Real Estate: Good Offense, Better Defense
by Ken Jorgenson
Whether your favorite sport is football, foosball or fútbol, you can’t win the game unless you have both a good offense and good defense. Bear Bryant echoed this by saying “Offense sells tickets, but defense wins championships.”
The same can be said about winning in business and personal finance. In the classic personal-finance book, “The Millionaire Next Door,” Thomas Stanley and William Danko liken offense to income and defense to how you spend (or do not spend) that income. Their premise is that to win at personal finance and become wealthy, you must be excellent at producing income (offense) and even better at retaining it (defense).
Clearly, it takes money to make money and some expenses are unavoidable. However, it is important to focus your attention on saving money the right way and looking at big ticket items. That focus can have a huge impact on your personal finance and financial well-being of your healthcare practice.
We recently had two clients who were excellent practitioners; able to produce high revenue for their practice and create significant take-home income. They were great at offense, bringing in income; however, upon reviewing their leases, we found their defense to be lacking.
Client #1
Our client was leasing space in a multi-tenant building. Her lease was set to expire in just over twelve months, so she was considering relocating her practice or purchasing her existing leased space. After reviewing her lease, we noticed she was paying rent on the entire building (nearly 6,000 square feet), rather than her 4,000 square foot space she was practicing in. She was paying for 2,000 square feet that her practice was not occupying, while the landlord was collecting double rent on the adjoining 2,000 square foot leased space.
Consider the ramifications of this. For the sake of round numbers, let’s use a fifteen-dollar per square foot lease rate over a ten-year term.
$15 x 6,000 sf = $90,000 (annual rent) x 10 years = $900,000 total rent
vs.
$15 x 4,000 sf = $60,000 (annual rent) x 10 years = $600,000 total rent
The difference in this scenario is $300,000 over a ten-year lease term. It turns out, there was no malicious conduct or deceptive intent on the part of the landlord (just an honest mistake), but this lease was reviewed by a practice broker, an attorney, two or more doctors and others before it was signed. The space was a part of a practice purchase, so the lease unfortunately was an afterthought.
How long would it take to make up for a mistake like this by cutting back on supplies?
The reality is, no matter how many pennies you pinch on cotton rolls or materials, it’s unlikely you could make up for this type of an oversight. Simply assuming that the math on a lease will work out fairly or believing that it is not worth the time or money to have a professional review the terms of a deal may end up being the costliest mistake of your professional career. This is an example of poor defense: not having someone there to protect your bottom line.
Client #2
The other client was nearing the expiration of his lease, so we reviewed the negotiable terms; namely tenant improvement allowance, free rent, lease rate, operating costs and escalations. The one that stood out the most was the tenant improvement allowance. On the past lease, the landlord’s terms were at least ten dollars lower than what the client should have achieved. Doing the math here ($10 per SF x 3,500 SF = $35,000).
Another example of poor defense. One negotiable term that seems minor or even “fair” could cost you tens of thousands of dollars.
The hard part about these transactions is that you want to believe you are being treated fairly. The reality is, your definition of fair is most likely very different than that of an opposing party. You must realize you have competing interests with the landlord, broker or investor that is a professional negotiator with full knowledge of their trade. You could say, a landlord’s offense is better than an unrepresented tenant’s defense.
Real estate is the second highest expense for most practices.
With this much at stake, it’s not something you want to take a risk on.
The good news is that buyers and tenants have every opportunity to create a good defense by seeking professional help. Often times healthcare professionals will have an attorney review the legal ramifications and consequences of a lease, but the legal side of a lease and the fair-market-value side of a lease are completely different. Very few attorneys know the going rate for tenant improvement allowance, free rent, escalations or lease rates in a healthcare-real-estate transaction.
Another common mistake is hiring the wrong real estate professional. Be sure to hire a broker or agent with healthcare real estate experience. Failing to understand the electrical, mechanical and plumbing needs of a healthcare practice on the front end can be extremely costly. Additionally, there are many other business deal points that are vastly different in healthcare real estate vs. general commercial real estate.
In summary, a successful practice focuses on production to increase revenue while investing in resources that drive business without neglecting to protect what has been earned or could be lost. Professional representation protects your interests and the valuable revenue you work so hard to attain. You don’t have to choose between having a good offense or better defense; you can have both.
Ken Jorgenson
Ken is a Director at CARR and he has helped complete hundreds of transactions for healthcare practice owners. He is a licensed real estate broker in six states. Ken has lectured to thousands of healthcare professionals and administrators throughout the country at national meetings, conventions, associations, universities and more. 813.690.9755 ken.jorgenson@carr.us
PAHCOM Corporate Partner Since 2020