Key Takeaways
- Most medical practices should plan to occupy a building for at least 10 years before buying, as specialized clinical build-outs make moving expensive.
- Simple mortgage-vs-rent comparisons are misleading. Operating costs add roughly 40%–60% on top of a mortgage payment when you own.
- SBA 504 loans let qualifying practices buy with as little as 10% down, with the rest split between a bank lender and an SBA-backed second mortgage at a fixed rate.
- Owning can provide real tax advantages, depreciation, cost segregation and the mortgage interest deduction, that lower the after-tax cost of ownership.
- Don’t underwrite a building purchase based on future appreciation. The deal needs to work on operations alone.
In representing healthcare groups and specialized practices in leasing and purchasing clinical space for decades, we have found that some medical practitioners reach a crossroads—is it time to stop paying rent to a landlord and own the facility where they provide care? As a tenant only advisory firm, when we evaluate a potential medical office purchase, we utilize a framework that balances strategic fit, risk profile and the financial implications. In the healthcare world, the issues of fit are often far more consequential than the purchase price itself.
Strategic Fit of the Real Estate
The strategic fit of owning clinical real estate is perhaps the most critical hurdle. To justify purchasing a building, a practice should have at least a ten-year expected utilization of that facility. This is especially true for physicians, as the cost of specialized medical build-outs including heavy plumbing, reinforced flooring for imaging equipment and specialized HVAC systems, makes moving far more disruptive and expensive than it is for a typical office user. Consequently, a rapidly growing multi-specialty group that may outgrow its footprint in five years, or a practice looking for a near-term exit strategy to a hospital system or private equity firm, should generally remain in a lease. Ownership can complicate a practice’s sale, as financial investors are looking for returns on the business and will have little interest in the real estate.
Getting the Apples-to-Apples Correct
The risk profile of a medical building must also align with your personal financial security. When a physician buys a building, they are relying on the strength of their own practice as the primary tenant to cover the mortgage and the building’s operating expenses. We often see doctors compare a mortgage payment to a rent payment and conclude that buying is cheaper. But this frequently overlooks the “operating expenses” associated with medical facilities that are often included with the rent payments under a “net of electricity,” “full service gross” or other gross lease arrangements. Real estate operating expenses that are generally included in a gross lease include property taxes, building insurance, water, gas, elevator maintenance, landscaping, buildings repairs and maintenance, specialized janitorial services, biohazard waste management and a myriad of other costs. These costs add 40% to 60% on top of the mortgage costs.
Furthermore, commercial real estate is highly illiquid, and most SBA loans require any shareholder owning 20% or more of the practice to personally guarantee the loan—and occupy at least 51% of the building. If a change in reimbursement rates, change in the practice ownership composition or a market downturn affects the practice’s ability to pay rent, the bank will look toward your personal assets to make up the difference.
Hidden Costs of Ownership
Beyond personal liability, another potential risk involves purchasing a building that exceeds the practice’s actual occupancy needs. While it may seem like a wise investment to buy a larger building and lease out the extra suites to other specialists, one must be prepared for the realities of being a landlord. Managing and paying for tenant improvements, carrying vacant space between tenants, legal fees and commissions, and any free rent concessions that the market demands can be a significant hidden cost and distraction from your clinical work. It is essential to identify these potential challenges upfront and purchase at a price that remains viable even under conservative vacancy assumptions around lease up and turnover.
What You Pay When You Own
When you own, you pay the mortgage. Then you pay all the things a landlord used to pay.
- Property taxes
- Building insurance
- Utilities (water, gas, electric)
- Elevator maintenance and inspections
- Landscaping and exterior maintenance
- Roof, HVAC and structural repairs
- Specialized janitorial and biohazard waste management
- Property management (if outsourced)
- Capital reserves for big-ticket items
- Tenant improvements for any and all space modifications, including hard & soft costs (i.e. space plans, architectural drawings, permitting, construction management, etc.).
