For most healthcare practices, real estate is the second highest expense behind payroll. The difference between a properly or poorly negotiated transaction can benefit or cost a practice tens to hundreds of thousands of dollars over a ten year period. Additionally, you typically get only one opportunity every 5 to 10 years to take advantage of a new negotiation. With this much at stake, every transaction is paramount to maximizing profitability.
Being educated on commercial real estate fundamentals can increase the potential to make your practice a success. The first important consideration to understand in this series is evaluating the proper amount of interior space needed for your practice.
Square Footage Needs
There are many property considerations to evaluate when choosing an office space for your practice. One of the most important considerations and first questions to be asked is: what size space are you looking for?
Choosing the proper square footage for your new office space is a balancing act between size and money. You need to choose between how much space you need right now and how much space you will need in the future, say in five years from now or as you grow your practice. You also need to understand the cost of what you can afford now compared to what you can afford in the future.
If you play it too safe you can end up limiting your upside and ability to grow your practice. On the other hand, if you acquire too much space, you can dramatically hurt your profitability in your first few years.
In an ideal scenario, you can find a space that gives you a healthy amount of room to grow but also allows you to successfully manage your budget and profitability both at the beginning of the lease and through the completion of the term. Your goal is to be profitable as soon as possible but not to the detriment of future profitability which comes through growth.
Each real estate location and market also impacts the size you can afford. The real estate market in San Francisco, California is very different than the real estate market in Omaha, Nebraska or even Denver, Colorado. The more competitive the market and current economy is, the more limited your choices will most likely be.
If you are borrowing money from a lender, they may require your total monthly rent to be below a specific amount during the first few years of the lease or set a cap on the average monthly mortgage payment if you are purchasing. The specific amount of money these numbers are typically based upon is derived from the lender’s underwriting guidelines and are aimed at keeping the monthly payments to a manageable amount, especially in the first few years.
The best way to understand how to choose between the ideal amount of space and budget, is to work with several partners who can each help you balance the two decisions. A lender will tell you what your maximum budget is. An architect or general contractor can help you determine how much you can build inside the space and at what cost. An experienced healthcare real estate agent can make sure you evaluate your top options that best fit your requirements, and then how each option compares to the others, both financially and through other important business considerations.
Selecting the proper square footage for your new office is an extremely important decision that you should make based upon market knowledge, current and future needs, and most importantly – budget.