Nobody's retirement plan consists of paying for an empty building.

After driving the length of the field in their careers and scoring retirement, many physicians look back and realize that they've missed something big. Their medical office building isn't behaving like an asset- It's costing them money every month. Their next step can be even more challenging. For those seeking a tenant, the cost to build out a space can be over $60 per square foot, it takes time to find a tenant, and the tenant could leave, repeating the cycle. For those selling, vacant buildings take longer to sell and sell for less money. Some vacant buildings in this market have been for sale over 3 years. Sitting on a vacant building simply doesn't provide many good alternatives. There are better strategies than hoping for the best as you wind your practice down and vacate your building, but planning these strategies in advance is key.

There is a better way- Your red zone strategy

If your practice has a succession plan in place and will be an ongoing concern after the building owner(s) retire and there is a great degree of confidence that that practice will continue to use the space then you're in better shape. You'll still want to ensure a strong lease with a lengthy term is in place so the practice doesn't move or default without penalty. This can be contentious for physicians since those remaining will be paying rent to benefit the retired owners. You may want to consider allowing some sort of buy-in or participation in the building profits to help all parties feel that it's an equitable arrangement.

If you do not have a clear succession plan, or if you lack certainty about the direction of the practice five or ten years after you retire, you should consider a sales-leaseback. Sales-leaseback is simply selling your building to an investor, while continuing to stay in the building as a tenant for a pre-determined period of time. This provides you with capital today, which can be placed in other personal investments or reinvested into the practice, and to this article's point, shifts the risk of vacancy to a 3rd party.

Nationally, leased medical buildings usually sell more quickly and for substantially more than vacant buildings. As an example, using current national averages, a 10,000 square foot occupied building would sell for $300,000 more than a vacant one. In Columbus, physicians bought their building from their landlord for $2.35 million and then sold it to an investor 12 months later for $3.95 million. What does a $1.6 million profit provide? In this case, they added physicians and upgraded their infrastructure to increase the efficiency and profitability of their practice. And, this practice doesn't have to worry about disposing of their building when they retire.

Does a sales-leaseback make sense for you?

If you have no dependable plan for your practice to continue after your retirement, it probably does. If you could use funds today to increase the efficiency of your practice, add physicians, or add locations, then it may. Or, if you have alternative personal investment opportunities that you'd expect would yield a higher return than the real estate appreciation and tax benefits of ownership then it may.

If you're considering a sales-leaseback, you should evaluate the potential impact of the proceeds if placed back into the practice or other personal investments, and the value of shifting vacancy risk long-term. Weigh this against your current ownership tax advantages, practice's willingness to do a lease with a new owner, and alternatives for capital such as borrowing against the building.

What are the next steps to evaluate?

It's critical to have a sense for how much investors would pay for your building. Today's climate is highly favorable for sales leasebacks. Investors aren't generating much of a return in other investments, interest rates are low, and the healthcare industry is seen as a long term win because of demographics and increased patient volumes from healthcare reform. Medical buildings were least impacted by the recession and are the first to bounce back.

Think about your long range plan, and if there's a chance the sales-leaseback could solve or prevent problems, contact a specialist in medical office building investment sales to discuss your goals and to derive an opinion of value. This specialist can then confidentially market your property at a price point acceptable to you if you decide to move forward. On a final note, there should be minimal disruption to your staff and certainly no sign on your building. These sales are done through contacts and networks, and the buyers are from everywhere.

Paul Heiserman, Healthcare Services Group, is a recognized leader in healthcare real estate services, having been quoted in Business First, AMA News, Columbus Monthly, and ReachMD (XM Radio 160). His core strength in research and analysis and exceptional customer service skills help him excel in his unique niche. He can be reached at paul.heiserman@colliers.com or 614-437-4497.