Maximizing Income, Minimizing Expenses
Whether your favorite sport is football, foosball, or fútbol you can’t win the game unless you have both a good offense and good defense. Bear Bryant echoed this by saying “Offense sells tickets, but defense wins championships.”
The same can be said about winning in business and personal finance. In the classic personal-finance book, “The Millionaire Next Door,” Thomas Stanley and William Danko liken offense to income and defense to how you spend (or do not spend) that income. Their premise is that to win at personal finance and become wealthy, you must be excellent at producing income (offense) and even better at retaining it (defense).
Clearly, it takes money to make money and some healthcare expenses are unavoidable. However, it is important to focus your attention on a healthcare real estate savings strategy while looking at big ticket items. Shifting your financial focus to defense/savings can have a huge impact on the income you earn in your personal finances and the finances of your healthcare practice.
We recently had two clients who were excellent practitioners; able to produce high revenue for their practice and take home significant income. They were great at offense, bringing in income; however, upon reviewing their commercial leases, we found their defense/healthcare real estate savings strategy to be lacking.
Our client was leasing space in a multi-tenant building. Her lease was set to expire in just over twelve months, so she was considering relocating her practice or purchasing her existing leased space. After reviewing her lease, our healthcare real estate broker noticed she was paying rent on the entire building (nearly 6,000 square feet), rather than her 4,000 square foot space she was practicing in. She was paying for an additional 2,000 square feet that her practice was not occupying, while the landlord was collecting double rent on the adjoining 2,000 sf leased space.
Consider the ramifications of this. For the sake of round numbers, let’s use a fifteen-dollar per square foot lease rate over a ten-year term.
$15 x 6,000 sf = $90,000 (annual rent) x 10 years = $900,000 total rent
$15 x 4,000 sf = $60,000 (annual rent) x 10 years = $600,000 total rent
It turns out, there was no malicious conduct or deceptive intent on the part of the landlord (just an honest mistake), but this lease was reviewed by a practice broker, an attorney, two or more doctors and others before it was signed. To be fair, the space was a part of a practice purchase, so the lease unfortunately was an afterthought.
How long would it take to make up for a mistake like this by cutting back on supplies?
Our healthcare real estate brokers have a detailed savings strategy designed to expose hidden contract mistakes and maximize savings. The reality is, no matter how many pennies you pinch on cotton roles or materials, it’s unlikely you could make up for this type of an oversight. It is dangerous to assume the math on a lease will work out fairly or believe it is not worth the time or money to have a professional review the terms of the deal. Doing so could end up being the costliest mistake of your professional career. This is an example of poor defense: not having someone there to protect your bottom line.
The other client was nearing the expiration of his lease, so we reviewed the negotiable terms; namely tenant improvement allowance, free rent, lease rate, operating costs and escalations. The one that stood out the most was the tenant improvement allowance. On the past lease, the landlord’s terms were at least ten dollars lower than what the client should have achieved. Doing the math here ($10 per SF x 3,500 SF = $35,000). One negotiable term that seemed minor or even “fair” was very costly in the end.
This is another example of poor defense. Again, utilizing a specialized healthcare real estate broker with a detailed savings strategy has the potential to save you tens of thousands of dollars on just one item.
The hard part about these transactions is that you want to believe you are being treated fairly. In a few select scenarios you might be, but even then, you must realize that you have competing interests with the landlord, broker or investor that is a professional medical real estate negotiator with full knowledge of their trade. You could say, a landlord’s offense is better than an unrepresented tenant’s defense.
Healthcare Real estate is the second highest expense for most practices.
With this much at stake, it’s not something you want to take a risk on.
The good news is that buyers and tenants have every opportunity to create good defense by seeking professional help who can develop a healthcare savings strategy on their behalf. Often times healthcare professionals will have an attorney review the legal ramifications and consequences of a lease but the legal side of a lease and the fair-market-value side of a lease are completely different. Very few attorneys know the going rate for tenant improvement allowance, free rent, escalations or lease rates in a healthcare-real-estate transaction.
Another common mistake is hiring the wrong commercial real estate professional. Be sure to hire an experienced healthcare real estate broker. Failing to understand the electrical, mechanical and plumbing needs of a healthcare practice on the front end can be extremely costly. Additionally, there are many other business deal points that are vastly different in healthcare real estate vs. general commercial real estate.
In summary, a successful practice works hard on production to increase revenue while investing in resources that drive business without neglecting to protect what has been earned or could be lost. Professional medical representation protects your interests and the valuable revenue you work so hard to attain. You don’t have to choose between having a good offense or good defense; you can have both.
CARR Healthcare is the nation’s leading provider of commercial real estate services for healthcare tenants and buyers. Every year, thousands of healthcare practices trust CARR to achieve the most favorable terms on their lease and purchase negotiations. CARR’s team of experts assist with start-ups, lease renewals, expansions, relocations, additional offices, purchases, and practice transitions. Healthcare practices choose CARR to save them a substantial amount of time and money; while ensuring their interests are always first. carr.us