As a rule of thumb, those operating costs add 40% to 60% on top of a mortgage payment. A $10,000 monthly mortgage often translates to $14,000 to $16,000 of true monthly occupancy cost.
SBA 504 Loans for Medical Practice Buyers
The SBA 504 loan program is purpose-built for owner-occupied commercial real estate. It’s the most common financing tool for medical practices buying their building.
How an SBA 504 Loan is Structured
The deal has three parts:
- 50% from a bank: A first mortgage from a conventional commercial lender, typically at market rates.
- 40% from a Certified Development Company (CDC): An SBA-guaranteed second mortgage at a fixed rate, usually with a 25-year amortization for real estate.
- 10% down from the borrower: Versus 25%–30% down on a conventional commercial mortgage.
That 10% down payment is the headline benefit. Most practices don’t have $500,000 sitting around to put down on a $2 million building. SBA 504 makes the deal possible.
Who Qualifies
The basic SBA rules:
- The practice must occupy at least 51% of the building (60% for new construction).
- Anyone owning 20% or more of the practice must personally guarantee the loan.
- Project size limits run up to $5.5 million on the SBA portion for most healthcare deals.
- The building must be for owner-use, not pure investment.
The personal guarantee is real and worth taking seriously. If the practice can’t service the debt, the lenders can come after the partners’ personal assets.
When Owning Makes the Most Sense
Buying tends to be the right call when most or all of these are true:
- The practice is established with a stable patient base.
- Partners plan to occupy the same location for 10+ years.
- There’s no near-term plan to sell to a hospital system or PE-backed acquirer.
- The deal pencils out using current rents and operating costs, without assuming appreciation.
- Partners are comfortable signing the SBA personal guarantee.
- There’s a CPA already engaged who can structure the tax benefits properly.
If you’re missing two or three of those, leasing is almost always the better call right now. You can revisit ownership when the picture is clearer.
Caution on Betting on the Future
Finally, the math must work on its own merit without relying on aggressive appreciation assumptions. While there are significant depreciation benefits to owning, which can be accelerated through cost segregation techniques, these are often secondary to the long-term goal of controlling costs. We have seen medical buildings in high-demand areas purchased at premium prices that were later worth significantly less during market corrections, or when newer medical office buildings come on the market as competition. When analyzing a purchase, the safest approach is to assume no capital appreciation over the life of the asset.
While navigating the risks of ownership requires expertise and careful consideration, a strategic acquisition—aligning the ideal property with the right price—can transform a medical practice’s real estate into a valuable asset for their eventual retirement. Hughes Marino can help you navigate the process and evaluate all of your options, whether it be leasing, purchasing or building your own project from scratch.
Frequently Asked Questions
Buying makes sense for established practices that plan to occupy the same building for at least 10 years, have no near-term plan to sell, and can underwrite the deal without depending on future appreciation. Leasing is usually better for fast-growing groups, practices considering a sale to a hospital or PE-backed buyer, or any group that values flexibility over long-term equity build.
Operating costs typically add 40%–60% on top of the mortgage payment, including property taxes, insurance, utilities, repairs, capital reserves for major systems and specialized janitorial. Owners also carry the operational responsibility of managing the property, the illiquidity of commercial real estate, and, if leasing out surplus space, the leasing commissions, free rent and tenant improvement costs of being a landlord.
The right time is when the practice is established with stable revenue, partners commit to staying in the same location for 10+ years, there is no near-term acquisition or exit on the table, and the deal makes financial sense at current rents and operating costs. The wrong time is when growth is uncertain, an exit is possible or the math only works on appreciation assumptions.
Multiple benefits can stack in your favor: (1) the mortgage interest deduction, (2) depreciation of the building over 39 years (a non-cash deduction), and (3) cost segregation studies that accelerate depreciation on certain components over 5, 7 or 15 years. Together, these often reduce the after-tax cost of ownership by 20%–30% compared to the pre-tax mortgage payment. Always check with your licensed tax advisor—as these are very high-level benefits and the situation may be different for everyone.
