January 21, 2020

Owning Versus Leasing Your Office Space With Colin Carr

PTO 80 | Owning Versus Leasing

 

Many PT owners find themselves asking the ongoing question of whether or not to lease or own their own clinic space. Taking it upon himself to help you out of this dilemma, host, Nathan Shields, brings over to the show Colin Carr. Colin is a commercial real estate expert who works specifically with healthcare providers to help them answer questions about real estate—ownership, leasing, negotiating, etc. It's an invaluable episode for any clinic owner who is looking to manage his finances optimally. There is tremendous value and savings to be had if you handle things the right way and with help! Don’t try to do it on your own.  Build a relationship with a great real estate agent to guide you through the process. From Nathan’s personal experience, they are worth their weight in gold!

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Listen to the podcast here:

Owning Versus Leasing Your Office Space With Colin Carr

I decided to bring on a commercial real estate expert. Many times, the conversation comes up in regards to owning versus leasing your space, the benefits and the pros and cons. How can I renegotiate my lease? When can I do that? We get into all that in my interview with Colin. When I look back at it, you can save tens, if not hundreds, of thousands of dollars over the course of your clinic life-cycle if you negotiate and do what's best for your clinic early on with the help of a professional. If there's one key takeaway that I want you to get that I got out of this interview, it's important to have a commercial real estate agent that knows their stuff on your side so they can help and guide you. Doing it all on your own isn't worth it. You can save a lot of money if you get a professional to help you. I've asked him all those questions and then some on the interview.

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I have Colin Carr, Founder and CEO of CARR, a commercial real estate firm that specializes in representing healthcare providers. It's an ongoing conversation amongst physical therapy owners that I've seen amongst my network and also in my social media networks about what are the pros and cons of owning versus leasing your space in which your clinic resides. I thought it'd be great to have a real estate expert on hand. Thank you, Colin, for coming on the show.

I appreciate it. Thank you.

I usually get into the physical therapists that I interview about their professional story and what got them to where they are. I'd love to hear your story a little bit. What got you to where you are in commercial real estate specifically helping healthcare providers and what makes you an expert in the field? Do you mind sharing your professional story?

I've got a pretty streamlined story. I've been in real estate since nineteen years old. I started managing apartment complexes when I was nineteen. I lived in Michigan and worked for a couple of investors that own some larger communities. I moved to Colorado in my early twenties. I kept managing apartment complexes. I switched from property management into brokerage when I was about 23. The initial person I worked with was a senior broker that did a lot of tenant representation for large retailers like Walmart, Wendy's, Blockbuster and people like that. I worked for him for a couple of years and got some good exposure to the large national retail world of real estate. I switched to an international firm after that. I worked there for about five years and got exposed to office, industrial land and lots of other types of commercial real estate.

Over the course of those seven-plus years between those two firms, I had the privilege of working for a handful of healthcare providers, especially towards the latter end of me being with a larger international firm. I realized quickly that there were a lot of brokers that were trying to work in the healthcare space on the landlord and seller side working for the large medical office building owners or large hospital systems that virtually no one was working on the tenant and buyer side. I noticed that the number of healthcare providers that were good at what they did clinically or medically but didn't have a strong foundation on the business side of the business savvy, was high. I quickly find a niche there.

There's an opportunity cost of your time to be invested outside of your core focus. Click To Tweet

I had a couple of experiences too that opened my eyes to the need to specialize in healthcare. One of those was when I was first getting started, I did a lot of landlord and seller work. I'd get a phone call and they say, “I'm a dentist or I'm a physical therapist or I'm a physician and I need to move or open a new office.” They'd start asking me questions. 90% of the phone calls that I got from healthcare providers didn't have representation.

It was a combination of seeing the need and also realizing what was happening to the healthcare providers that were not represented. I have one story specifically that triggered this for me. This was one of the catalysts for me in starting our company, CARR and focusing on the healthcare provider side. I had a large medical landlord, publicly-traded landlord. I had a couple of class-A medical office buildings and we did the leasing for that group. We had a lease for NOLs coming up for a plastic surgeon. I got on the phone with the asset manager who was several states away and he said, “Let's talk about the upcoming lease for NOLs.” We start talking about one group. He asked me a couple of questions. He said, “Does Doctor so-and-so have a broker?” I said, “No.” He said, “Does he know the market?” I answered, “No.” He said, “Do you think he’s willing to move?” I said, “Based upon what I can tell, no.” He was paying around $27 a square foot. The landlord said, “Let's go back at $29 or $30 a square foot.”

