Setting Up a New Location? Tips for Leasing or Buying

Alison Werner:

Hello, and welcome to the Plastic Surgery Practice Podcast on the MEDQOR Podcast Network. I am Alison Werner and I’m joined by my co-host, Keri Stepens, and we are the co-chief editors of Plastic Surgery Practice. Today, we are going to talk about how plastic surgery practices can maximize their business, specifically, with regards to property leasing and/or purchasing and risk mitigation. We are joined by Kerry Cahill, an attorney with Lindabury, McCormick, Estabrook & Cooper in Westfield, New Jersey. She specializes in working with clients in the healthcare industry and frequently works with doctors in private practice. Kerry, thank you so much for joining us today.

Kerry Cahill:

Thank you for having me.

Alison Werner:

Well, let’s get started. I know you have a number of tips for practices. And so, one thing that all practices need is physical space. How do you go about helping clients decide whether to lease or buy?

Kerry Cahill:

That’s a great question. Before making a decision on whether to lease or buy, I encourage practitioners to do their market research. For example, what is the practitioner’s target market? And how and in what ways has the population fluctuated in recent years? What is the visibility of the practice? With the assistance of an accountant, I encourage practitioners to make a conservative estimate on the amount that they can afford with respect to a monthly rent or mortgage payment. If the practitioner’s unsure about the market, or has a limited startup budget, it may be worthwhile to start with a short term lease in a complex with other tenants in order to offset common area costs of maintenance.

On the other hand, if the practitioner is confident about the viability of the market, and has sufficient startup capital to handle the expected and unexpected maintenance and repair costs, purchasing is a great solution. There, the equity in a purchased office space can significantly add to the valuation of a practice, so there isn’t a one-size fits all answer.

Keri Stepens:

Okay. So for doctors who are leasing a space, what are some of the common pitfalls you see when they’re negotiating your lease?

Kerry Cahill:

The two primary pitfalls that I see are that practitioners are not able to articulate their deal breaking terms at the commencement of the negotiation. And second, they may not be aware of what regulations and laws apply to their practice. For example, a commercial landlord may not be aware of all the regulations that are applicable to a practitioner’s practice. So from ensuring the space can be fit up to operate the practitioner’s diagnostic and treatment technology, to ensuring the proper disposal of medical waste, the practitioner, as a trained professional, must be able to ensure the space they are renting is capable of operating their practice. I would recommend having a professional contractor, with experience in medical office fit ups, view the space prior to commencing a lease or to purchasing the property to ensure that the practitioner has sufficient startup capital to get their office up and to running.

And additionally, the contractor can aid in the negotiation of the lease, as the landlord may be able to negotiate a rent abatement during the fit out period. And also with the rentals, practitioners must remember that the owner of the property has the ability to sell it. So even prior to the date of termination of the practitioner’s lease, I encourage the practitioners to speak with the landlord with respect to how long they have been operating the property, what the average percentage of occupancy has been, and what the long term plans are with respect to their ownership. So if there’s a potential for the owner to sell, the practitioner may want to negotiate an option or right of first refusal in order to purchase the property.

Keri Stepens:

Okay. So what is your advice to practice owners as they negotiate their leases?

Kerry Cahill:

Before you start negotiating, speak with your council to ensure you’re on the same page. Your attorney can help you identify what laws and regulations apply to your practice, as well as identifying local and state regulations that may impede your ability to operate in the space.

Alison Werner:

Okay. Now, for those doctors who are buying commercial real estate, what should they keep in mind as they start the process?

Kerry Cahill:

Purchasing is a more permanent solution than leasing, in the sense that it typically requires more money upfront, and the cost of upkeep is generally not offset by other tenants. I would highly encourage practitioners to do their due diligence on the market to ensure that the property can be utilized in the manner that the practitioner intends and that the property has the capacity to accommodate growth.

Alison Werner:

Let’s see. Once they’re narrowing down their properties, what are the red flags to keep an eye out for?

Kerry Cahill:

I would be concerned about properties that have had significant turnover and those which are priced below market rate. And I would also contact the applicable environmental regulatory body to ensure there are no environmental issues with respect to the location.

Keri Stepens:

Okay. Let’s talk about negotiating the real estate contract. What are the keys to negotiating a competitive contract?

Kerry Cahill:

Depending on the permissible uses, a property may have a variety of potential uses in addition to medical or dental office space. Sellers want to maximize their profit on the sale of the property, and, as a result, the practitioners must make competitive offers. For the practitioners who are receiving financing, the mortgage obligations may commence before the practice is physically up and running. As a result, the practitioners must ensure they have enough capital during the fit out period to cover any mortgage, tax, insurance, utility, and repair obligations. Additionally, understanding these costs can give the practitioners some leverage during the negotiation. For example, after the inspection, they may seek to negotiate a credit towards the fit out cost in lieu of a repair.

