LLC Structuring for Medical Office Purchase

[joehoya04]

I work as a physician within a single-specialty group. The practice (of which I am an employee, not a partner) leases all its five medical offices. Some of the members have desired expansion into a new area. As a result, I have identified a medical office that would be ideal to purchase and then lease back to the practice. The managing partner is on board and fully supportive of this strategy.

Two other physicians (one of which being the managing partner) which to invest with me. As a result, I have been looking into LLC creation to give them the opportunity and to decrease the cash outlay on my end.

The issues regarding structuring the LLC I am struggling with are two-fold:

1) Liability and decision making - I intend on assigning myself as the manager, the person who will decide when to sell, what renovations that are needed, etc. This obviously means other investors in the LLC will have to relinquish control as well as liquidity potentially. But what about liability? Should I bear this all on my own shoulders in order to account for the fact that I have all the "power"? Or should liability be a factor of the capital that was invested? If all the liability is on me, should I be compensated extra for that?

2) "Sweat equity" - what is a fair way that I should be reimbursed for the work that I am doing? A lawyer that I have hired to create the LLC suggested a management fee but that didn't seem ideal in my eyes. Would it be unreasonable for me to be given extra "shares" for the work that has been put in? If not, what would be a reasonable way to structure this?

If it helps, the office we are looking at is about $500k and is essentially move-in ready.

Any help would be greatly appreciated!

[Chickenlittle]

Wow I see potential problem with conflicts. Of course, just like a marriage no conflicts seen until marriage. Partnership is difficult enough. Potential areas of problems could be how tent is determined, including future increases or decreases. Decision about when to sell, who will decide? Once lease up could practice find better opportunity and move or could you find opportune time to sell and practice needs to move? Potential issues more numerous. If it works out financially will members not included become jealous or you more resentful if not doing well?

[Kamban]

Fully agree with chickenlittle.

Unless you include all members and have them as equal partners somewhere down the line this will become a big source of resentment. Is it 500K total cost or down payment. If it is the former and there are sufficient partners, the $150K or so down payment should be divided equally . If some do not want to take part, make them decline in writing and divide their share equally among the rest.

[jfoxcpacfp]

You need a good contract attorney and a good CPA. If the other two are fine as passive investors, then I would respectfully disagree with @Chickenlittle and @Kamban. All of the above should be clarified in the partnership agreement without emotion. There are multiple ways of structuring an investment. What matters is clarity before you invest, an iron-clad agreement, and making money on your investment.

[Chickenlittle]

jfoxcpacfp wrote:

You need a good contract attorney and a good CPA. If the other two are fine as passive investors, then I would respectfully disagree with @chickenlittle and @kamban. All of the above should be clarified in the partnership agreement without emotion. There are multiple ways of structuring an investment. What matters is clarity before you invest, an iron-clad agreement, and making money on your investment.

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Having lived through a very bitter split from prior associate that ended up in protracted litigation I am very jaded about contracts protecting someone completely. Not the reason for the breakup but a good example of how contracts do not protect you completely. We originally agreed to split income equally but discovered myself (the senior partner) double booking so as not to turn patients away while associate would turn away new patients when he had more than 2 new patients in 3 hr period. So we went to eat what you kill model with each being credited with their own receipts. Then I saw his bookings go up dramatically which was good but noted new gaming strategies. Any Medicaid patients he saw in the hospital would be booked to see me in the office. When I asked patient why they booked with me they were told to by my associate. This increased my work load (had to treat as new patient and review hospital course). This maximized his income since Medicaid such a poor payer then.  I realized there was no way to protect yourself from a bad actor by contract. People will game situation. So I would be careful, if a good investment no contract will protect you from someone being jealous and if it turns out to be a poor investment than you maybe come resentful

[jfoxcpacfp]

Chickenlittle wrote:

jfoxcpacfp wrote:

You need a good contract attorney and a good CPA. If the other two are fine as passive investors, then I would respectfully disagree with @chickenlittle and @kamban. All of the above should be clarified in the partnership agreement without emotion. There are multiple ways of structuring an investment. What matters is clarity before you invest, an iron-clad agreement, and making money on your investment.

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Having lived through a very bitter split from prior associate that ended up in protracted litigation I am very jaded about contracts protecting someone completely. Not the reason for the breakup but a good example of how contracts do not protect you completely. We originally agreed to split income equally but discovered myself (the senior partner) double booking so as not to turn patients away while associate would turn away new patients when he had more than 2 new patients in 3 hr period. So we went to eat what you kill model with each being credited with their own receipts. Then I saw his bookings go up dramatically which was good but noted new gaming strategies. Any Medicaid patients he saw in the hospital would be booked to see me in the office. When I asked patient why they booked with me they were told to by my associate. This increased my work load (had to treat as new patient and review hospital course). This maximized his income since Medicaid such a poor payer then.  I realized there was no way to protect yourself from a bad actor by contract. People will game situation. So I would be careful, if a good investment no contract will protect you from someone being jealous and if it turns out to be a poor investment than you maybe come resentful

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That is really sad and I'm sorry for your experience. There are successful partnerships in which all duties, responsibilities and payment structures are not mirrored. I think you are correct that it involves a lot of trust (and due diligence!) during the "courtship" phase.

[joehoya04]

Thank you to all for the helpful comments.

I think it is critical that I elaborate a bit more regarding my group's structure, since it is "non-traditional". Essentially, there is one physician owner/manager of the practice. All other physicians (four) are employees and receive a W-2...none are partners. All the employed physicians have the exact same contract that is purely "eat what you kill" where compensation is directly tied to collections (compensation=60% of collections). How the practice as a whole does financially does NOT impact the compensation of the individual employed physicians. The physician owner/manager makes all decisions regarding the practice such as who to get malpractice insurance from, where to lease offices, suppliers of office materials, etc etc. He also bears the liability of the practice on himself.

Hopefully, that changes the perspective from some of the previous posters. The physician owner/manager wishes to invest in the LLC (thus foregoing control of property management) AND is willing to sign a 10-year lease agreement for fair market value with a standard escalation clause on behalf of the practice. The decision of the employed physicians to invest or not invest has no bearing whatsoever on their income as it relates to the practice of medicine.

I hope I haven't confused anyone. What have others used or even seen with regard to the original points of concern: liability and sweat equity?

[Kamban]

Few issues I can see

1. You are an employee and will never be a partner in the medical business.

2. There is one boss who makes all medical decision.

3. You want to be the majority owner and managing partner of a property that you want to lease to the medical practice.

4. Right now you might be chummy with the owner. But if things go south and he pulls out of this building are you going to sue him. Especially if can terminate you as a employee and you lose your income. If you were only a real estate developer leasing to him or was a partner in the practice you might have some leverage.

Thing long and hard before you put money in with him. I speak from experience, having worked for a solo owner who only wanted employees and not partners.

[adventure]

joehoya04 wrote:

I have identified a medical office that would be ideal to purchase and then

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start your own practice?