It’s like, “Let's take advantage of this guy.”

The indicators were, does he know the market? Is he willing to move? Is he educated? The answers were all no. We adjust on a new lease in a building with a doctor that was represented and that lease got done at around $24 a square foot. I asked him, “He's already paying $27. He's already $3 a foot above the last lease we did, $29 or $30, it seems a little egregious.” His response to me was literally, “Get it done,” then he hung up the phone. I got off the phone. I sat there for a second. This isn't anything new. I've been around the real estate at this point for over a decade, but that was a defining moment for me where it clicked. I realized, if a healthcare provider doesn't have representation, they're going to get taken advantage of at the highest level by the landlords because that's what they do.

Before anyone gets too mad at landlords, you got to stop and ask yourself the same question. If you own a house and you're going to sell the house and the house was worth $400,000, but your real estate agents said, “I think we could get $500,000 if we market it a certain way.” Even though it's worth $4,000, your response would be, “Let's get $500,000.” The landlord's mindset is, “If we have unsophisticated tenants that aren't willing to move or can't move or don't want to move, they don't know the market or they miss the proper timeframe to negotiate, it's too late and they're backed into a corner, they're going to capitalize on that.” The combination of me seeing these different things, I saw an opportunity there to specialize in a specific niche of representing tenants and buyers. In 2009, we launched our company. We're now in a place where we represent a couple of thousand healthcare providers per year. I believe we're making a huge impact.

PTO 80 | Owning Versus Leasing
Owning Versus Leasing: The time it takes to learn the market, understand the process, and be able to put together the correct posture and set the table for the negotiation is very time-consuming.

 

First of all, congratulations. You've got a great story and you're filling a definite need in a particular niche. From my perspective, I can't emphasize enough the value that my commercial real estate agent has had for me over the years. I've had the same guy, Tanner Milne, down with Menlo Group in Phoenix. He has guided me and instructed me on not only real estate purchases, but potential places where I would move to and see if the numbers worked out or not. He talked me through it. He'd spend time on the phone with me. He would bring me different pro formas of real estate places that I could move to, purchase or also consider the lease agreements and go back and forth. He’s instructing me because we don't have that instruction. We're professionals, but we don't have the language down. We don't know the ins and outs of real estate. I can vouch for the need for having a professional commercial real estate agent on your side to guide you and direct you, especially one that's good at communication. It’s exactly what you're talking about and to emphasize the point, it's valuable for owners to have a realtor on their side that knows the ins and outs of commercial real estate.

A lot of times, it's a matter of how much time do you have to devote to a certain area. If you look at the average transaction, it takes 30 to 40 hours and certainly, you can do a deal faster than that. Other deals can take longer. There's an opportunity cost of your time being invested outside of your core focus. The time it takes to learn the market, to understand the process and then to be able to put together the correct posture and to set the table for the negotiation is time-consuming. It takes a specific skillset.

To get to a little bit of what we were talking about initially and the conversation that tends to go on, what are some of the benefits of owning the space versus leasing?

We get asked that a little on a daily basis. Does it make more sense to own or lease? There are a handful of variables that we need to go through before we get to that decision for each person. Let me start by giving a couple of disclaimers. Every market is different. If you're in downtown Manhattan versus rural Nebraska, it's going to be a different market. There are different factors playing there. One of the things that we let every person know when they ask that question is we tell them, “We should look at all your options.” We should look at options to lease. We should look at options to purchase. We should look at options that are high visibility retail if they're available. We should look at options that are in an office building as well because there are pros and cons to every opportunity. There's no one size fits all.

