Doctors Their Own Landlords

May 4, 2007
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GRAND RAPIDS — Physicians' practices give new meaning to the idea of "rent to own," as many doctors are putting up their own buildings and paying rent to themselves.

"The growth that's been in the office market has been people building their own buildings, medical and otherwise," said Michael L. Mikesell, director of brokerage for Signature Associates in Grand Rapids. "I think that's really interest-rate driven as much as anything, and obviously,  of the areas that have been a positive growth field, medical leads the way in West Michigan."

But a health care business consultant cautioned health professionals about jumping into ownership, especially considering the volatility of the local health care market over the past 10 years.

"For example, look at the tremendous relocation of health care to the center of town on Michigan Street … and Metro (Health Hospital) moving out to M-6," said Michael La Penna, principal of The La Penna Group Inc. in Kentwood. "That's a huge relocation of doctors' business. If you're renting, you can just follow. If you own your own building, you have to pack up and sell to reflect the market movement."

If it's a multi-doctor practice, building ownership can complicate moves in and out of the partnership, he added.

Plus, as with any investment, doctors, dentists, physical therapists and other health professionals should carefully look at the return on investment of building ownership and weigh whether the money is better invested elsewhere, La Penna said.

Scott Morgan, vice president at commercial real estate firm Grubb & Ellis|Paramount Commerce, said health professionals may look at investing in their own buildings as a good way to diversify investments and balance a bear stock market.

"I would say the purchase of vacant land and building of new buildings has slowed in the more traditional office areas like the East Beltline, Cascade and East Paris because of a lack of land with direct road frontage," Morgan said. "However, there's definitely construction in some of the newer, up-and-coming areas off of the M-6 interchanges. The hospitals were out ahead of the curve in moving out to those interchanges to service additional patients from the southwest areas. Doctors have followed suit to go out there and join them."

Mikesell said often a doctors' group will work with a builder who owns land that's conducive to medical development. The doctors and the builder then form a limited liability corporation to construct and own the building, with the tenants paying rent to the corporation in which they are owners. It can be a win-win situation, Mikesell said, both in terms of building equity and in tax advantages.

"It's pretty common," he said. Builders "like to be owners because it's more long-term income for them; it's a great investment for them. If they have the tenants in place, it's a great investment for the owners. Either way, the value is in the lease with a very good tenant able to pay."

A medical office with a tenant signed to a long-term lease "is one of the most liquid pieces of real estate you can have," Mikesell said. "I think (interest) rates are still very good, very attractive. That's really the majority of stuff we're seeing: doctor-owned.

"For ones that do it, it's more to control knowing what they have, and more the appreciation and real estate investment in it. They're basically benefiting from their own lease, which is a smart move. It's their lease that creates value."    

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