Doctors Can Own Their Medical Offices
Many physicians earn moderate to high salaries, but they can’t rely solely on their practice income to build wealth. Many also want to own income-generating real estate aside from their own homes, dreaming that the historically lucrative Southern California real estate market will help them realize financial independence.
Yet investing in medical office buildings or other healthcare real estate is often a major financial leap, usually requiring an investment well into the six, seven or even eight figures. That's why, according to the real estate information company Costar, about 90% of doctors lease rather than own their place of practice.
However, forming a syndicate of doctors to purchase such a property is a low-risk, high-return way for them to own their place of business and invest in commercial real estate.
Such a syndicate is fairly straightforward: The physicians within a group medical practice make fractional investments in the property (sometimes no more than the low five figures). Typical rules are in place regarding the minimum net worth of each investor, although home value can often be counted in the valuation. The shares can be made part of the physician's family trust. Larger medical groups may make the investment on behalf of each physician, allowing their shares to vest after a certain period of time has passed.
A minimum return on investment is often guaranteed for these syndicates, sometimes accompanied by dividend payments. Real estate investors or a nearby hospital or hospital system can also co-invest and provide financing if construction is involved. In all these situations, the physicians themselves have no personal liability attached to the project or syndicate.
A Strong Physician Retention Tool For Hospital Systems
Such arrangements are used by hospitals or healthcare systems that own medical offices or standalone medical retail buildings as an incentive to retain medical staff. The hospital or healthcare system usually maintains a controlling interest in the property. For example, MemorialCare Health System in the Orange County/Long Beach area has sold fractional interests to physicians and other syndicates in seven different pieces of commercial real estate.
St. Joseph Healthcare, another hospital system in Orange County, offered a syndicate for one of its office buildings for a group of its affiliated physicians. Constructed in 1993, the debt on the structure was recently retired, and St. Joseph was looking for a way to retain some of its physicians, particularly primary care practitioners, whom are in scarce supply. Unlike orthopedic surgeons or other medical specialists, primary care doctors tend to earn in the low six figures, often making commercial real estate investments a challenge. St. Joseph's was trying to create a partnership opportunity with them.
St. Joseph's retained a majority stake in the building (the physicians were allowed to invest only in the medical office portion) with certain conditions attached to those physicians wishing to invest. Primary care physicians were offered the first tranche of investments, followed by other members of the medical staff of St. Joseph, then physicians who were generally affiliated/had admitting privileges at St. Joseph hospitals.
Altogether, some 250 physicians – about half of whom were primary care doctors -- invested a total of $13 million, with the transaction fully funded in about two weeks. Some doctors were able to invest as little as $25,000. The number of fractional shares each physician was able to purchase was capped. If a physician leaves the group or surrenders their affiliation with St. Joseph, they have to sell their shares back to St. Joseph.
The deal was structured as a very conservative investment, cash on cash. The investors were guaranteed a 6 percent annual return – an attractive option at a time when savings accounts rarely return more than 1 percent per year.
The End Result
What does a syndicate look like when a property is liquidated? The Southern California Orthopedic Institute (SCOI) in the San Fernando Valley offers a good example. A group of orthopedic surgeons work out of a 90,000 square foot build-to-suit building adjacent to Valley Presbyterian Medical Center in Van Nuys that was built in the early 1990s. A significant amount of space in the building is also leased out to third party physicians. The doctors owned the building through a syndicate formed via shares in an S-corporation. However, SCOI is engaged in a long-term ground lease from Valley Presbyterian. As the mortgage on the building was nearing payoff, “we got the idea that perhaps we could do a sale leaseback and we could monetize the leasehold interest,” said Steve Goodman, SCOI's Vice President of Finance.
In 2008, the syndicate of SCOI physicians who owned the building sold the property to a real estate investment trust, a transaction handled by CBRE senior executives. Although SCOI will continue to pay rent on the building for the foreseeable future, its individual physicians reaped the benefit of a market where values increased four to five-fold between the early 1990s and late last decade. In this case it was a life-changing sum of money – the type of life change that this kind of investment in commercial real estate can bring.
Bryan Lewitt is CBRE Senior Vice President in Los Angeles. Craig Beam is a Managing Director for CBRE's Health Services Group in Newport Beach.