We're a big fan of no matter if you lease for twenty years and you're only going to practice for another five years and you think owning doesn't make sense, I would encourage you, it does make sense to still look at your options. If you found an opportunity to purchase where the effective cost of ownership would be less than it would be to lease after you bought a building and paid for your build-out, even if you're going to practice for five more years, if you’re going to sell that practice, you could then write a lease for ten years. You can have that tenant pay down the principal and have a profitability string pick-up from some nice tax deductions. Step number one or pro-tip number one is you should always look at all your options.

Number two, when you're looking at options to purchase versus lease, there are three places that we like to look at a purchase from an economic standpoint. The first portion or the first perspective is what does the monthly payment look like in leasing versus owning from a cashflow standpoint? If I have a chance to lease and it would cost me $5,000 a month and I have a chance to own and it would cost me $5,000 a month, there's no detriment to the purchase from that standpoint. It's the same monthly payments and the same cashflow. That's a great first place to start. Sometimes you look at a purchase and the lease option might be $5,000 a month and the purchase is $9,000 a month. People say immediately, “That's way too much. That doesn't make sense,” but that's not the full evaluation.

You need to go to the second step, which is what does it look like after-tax deductions? When you get into tax deductions, we'll try to keep this at a high level, but just to give you some talking points. You got some additional tax deductions that don't happen on a lease that does happen when you purchase. For instance, you get to depreciate the asset over 39 years. If it's a commercial property, that's over 39 years. You subtract the value of the land from the purchase price and you get to write off a portion of that through depreciation. You create additional tax deductions that don't happen when you lease that happen when you purchase. You've got to factor in all the tax deductions that you get when you purchase. There are additional write-offs like the mortgage interest and stuff like that.

You could have a situation where maybe it costs $5,000 a month to lease and $9,000 a month to own, but the effect of the cost could be several thousand dollars less now because you're going to pay less in taxes. You might pay more in your mortgage payment, but you're going to pay less in taxes to the government. That $9,000 payment versus a $5,000 lease, there's a $4,000 delta. It’ll shrink down to $2,000 or less once you look at the tax deductions because you're going to need to pay more to the government or you’re going to pay more to a lender or other operating costs of the property. The second area is what does it look like effectively to lease versus own after-tax deductions.

The third area we would like to look at is what is the principal pay down? Every month you cut a check on that mortgage, a portion of that goes to satisfy the principal in that loan. That essentially is the equity you're building. That becomes a forced savings account. If every month you cut a check for $9,000 and depending on the length of the loan, whether it's 20, 25 years, whatever it is, depending on the interest rate, $2,000, $3,000 a month might go to pay down the principal. That $9,000 payment could end up costing you less per month than a $5,000 lease payment, once you filter it through tax deductions, principal pay down and other areas.

Our recommendation is to look at everything available. Look at options to lease. Look at options to purchase. Look at office and retail. Look at properties that are outside of your initial target as far as what you thought made sense. What it comes down to is you've got to run the economics on them. A lot of times you'll find that properties you thought were too expensive are not once you factor in those variables. At the end of the day, it comes down to what's the best property for your practice? What's going to help you to be the most successful and have the highest level of production? You then have to make a personal decision at that point of is it worth paying a little more to purchase. If that's the case or if the purchases last and if they're the top property, it's a no-brainer.

PTO 80 | Owning Versus Leasing
Owning Versus Leasing: If you find a broker that specializes in tenant-buyer rep and has healthcare experience, you're going to be in good shape.

 

Some people get scared away regarding, “If I own it, then I've got to do the maintenance on it? It becomes a liability and not an asset. What if the parking lot needs to be repaved or I need to put on a new roof?” How do you address some of those concerns?

Depending on the type of property, it is going to determine what type of management you're going to be responsible for? There are a lot of opportunities to own standalone buildings where maybe you're the only owner and you’ve taken all the responsibility. You have to decide, are you going to handle that yourself? Are you going to hire a professional property management firm that handles those responsibilities? You could be in an office condo situation where you own a space in a building as you would in a residential condo, but it's commercial. In those cases, the majority of those have professional property management. They're going to have people that are bidding out the parking lot maintenance, the snow removal, the landscaping and the janitorial companies. They're helping you get the best vendors in place and make sure that the prices are competitive.