When I represent a purchaser in such a transaction, two of my primary concerns are negotiating amenable financing and due diligence contingency periods, as these are integral for my clients to obtain financing, to inspect and assess the property, and ultimately to have the assurance that the property can be used in the manner that the practitioner desires.

Keri Stepens:

Okay, cool. Thank you. Okay. What are some biggest pitfalls practitioners should be aware of when they’re negotiating a real estate contract?

Kerry Cahill:

Purchasing a property for one’s practice is one of the largest investments that the practitioner will make during their career. Practitioners must do their due diligence instead of rushing towards a closing date. Don’t waive the inspection or the environmental investigation and ask questions. Have any claims regarding the property been submitted in the past 10 or 20 years? Is the property in a flood zone? And also, the practitioner shouldn’t expect to be an expert in everything. If the practitioner hires experienced advisors, these individuals have the requisite expertise to help the practitioner evaluate any risks that are inherent with the property.

Alison Werner:

Okay. Let’s switch gears a little bit. Given that all Americans are dealing with inflation, including doctors in private practice and the possibility of a recession, do you have any additional advice to doctors, either leasing or buying commercial property for their practices?

Kerry Cahill:

My biggest piece of advice is to not rush the contract or the closing date. With increasing interest rates, I’ve had a number of transactions recently where the purchasers are rushing to close, because they will otherwise lose their rate lock. But as attorneys, we handle transactions as expeditiously as possible, and practitioners must understand that the due diligence process takes time. One of the worst things that the practitioner can do is waive an inspection or the environmental investigation and proceed with the transaction, and then discover that there’s a significant issue or a liability which may be fatal to their practice.

Alison Werner:

Well, my next question was going to be whether leasing or buying, what is the benefit of having a lawyer on board to represent your interest? But it sounds like you’ve outlined that a lot, but is there any additional advice you have in terms of bringing on a lawyer?

Kerry Cahill:

Sure. Lawyers have an ethical and fiduciary obligation to their clients, including obligations of confidentiality. Attorneys have confidential strategic conversations with their clients, and we can negotiate favorable contracts. We aid in assessing and mitigating legal risks in the transaction. And additionally, we can often neutralize the communications and temper the emotions between the parties. And ultimately, we close the deal. I would recommend having an attorney on board before you start negotiating so that the attorney may aid the broker in the negotiations. And even after a letter of intent or contract is signed, the parties can continue negotiations to effectuate the transaction. We need to understand and be apprised of the terms of the transaction to draft an accurate contract, which reflects the party’s agreement.

Keri Stepens:

You just talked about risk. I want to go back to the risk part. As practitioners are setting up their practices, you advise that they establish policies to mitigate risks. What are the risks that are most common to private practices?

Kerry Cahill:

Risk comes in all shapes and forms. Practitioners need to mitigate the risks associated with their office space, as well as the interactions with their patients, their staff, and their insurers. Having adequate levels of insurance is integral. For example, general commercial liability, malpractice, employment practices, the ELI or EPLI insurance, there’s workers compensation, DNO for directors and officers, and general umbrella policies. The practitioners should ask their insurers what is excluded from coverage under those policies, and they may wish to obtain riders for the excluded coverage.

Additionally, the practitioners should implement policies, protocols, and procedures to mitigate their risks, and sometimes there are financial incentives for doing so, for example, with HIPAA and the HITECH Act. In many states under the corporate practice of medicine principles, the licensee must be in control of their practice. And as a result, the practitioners should take affirmative steps up front to remediate the risk, such as utilizing employee handbooks, having protocols for patient interacting, and conducting periodic billing audits.

Alison Werner:

How often should practice owners review their risk mitigation policies?

Kerry Cahill:

Periodically. There is no bright line rule, but the ultimate goal is to ensure your policies are current with the law. In the heavily regulated healthcare and dental industries, the policies frequently change. And as a result, I would recommend having an annual review to ensure the policies are not only current, but meeting the needs of the practice.

Alison Werner:

Okay. And then what role can a lawyer play in helping a practice set up a risk mitigation strategy?

Kerry Cahill:

Lawyers play an integral role in risk mitigation. We can help practitioners discern and mitigate general risks, but also risks that are specific to their individual practices. Accordingly, we can help practitioners from the formation of their practice in terms of selecting the most beneficial corporate structure, to continuing to aid in the operation of the practice throughout its longevity.

Keri Stepens:

Well, Kerry, this has been great information. Thank you so much for joining us today.

Kerry Cahill:

Of course.

Keri Stepens:

And to our listeners, thank you for spending this time with us. Make sure to subscribe to the MEDQOR Podcast Network, and check out the latest episode of the Plastic Surgery Practice Podcast. And to keep up with the latest industry news, please visit plasticsurgerypractice.com. Until next time, take care.