Questions about buying office space.

[INGI]

Hi,

My questions are towards those who owned an office as I am questioning the prudence of buying an office space. So here is my situation. There is an office building where 1st floor consists of 2 suites. One is occupied by our surgical center which is owned by my partners but not me. I don't own it because I just recently joined the group. Now we are very busy and want to expand surgical center into the second suite. This suite is currently owned by 1 physician who is also part of our group. He is retiring in 1-2 years so he offered to sell his office suite. The thing is that he paid $300/sq foot in 2008. As I looked on market, there are 2 medical office suites for sale in my city, at $225-250/sq foot and both sit on market for over 1-2 years. In addition we just bought a vacant building for our clinic at $150/sq ft.  So in other words the retiring physician paid too much for the office. He did not name price but I anticipate same $300/ft range.

Let's assume I pay cash for the office. My partner purchased in 2008, and now the office is worth less if he sells on open market. I think at best he gets his money back by selling to us, but his investment cash overall lost to inflation. Alternatively if he put same lump sum into index fund (VTSMX), he would have doubled his investment by now. Yes, surely he got some tax benefits but not sure if that benefit doubles his investment.

Does it make sense for me to buy in at that price even if I am planning on practicing for next 20-25 years? What other factors do I need to count in my analysis? Thank you.

[NJDoc]

It's a bit surprising he paid what may be top dollar in your area post crash. But, from your brief synopsis of the market in your area he probably paid too much.

To be frank, if he paid too much that is not your problem, it is his. If he wants to retire in 1-2 years, he will likely want his cash back , or at least what he can get.  I would not want to overpay now just to appease your partner. Will he help you 20 years from now when you want to sell it?  I think the best way to approach this is get multiple comps if you can for similar properties, call a broker, go on Loopnet, anything just get some comps and present that to your partner.

He paid too much - don't make the same mistake.

 

 

[East coast]

My first step would be to encourage you to only consider facts germane to the business decision - what he paid for it shouldn't play any part in the decision as far as I can tell. Also, what he could have done with that money instead REALLY shouldn't play into this decision/discussion.

Second, everything stated is conjecture - I'd get the price information before any next step.

Third, in theory, that 2nd floor space is more valuable to you (and your group) than to the rest of the real estate market as a whole, so it's still potentially a good business decision to pay more for that space than someone else may be willing to pay (in reference to the cost of the other places on the market). He clearly knows that, and thus can use that asymmetric information to his benefit.  Maybe paying $75/sq ft is worth having it all in one space.

[jfoxcpacfp]

The answer is fairly simple. Just get an independent appraisal. Realize that the fact that you need that particular space makes it more valuable to you than to many other buyers, however, so you will likely buy a premium over the appraisal.

[INGI]

So the way I see it I won't make money from appreciation of the office space. Based on your experience would the tax benefit of paying myself rent, depreciation, etc would be meaningfully beneficial?

[Zaphod]

INGI wrote:

So the way I see it I won’t make money from appreciation of the office space. Based on your experience would the tax benefit of paying myself rent, depreciation, etc would be meaningfully beneficial?

Click to expand...

You're still considering buying him out at a price thats good for him only? Is this person making the same considerations to your needs? If so, that is wonderful and maybe you can meet in the middle in somewhat of a less lose lose situation. Otherwise, this is a business decision only, you dont have to do anything and are basically rescuing this guy from what appears the goodness of your own heart.

You guys might like the space, but maybe you dont "need" it right now, in fact you just bought some more space. You guys have all the leverage, hes the one with a time frame and little options as far as buyers go. It'd be foolish to not at least recognize that, not advocating putting your partner/possible friend through the ringer but making the obvious point. Agree that you would easily pay a premium as its definitely most convenient to your group.

As far as not making any money from the space, if you cant, then certainly its a no buy. However, I presume you would be able to expand your practice and it may help bring in more revenue from that kind of activity. If none of those kind of aspects seem like reasonable money makers I dont know why you would even consider it.

[jfoxcpacfp]

INGI wrote:

So the way I see it I won’t make money from appreciation of the office space. Based on your experience would the tax benefit of paying myself rent, depreciation, etc would be meaningfully beneficial?

Click to expand...

Based on my experience, there are tax benefits to be had from any business expense. However, the overriding concern is the purchase of this particular property at (what appears to be) a huge premium. It sounds as if you are trying to find some excuse to make this purchase logical. Concur with @Zaphod.

[Raster]

I don't think the other respondents are evaluating this problem correctly.  If I am understanding your dilemma, you are deciding how much you can spend to buy space to expand your adjacent surgery center.  If you are talking about an typical ASC, and your ASC requires expansion for necessary business growth, the real question is this: is it cheaper for you to pay this guy whatever he asks ($300/sq ft ?) or move the entire ASC to another building where you can have adequate space?

If you pay an extra $75/sq ft (above the market price) for the adjacent space to expand your ASC and the rest of the ASC can be left unchanged, that seems like a bargain.  If you have to move the entire ASC, you will be paying probably between $150-$400 / sq ft depending on your area for ASC buildout - on the entire space, including all the space that would remain unchanged in your current ASC if you were able to expand into the adjacent space.  When you combine this with all the regulatory hurdles and inspections and potentially new code requirements that you could be subject to depending on the age of your center, the move looks even more expensive.  If your center has been around awhile, you may find that creating the same facilities (number of OR's, number of pre/post op beds) today could require much more square footage than you are currently using.

There may be other ways to "find" space - moving non-clinical staff to a different location, eliminating clinical staff offices, etc.  If you can keep a surgery center busy, paying $300/sq ft for the space is cheap.

[Quan]

I read the situation similar to Raster.  Seems like you guys want to expand the ASC, and this guy has the space to do so.  If you can't expand into his space, you'll have to see what other options you really have.  Problem with having a successful ASC is that the retiring partner knows you guys are doing well.  If I were the retiring partner, I'd probably ask for above market value also.