How much time you invest in that process is determined by who's managing it. When it comes to concerns about capital expenses are going to be higher like if I had to replace a parking lot or roof, you have to run profitable investment and you've got to have reserve accounts. It’s like your own personal finances. You've got to have a savings account, which is usually a reserve account for your property. You've got to contribute to it monthly. You do have to be prepared because it could cost $30,000 to change out an HVAC system or a new roof could cost whatever it is.

There are pros and cons to every opportunity. There's no one size fits all. Click To Tweet

You’ve got to have that rainy-day fund.

Professionally-run office condo projects typically have large reserves and they're constantly contributing to them. They have an operating account and a reserve account. You've got to make sure that you have money set aside for those improvements because you will have to put money into the property like you have to put money into a house. There's no way around it.

You tend to pay HOA or Homeowners Association fees or property management fees in order to have that type of security so that someone else is taking care of those situations. That's only in the office condo situation, I'm assuming.

Our company owns an office condo. We own about a 4,000-foot space for one of our offices. That is a larger property. It's about a 60,000-foot project. We have an operating account that has about $100,000 in it at all times and it has about $200,000 in it from a reserve standpoint. We're constantly building that reserve account up. You have large capital expenditures that pull it down and you keep putting money back into that. If you find yourself in a situation where you're the only owner of a stand-alone building or maybe it's a two or three-tenant building and you occupy one space and lease out a couple of others, you have to take a portion of the cashflow per month and set it into an account that you don't touch that built up over time. Everyone has a different opinion on what that should be. The goal is to get that account up to where minor capital improvements will be covered easily if you needed it. If you had a larger capital improvement, hopefully, you have enough money to recover.

If you have an owner say his lease is coming up in 6 months, a year or 2 years, walk me through the process. How soon do you recommend an owner a reach out to a commercial real estate agent? How much time do you give it? When do you start the negotiations process? Walk us through your typical protocol for someone who's coming up on the end of the lease.

The timing is important. If you start too early, you're going to have no posture. If you start trying to negotiate with a landlord two years in advance, they're not going to hold a space for you in the market that far. If you try to negotiate a legal lease renewal, your current landlord doesn't have a risk of losing you for two years. They're not going to be motivated to put their best foot forward either because it's too far advanced. The flip side of that coin is if you wait until your lease is up in 2 or 3 months, the landlord is going to assume that you have not been paying attention, that you haven't hired representation, you don't know what you're doing. They're going to assume that you're coming with a bluff or barter of, “Can you give me a better deal?” The answer usually is no. The right timeframe typically is 12 to 18 months out.

You could always contact a broker in advance, whether it's 2 years out, 3 years out. They should give you a market analysis and tell you where you're at compared to the market. They should tell you what your options are and start that relationship. It's never too early to start a relationship with a broker. A good broker though won't start the actual process until the target window. If you said, “I want to buy a piece of ground and I want to build my own building,” that is a solid 18-month process in most jurisdictions. You can get it done faster in certain areas. The more densely populated the area and the more growth the area is experiencing, you're looking at about an 18-month process. Some rural areas are maybe closer to twelve. If you're going to buy a piece of ground and build your own building, you've got to start that about eighteen months in advance to be safe.

If you are doing a traditional, “I'm going to go lease a space. I'm going to renew my current lease. I'm going to go buy an existing building,” a lot of times you want to start talking to your broker on eighteen months to get a game plan. If you rule out buying land and building venue, then you will wait until you're around that twelve-month window, and then at that point is the ideal time to start. That gives you that 4 to 5-month window to see the market, negotiate and make a deal and still have that 5 to 7-month timeframe to build out a new space if that's what you decided to do. Physical therapists have the benefit that typically if it's a more streamlined build-out. It takes a similarity to a traditional office space a lot of times. You're not running plumbing lines or oxygen or stuff like that. You don't have quite as much build-out as maybe a dentist does or a veterinarian. You can get away with a few months of the timeframe, but the ideal posture or the ideal process is about twelve months in advance.

If a physical therapy owner is in the middle of a 5 or 7-year lease and there are only 2 to 3 years into it, do they have any leverage at that point to renegotiate different parts of their lease?

