We have all heard the grim news. It seems like each day brings further negative developments: the credit markets have dried up, the stock market swings wildly from the gain to the loss column, and the economic forecasts are more of the same.
Buried in all this economic angst there is a bright spot. This is a very favorable time for medical physicians who are currently leasing their offices to consider purchasing a building of their own. Consider this: if a doctor owns a medical practice and is currently leasing his space, and if his lease is within a year of expiration, this could be an ideal time to begin the search for a commercial building to call his own for the following reasons:
Office vacancies are currently 19 percent throughout the Truckee Meadows and 33 percent in South Meadows. There are numerous vacant buildings for sale, sellers are motivated and prices are dropping.
Absorption is down and so is demand; there are over 30 buildings currently on the market in South Reno between 1,000 and 7,500 square feet.
Banks are still willing to lend, but they are selective. Medical office users are very much in favor from a lender's perspective, because they are not as subject to economic swings, they usually have good credit and the doctor is his own guaranteed tenant. Medical office buildings represent one of the hotter submarkets right now.
Two areas that stand out above the others are South Meadows and Reno Corporate Center on Longley Lane, because of their proximity to Renown Medical Center South and the availability of numerous buildings.
There are distinct tax advantages to ownership, including depreciation of the building and surrounding improvements, such as landscaping. In addition, the doctor can depreciate his equipment and tenant improvements, and under certain conditions, he can accelerate that depreciation. Of course, if the doctor secures financing the interest expense is also deductible.
Because we are in a buyers' market and prices are soft, now is a good time to buy a building or office condo to house a medical practice. A medical practitioner can save thousands of dollars over a five- to seven-year period by owning his own building. This can be accomplished through asset appreciation, debt reduction and tax savings. He also has the advantage of having control over future rent increases. A good rule of thumb is to purchase a building with the intent of maintaining ownership for a minimum of five years. At the end of that time, our economy will likely have cycled into a recovery period, and the physician will have several choices. He could sell his building and lease it back, sell it and move into a larger one or continue to own it. If the economy has recovered, he could receive a premium price for his building. If not, he could continue to own it and occupy the building as a user. The important point is that purchasing a building in or near the bottom of an economic cycle can give a buyer future choices and upside possibilities.
Commercial real estate values are often predicated on cash flows of the property and tenant stability. The higher the net property income and the more stable the tenant, the higher the property value. A physician knows his business better than anyone else. He must ask himself, if he were an investor, would he purchase a building in which he was a tenant? Most likely! Why not then purchase a building and become his own tenant? In doing so, a physician can have control over his financial future in the following ways:
By structuring a separate entity for ownership of the building, a physician (or group of physicians) can enter into a lease agreement that is favorable to his revenue stream.
As his equity in the building grows, he could refinance and pull out some of the equity to invest in something else.
Over the years, as his business grows, he may decide to sell the building, take the profit and lease it back from the new owner. He can have some control over the sale price depending on the lease he structures for the new investor.
By purchasing a larger building than his current needs, a physician can lease out the unused portion and use it for future expansion as his practice continues to expand.
As with any sort of investment, there are disadvantages along with the advantages. Those can include additional cash requirements for down payment and closing costs, fewer choices due to a pricing budget and reduced flexibility and mobility when compared to a lease.
While these disadvantages must be considered, and purchasing a building is not the best choice for everyone, the advantages of long term ownership can far outweigh the disadvantages.
There is an investment axiom that says, "When everyone is a seller, it is a good time to be a buyer". In the today's commercial real estate market, certain basic economic forces are at play. We are in a high supply and low demand market. The timing bodes well for a physician who is nearing the end of his lease and needs to make a decision on whether to renew his lease or explore other options. One of those options might include ownership of a commercial office building. The long-term economic prospects for Washoe
County continue to be promising. Population projections for the year 2020 exceed 468,000.
Northwestern Nevada continues to attract companies specializing in light manufacturing, logistics, finance and technology, all of which provide high paying jobs. The healthcare sector will also benefit from this growth, and medical practitioners have a limited window of opportunity to take advantage of soft commercial real estate market.
Reed Simmons is an investment specialist with Grubb & Ellis | NCG in Reno. He can be reached at (775) 332-2800.
