Planning a New Medical Office Space

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Step 1: Locating and Planning the Medical Office Space

Office Location

Health professionals must take many factors into consideration when deciding to open a medical office. In real estate it is said that the 3 most important considerations are location, location, and location, so let's start with that. You should plan on it taking 6 months to over a year for this process -- about half of that time to find the place and the other half for renovation.[1,2]

If you already have an existing practice, the location needs to be convenient to patients. It helps to take a local map or print out the appropriate section from an online mapping program, such as Google maps (http://maps.google.com/maps) or MapQuest (http://www.mapquest.com/). Draw a circle (or semblance of a circle) on the map circumscribing as many of the residences of your patients as possible. The ideal location is in the center of that circle. However, one must also take into account other factors, such as the availability of parking for suburban and rural practices, and the proximity of public transportation for urban practices. If you will be spending a good deal of your time in a hospital, proximity to that hospital will be important. It might also be prudent if you receive referrals from other physicians to consider locating in a medical office suite.

Office Size

The next consideration is size. How large of an office do you need? Space is measured in square feet. A rule of thumb for the size of a practice facility is 1200 to 1500 square feet for the first physician and 1000 to 1200 square feet for each additional physician up to 4 or 5.[1] Certain professional suites, such as those for psychiatrists, have less need for space. Some practices may require additional space for equipment, such as x-ray or other imaging equipment.

Renovation

Renovation is another important factor. To hit your mark(et), aim carefully. The goal for most physicians is to represent their practice well, at the best value for the money. First, consider your patient base and the image you want to project to those patients. Physicians who are running a clinic, for example, do not require an upmarket location and costly furnishings. If you want your space to be more upscale, consider hiring an architect.[1]

The next step is to consider the condition of the premises and the cost of adapting it for the intended use. Renovation might consist of no more than fresh paint, new carpeting, and changing the pictures on the wall or it might require a total makeover. First, decide on the number and size of rooms, their layout, appropriate electric service, plumbing, and HVC (heat, ventilation, and air conditioning). If walls need to be moved and electricity installed, these are considered capital improvements

Purchasing a Medical Suite

A major consideration in any new medical office space is whether to rent or purchase. While renting is less costly in the short term, purchasing a space or building is likely to be more rewarding in the long term. In addition, the more capital improvements that need to be made, the more beneficial it is to purchase, or at least obtain a long-term lease. If you purchase space, you need to factor in the operating cost of the space, the taxes, and the debt service for any loans that are taken to finance the purchase. Such costs form the annual carrying charges and need to be measured against the annual rent for comparable space.

If the office is to be located in an economically growing area, the local real estate is likely to appreciate -- perhaps substantially -- so that at a future date the profit made from the sale of the professional space suite could equal or surpass the total amount of rent you would have paid, thus making the professional suite 'rent free.' By way of example, a professional suite that is purchased for $125,000 might be sold 5 to 10 years later for $375,000, giving a $250,000 profit. In this case, if the down payment was 20% and the balance was a bank loan, the $25,000 invested could return 1000%.

Assuming you decide to purchase, what are the next steps? The prudent physician will retain a real estate broker who is experienced with the target neighborhood and with the type of space required to help locate the space. Therefore, a residential broker or a broker who specializes in industrial properties might not be the best suited for the task.

Practice Note: Brokers should always work on a commission basis and that commission is always paid by the seller.

The most important factor is, of course, price. The seller might be convinced that doctors "can afford the high price." As a purchaser, you are comparison shopping, and even if you can afford the price, there might be a better deal down the block.

A prudent physician will also consult his/her attorney and accountant:

    * The attorney represents the physician in negotiating the terms of purchase and attends the closing; and

    * The accountant structures the transaction in a manner most tax-favorable to the physician.

The purchase transaction focuses around the contract of sale. That document sets forth the terms and conditions pursuant to which the owner will sell the property to the purchaser. In addition to the price, the contract of sale typically includes the following:

    * The personal property that comes with the property (eg, furnishings and equipment), if any;

    * The names of the brokers and the party responsible for the broker's commission;

    * Any approvals that may be required for the sale, especially proper zoning authorization that the property may be used for professional and/or medical space; and

    * Enough other legal considerations to make your attorney earn his or her fee.

Typically, the purchaser pays 10% of the agreed-on price at the time the contract is signed. Once this occurs, the buyer then will have about 60 to 90 days to obtain a mortgage or other loan commitment. This money is usually forfeited if the purchaser fails to obtain financing.

If the premises being purchased are part of a condominium or cooperative property, there will be additional considerations during this period, including compliance with the building's rules for selling space, possible board approval (if it is a cooperative), and proof that the physician can meet his/her financial obligations to maintain the property and pay loan payments, maintenance, and taxes.

Once both parties are satisfied on all financial and operational conditions, the parties will 'close.' The closing occurs at a live meeting during which the title to the property changes hands by the exchange of the deed for the balance of the purchase price.

Practice note: The foregoing is not intended to substitute for a prudent lawyer's engagement of an attorney to assist in the purchase of the property, but rather to give the physician some insight into the substance and process of the transaction.