Typically not. Most leases are going to require the tenant to sign a personal guarantee. That's a negotiable deal point. The larger you get, the more number of offices you have, the higher revenues you can try to minimize or eliminate it. If you're doing a lease renewal and you paid faithfully for at least a term or two before, it's possible to get that to go away. As a whole, most leases have a personal guarantee. If you're trying to break a lease, you'd be held liable. If you’re coming from the angle of, “Can we renegotiate?” If the landlord already knows that you're locked into a lease for the next 4 or 5 years, without you trying to break a lease or doing something else that you can't get out of it and you have to pay them that amount of money, they're rarely willing to negotiate and voluntarily reduce your rent or give you concessions. That's literally them giving you a benevolence check or discount.

In order to set ourselves up better, what are some negotiation tactics when you are negotiating a lease? How does an owner know if they have a good commercial real estate agent? Are there some negotiating tactics or things that good commercial real estate agent will focus on in order to get the tenant the best lease possible?

Let me give you a couple of things that you want to be looking for when you're trying to find a good real estate agent, when you're interviewing them, etc. The first thing you want to figure out is, do they have the skillset to represent you? What I mean by that is a lot of real estate brokers focus primarily on the landlord side of the transaction. They'll do tenant-buyer rep, but they don't do much of it. One of the first questions you want to ask them is how many tenants or buyers do you represent on an annual basis? What portion of your business is tenant representation versus landlord representation? What you're going to find is the majority of brokers are going to be 80%, 90% or higher on the landlord side.

The challenge of that is number one, you're not going to be a priority as a tenant to them. Number two, every time they go out and look at or talk to a landlord, they're looking for the next listing because they're looking to feed their primary business, which is landlord rep. You're not going to find those brokers that typically will get as aggressive as you'd want them to be in helping you get the best terms possible. You want to start with finding someone who has a strong focus on the tenant side or the buyer side. That is a rare skillset, but there are good brokers out there that have that.

The next thing you want to ask them is what their experience is working with healthcare. Ideally, you're trying to find somebody who has healthcare experience and not somebody who thinks that you're another office user or a restaurant because you're not. There are different criteria for healthcare. There are different nuances. If you find a broker that specializes in tenant-buyer rep and then find a broker that has healthcare experience, you're going to be in good shape. A lot of times people will say, “How do I find that?” One of the best ways is to call people that are well-ingrained in your industry that know who the main players are and then ask them for referrals. Call the lenders, the merchandise reps, the CPAs, call the people that focus in your world and say, “Do you know of any good real estate brokers that specialize in healthcare and tenant-buyer rep?” Typically, if you call a handful of people, you're going to get the same names or you're going to get a couple of good leads to go after and start the process. That's how you would start to find a good broker. I could get into a couple of other details as far as the tone to have the right negotiation as well.

PTO 80 | Owning Versus Leasing
Owning Versus Leasing: The number one place that commercial real estate brokers look bad or give the industry a bad name is they don't communicate. They get busy with what they're doing.

 

You find a commercial real estate agent, what would you expect them to be doing for you? Is it much different than residential property? What can you expect from them?

The difference between residential and commercial is that with the invention of some of the online databases in residential, you can do so much window shopping from your living room or from your computer, iPad or the phone. In a commercial, that's a lot harder to do because the databases are not the same. There are not typically the visual pictures in commercial as there is in residential. There are also a lot of properties that aren't put into the databases depending on the market you're in. Some markets have a lot of information database, some markets have virtually none. Some markets there are multiple databases, but you have to subscribe to get access. A good real estate broker that you've pre-qualified has the criteria to represent you, tenant-buyer rep and healthcare experience, preferably. The next couple of things you're looking for is you want to make sure that these people are going to make you a priority and they're going to have a high level of communications.

That's the number one place that commercial real estate brokers look bad or give the industry a bad name is they don't communicate. They get busy with what they're doing. You need to emphasize upfront that you're looking for a high level of communication, a high touch and that you want to know you're a priority. You need to be convinced that person's going to make you a priority. It's easy for somebody to pitch you and tell you they're going to do a great job and then not perform. How many industries fall into these criteria? “Here's why I'll do a great job for you,” then they fall apart the second they get hired. Being convinced that the person's going to do a good job for you through the entire process is important.

