Considering Buying Real Estate for Your Practice? Part 2

The real estate you acquire for your clinic’s occupancy should not be
part and parcel of your chiropractic practice but separately owned and
leased to the chiropractic practice.

Set up a separate company to own the property
The real estate you acquire for your clinic’s occupancy should not be part and parcel of your chiropractic practice but separately owned and leased to the chiropractic practice. This is good business and it protects your investment against any legal liability that might be incurred by your professional corporation. To avoid problems with Canada Revenue Agency the lease should be at market rate and contain all of the same clauses as if you were renting to or from a third party. Building operating costs such as taxes, insurance, maintenance, etc., should be segregated from those of the practice. At the time of acquisition, set out specific rules, terms and conditions that will allow your present and perhaps future partners to buy in, or if in the property ownership, opt out.
 
Renovating an Existing Building
Probably the most difficult decision is whether to buy or build. Building requires selecting and purchasing a suitable site, design, employing a contractor, financing, going through the municipal, legal and other hoops to get it done, and the time element. This could take several months. Alternatively, the probability of finding a property, which, exactly as is, fits your needs and is in close proximity to your patient base is near impossible. At times it could make economic sense to buy an older building, modernize, and retrofit it for your specific use.  Doing so could produce a building with equal utility at a much lower end cost than developing new. With some creativity many older buildings can be effectively upgraded.

However, you must be very judicious in your selection. Many are not worth renovating. Before buying ensure that the building is structurally sound with all inherent problems correctable at a reasonable cost. If the building suffers cosmetically, superficially, or perhaps has a space allocation problem it is upgradable. However, if it has an obsolete design, is permanently impaired, has a broken foundation, or the roof joists are rotted out, it probably is not, or if so at an exorbitant cost. Before starting conduct a feasibility study. Begin with the initial cost of the building including legal and other acquisition costs, add the cost of renovation including a substantial contingency allowance and soft costs, then calculate the probable market value once renovated. Soft costs are architect’s or engineers, design and approval costs, building permits, building inspections, insurance during construction, taxes and utilities during construction, appraisers if obtaining financing (a good idea anyhow), surveyor’s cost, etc. If after completion, the market value is less than the cost of acquisition and renovation, it’s a bad deal. 
 
The Office-Clinic Condominium
Office–clinic condominiums have traditionally appealed to all classifications of medical, dental and other professional practices, particularly mid-sized projects that house only related practices, which would include a chiropractor.  There is a multiplicity of laws and regulations connected with condominiums, which vary from province to province. Before you buy into a condo project ensure that it is legal, meets all building, health, and fire codes, zoning, and municipal ordinances. Carefully read the bylaws. Check the financial reserves that have been set aside for future maintenance and ensure their adequacy. Next, confirm that the other occupants of the project are compatible with your chiropractic practice. Be assured that your occupancy cost will be less, and your financial and intra-practice advantages outweigh renting from a third party or occupying a single purpose structure. Although for many there are benefits with condos, for others the shortcomings exceed the advantages.

The same as if buying a free standing building, with the condo, the probability is that prior to occupancy it will be necessary to renovate your demised area. Except that now everything must comply with the condo association’s bylaws, or be approved by the association, the same renovating criteria earlier stated also applies, i.e., that value before renovation plus cost of renovation, must not exceed the value after. Always conclude the study by answering the question: “Does the condominium your clinic will own and occupy satisfy your needs and overcome your constraints?” If no, and you cannot correct the faults to make it satisfactory, it is probably best to forget a condominium and move on.
 
Clarify Your Objectives
The successful investor looks beyond today, into the longer investment horizon. Although all buy real estate with a specific objective in mind, only buy after you have considered other investment vehicles and determined that for your current situation and longer-term objectives real estate is preferable to the alternatives. The basis of good financial planning is to develop and follow a strategy that will enable you to achieve your goals with the maximum of personal and practice benefit and the minimum of financial risk. •

Lloyd Manning is a semi-retired business appraiser and financial analyst who is now a freelance business article writer. He resides in Lloydminster, Sask. He can be reached at lloydmann@shaw.ca.