well" - This means that if an investor puts in 10% of the total equity that was required, even if they get paid back all their money (see paragraph above), the investor will maintain her 10% position on the equity side of the deal (there is usually a developer side and an equity side).

    What this means in practical terms is that if the building sells she will get 10% of what the equity group gets in profit. It also means that whatever cash flow( monthly profit) is received by the equity group, she will get 10% of that.

    Hope that helps...

    Richard Boureston
    Medical Real Estate Developer
    Medical Office Space blog
     
  26. MTurk72

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    I can see the point in this, but to be honest I wouldn't risk buying office space until you really know you are going to want to stay put at that location for the remainder of your business. Trying to lease out or resell office space if you decide to move is usually more of a headache then a good investment.

    However, if you were to try a lease first with someone willing to sell it after a short time renting, that could be a great option. That way you know if the location is right for you before you buy.
     
  27. jpflip

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    Indianapolis Indiana, great location that has been Ped doctors office and Ped Dentist office. I can make this a very affordable lease to buy or a straight lease. Private offices for multiple doctors, several bathrooms, large waiting room, 11 exam rooms with sinks and windows, large receptionist station, breakroom, large parking, single story, highly traveled main road (50,000 cars daily). This was once a thriving proffessioal building when founding Doctors retired and sold building to me. Email [email protected]
     

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