I think communication is huge. Whether it's your realtor or your CPA, they've got to be able to respond to my emails in a timely manner or it doesn't work.

You find that across the board. It's easy to tell people why you’re great and how you do a great job. You need to make sure that you're convinced the person's going to follow through the entire process. One way you can do that is you can ask for references. Ask them for testimonials, “Can I have a list of the last 5 or 10 healthcare providers you worked with and can I call them?” Doing something like that, you're going to find out quickly who is living that industry and who knows it in and out or who's trying to do a deal here and there and doesn't have the expertise or the timeframe to help you.

What are some of the mistakes that healthcare professionals make? We've touched on some of them, but to summarize them, what are some of the mistakes you commonly see the healthcare professionals make when it comes to either leasing or purchasing their space?

The first mistake they make is they don't hire representation or they hire bad representation. Trying to do it alone, the do-it-yourself mentality is going to cost you a lot more than you think you're saving, not just time but actual economics results. The next mistake is bad timing. They don't start the process at the right time. It's too late or it's too early. If you start calling your landlord on a renewal three years out trying to renegotiate it, they're going to assume you have no idea what you're doing because that's not going to work nine times out of the time. Another mistake that is probably the largest mistake that gets made is people don't know the market. They don't know what their options are. They haven't taken the time to go to the market and look at their options. They haven't taken the time to negotiate with multiple people.

One of our company's core focuses is you've got to have as many opportunities that are viable as possible. We're not going to negotiate on ten properties, but you've got to negotiate on 2, 3 or 4 properties if possible to get an understanding of what the market's going to bear. You can't look at the face rate where they say, “The lease rate is $20 a square foot” and assume you know where that deal is going to end up. Two landlords could be at $20 a square foot. If one landlord offers no free rent, no tenant improvement allowance or no concessions and the other one offers $40 a square foot in tenant improvement allowance and five months free to build and then four months free once you open, then they have lower annual increases and maybe they will do a limited guarantee. You could end up with $100,000 or $200,000 difference in the economics of that deal.

It's never too early to start a relationship with a broker. Click To Tweet

You can’t look at face rate and say, “These guys are all similar.” In my opinion, it should be done by your broker because that's what they specialize in. The best approach is you go to the market. You look at your top options to lease and purchase. You look at the top options that meet your criteria. You pick the top 3 or 4, then you negotiate simultaneously against those 3 or 4 so you get a crystal-clear picture of what the market bears. If you're looking at doing a lease renewal as an example, you can't go to your current landlord and start trying to negotiate a lease renewal if you don't know what the best terms are that you can get somewhere else.

That's one of the biggest mistakes people make on lease renewals. They wait for the landlord to come to them, flat a proposal across the table or shoot them an email and then they're trying to gauge, “Is this a good deal? Is it worth signing? Is it worth moving?” What they usually do is they take back, ask for a little bit better lease rate and ask for a little bit higher concessions. The landlord will usually give them a little bit of movement, so that movement to them indicates they got a good deal, but in actuality, they're usually leaving tens of thousands of dollars on the table because they didn't compare it with the other option.

My number one point here is if the landlord doesn't believe that you're willing to move or that you have other viable options, you're not going to see the best terms. They have to know that you're educated, that you know the market, that you're willing to move and that you have other viable options that are ready to go. If you get to that place with the negotiation, you're going to capitalize. At that point, the landlord is going to realize they can't hit you with a lease rate that's several dollars above the market and expect you to roll over and take it. At that point, the landlord is going to move from being ultra-aggressive in the beginning to a little bit defensive and saying, “I've got to put together a fair deal because I don't want a vacancy,” because the vacancy costs the landlord a lot more than that it usually costs the tenant to move.

That’s great advice. It puts you in a position of power. Many times, we feel subservient to the landlord. They're holding our space, but you don't want to be in a position of weakness. You want to be in a position of power and be able to leverage what the market will bear.

It's not a position of arrogance. There's a big difference between being arrogant and confident. Arrogance is you can say whatever you want and throw your weight around. A lot of landlords do that. Our recommendation is to get in a position of confidence. That confidence comes from having the proper timeframe, hiring actual representation, going to the market in advance, negotiate with multiple owners, and then you can have that negotiation with the landlord with confidence knowing, “I've got three options. You have a good property. I've been here for ten years. I'm happy to look at renewal, but it's got to make sense for my practice. It's got to make sense for me financially. If it does, I love to find a win-win scenario here, but if not, I'm going to go to the property that’s going to be the best for myself, my practice, my patients, my family, etc.”

The truth of the matter is if the landlord has a space become vacant, it depends on the market and space. They might re-lease it again quickly, but if they sit vacant for six months or for a year, which the average space is going to sit vacant for longer than that in most markets, then you have to look at how much money will it take to re-lease this space, and then how much is going to go in there as far as tenant improvement allowance of that deal, free rent, downtime, commissions and all these things. Most landlords, once they know you're serious and they know that you have options, they're going to put together a deal that makes a lot more sense for them to keep you as a tenant than to have that space go vacant and lose a ton of money. That's going to result in you, the tenant, capturing the best deal and typically swinging that pendulum in your favor to the tune of tens or hundreds or thousands of dollars.

PTO 80 | Owning Versus Leasing
Owning Versus Leasing: If the landlord doesn't believe that you're willing to move or that you have other viable options, you're not going to see the best terms.

 

It goes back to the value of having someone who's knowledgeable about the market, a commercial real estate agent, especially a good one that can guide you, lead you and talk with you about what's going on out there and where you can leverage things. There are many times where I'll bring up an idea of, “Can we do this?” My realtor will say, “I don't think you'll budge on that, but we can do this,” then you can start considering how you're going to attack this. That lends to the value of having someone in your corner that knows the ins and outs and also can read the attitudes and the positions of the landlords.

That's a great point too because it is a great sounding board. It's not uncommon to have a tenant say, “Can we push in this area?” There's a realm of you want to push and you want to get the best deal possible. There's also a realm of you can push too far and you can hurt yourself if you ask for too much as opposed to getting a reasonable response. If you ask unreasonably, you're going to get an unreasonable response sometimes too. It's great to have a sounding board that says, “That might be too aggressive. Why don't we come a little bit lighter in that area, but then come harder in this area and get you the same result you're looking for.” It may be packaged or balanced better. The way you say something or how you propose it, oftentimes it’s equally as important as what you're asking for as far as what the answer is going to be.

We've covered a ton of stuff. Is there anything else you want to add that you would recommend the physical therapists do out there in terms of looking for leases or purchasing land or vacated properties?

I'm a huge advocate for people owning real estate. I own real estate personally and professionally. I'm a huge advocate of owning real estate when it makes sense. If you've been in a mindset where you have to lease and leasing is the only option for you, there are times when leasing makes a lot more sense than owning and that's great. If you haven't looked at ownership, I would highly encourage you to do that. In a lot of scenarios, the real estate ends up being worth as much if not more than the practice does over time. We are involved in a couple of hundred transactions per year where there's a transition or sale happening with healthcare providers. When there's real estate involved, 89% of the time, the real estate is worth more than the practice.

If real estate makes sense, if there are good options available in the economics and it makes sense, look at it, look at the market. Don't get focused on, “I have to do this or that,” but keep an open option or keep an open mindset and look at your options. If it makes sense, give it the time or diligence that it would require to make a decision and don't be afraid of it. That being said, the same standpoint is you cannot get obsessed with owning if it doesn't make sense. There are times where the only option on the real estate is a dramatically inferior property in a worse location. If you're comparing that to a landlord giving you a better lease rate, huge tenant improvement allowance, huge free rent package, and then giving you the flexibility to maybe start smaller and expand overtime or maybe move to a better area over time, you would want to look at and weigh both options.

Do you have some owners that might be leasing their current properties, but you've helped them purchase commercial real estate in other states or across the nation?

Let me answer that in two ways. We helped a lot of healthcare providers that decide they want to own real estate. Sometimes they own their main space where they have their practice. A lot of times, they lease and they want to own real estate. We have a lot of clients buy and invest in real estate and that's a different topic. The same fundamentals apply as far as it is a solid investment, principal pay down and tax deductions. For your main question, we have a lot of clients that lease in some locations and own others. That gets down to the due diligence. If you've got a space and it's built out, it works phenomenally, your practice is thriving, you get a renewal opportunity with free rent money to improve the space and freshen it up, the lease rate is super competitive. It’s a no-brainer and no hassle, as simple as possible, it can make a lot more sense than going through an eighteen-month process to build your own building and then having it cost you an extra $8,000 a month. The economics make that decision clear.

I threw that out there because there's a number of PT owners out there that might be in the middle of a 5 or 7-year lease. Maybe they're doing well and they have some disposable income, yet they'd be intrigued with real estate as a future investment and look at properties either within their community. Talking to someone like you could expose them to opportunities elsewhere that might be in good markets.

Anytime you have a chance to own real estate for your own practice, you're typically going to get the best financing with that. If you can get the property classified as an owner-occupied property, you're going to get the best financing. Also, whatever percentage of the building you occupy, the security that's based upon your practice, that's usually high for most owners who believe in their practice. If you have a chance to own commercial real estate and occupy a portion, that's great. We do have owners that own some and lease others. Hiring good agents to help you advise in the market, to help advise you on your options, you will come to a conclusion quickly of what makes the most sense of your practice. That's a great way to do it.

Thank you for sharing your time. Do you want to leave us with some contact information? How do we get in touch with you if we have further real estate questions?

Our website is CARR.us. We have a specific division of our company that's Only Healthcare, Only Tenant and Buyer rep. You can get in there and see more information. At the top of the landing page, we have “Find an agent.” You can click on that and you get in touch with an expert agent in your area that can start the process, that can answer any question you can come up with. There's also a tab up there that says, “Lease or purchase evaluation.” If you wanted to say, “How does my lease compare to the current market? If I wanted to own, what would that look like compared to my current scenario?” We'll put together a free analysis for you. You fill out a little bit of information and then the agent with our company that would be representing you in that area will contact you and then give you a free analysis. It's a helpful way to start the process.

The do-it-yourself mentality is going to cost you a lot more than you think you're saving, not just time but actual economics results. Click To Tweet

That's a cool add-on. It’s a great opportunity for people to evaluate what they're doing.

We get that. That's one of the biggest questions too. People might be 3 years into a 10-year lease or 5 years into a 10-year lease, it doesn't matter. They're curious, “Where am I at? Did I do a good job or a bad job? We love to answer those questions because it puts people's minds at ease to where they're not constantly thinking about this unknown variable for the next 5 or 10 years. Even if you're far in advance, we'll get with you, look at your lease, we'll tell you where you currently stack up compared to the market. We’ll tell you what we think your options are currently. Once the target window hits, whether that's in a year and eight years, then we start the process. It's a great way to get questions answered now and not worry about it for the next 3, 5, 10 years. That puts your mind at ease there and then knows that you have a game plan coming up that you're going to execute in the future.

That’s super valuable. I appreciate the time that you've taken with us. You shared a ton of information, especially for those of us who don't have a lot of exposure to real estate but are interested in it. For those who want to know, “Where do I stack up? What do I need to look for?” Getting a commercial real estate agent on your side is the first step. That's huge.

I appreciate being able to share it with you. This is our passion. We started the company with this entire model of helping healthcare providers level the playing field. This is our heartbeat and why we do it. It's fun to have the ability to positively impact lives as you do with your patients. It's the same thing.

Thanks for your time, Colin. I appreciate it.

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About Colin Carr

PTO 80 | Owning Versus LeasingColin Carr is the founder and CEO of CARR, the nation’s leading provider of commercial real estate services for healthcare tenants and buyers. Every year, thousands of healthcare practices trust CARR to achieve the most favorable terms on their lease and purchase negotiations.

Colin has been involved in commercial real estate since 2000 and has personally completed over 1,000 transactions. He is a licensed real estate broker in ten states. Colin lectures and trains thousands of healthcare professionals, administrators, business owners, students and more on an annual basis throughout the country at national meetings, conventions, study clubs, associations, universities and more.

CARR’s mission is to help companies, practices and investors “Maximize Your Profitability Through Real Estate®”

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