What would you do in this situation?

[xrayvsn]

I own part of the building my multispecialty group practice is (70+ docs). It has been by far my best investment, I calculated that it has a blended gain of 575% since I originally bought it in 2006. It spits off pretty reliable dividends ($17,850/yr) which based on current assessed value is very low (little over 3%) but from initial investment put in the yield is great (22% or so).

The reason why now it is so low is because our charge for rent was way lower than market (and kept that way for 10 yrs with us now finally increasing it to still slightly below market).

The view of the majority of owners basically was wanting to make sure the other partners didn’t have massive overhead and help retain partners which lowered general overhead that way (more bodies to divide costs).

However we have had a recent unsolicited offer that is almost 2x our last April 2018 appraisal. Original investors could literally walk away with nearly 20x their initial investment (easily 7 figures for majority of the original investors).

The great debate is if we sell, those people who invested (especially early, which I was on the ground floor) would profit, but the clinic may self implode as the new buyer would not do what we did and actually run it as a business for profit and bring rates across the board to market value.

I have a colleague in Florida that apparently had the same situation happen, they sold, rents became high, overhead caused those operating on thin margins to leave, and thus remaining partners shouldered more overhead and the death spiral began.

Curious on how you would approach this dilemma. I’m near the tail end of my career so honestly the selfish part of me wants to cash in while the market is hot (who knows if this property will ever be worth the offer in future).

The main problem is the 2 groups (one is labeled properties, the other clinic) do not have the same participation (some newer partners don't have any stake in the properties side).  The property group made a lot of concessions to promote the clinic group (which honestly was a poor business decision solely from the property group viewpoint).

Another complicating factor is that as the bylaws stand, any retiring physician would have to surrender his/her shares back at then market value within 5 years of retirement (unless they were employed 20 yrs plus which it would then become an indefinite holding period up until death, when heirs would have to then sell back at then market value).

I don't hit the 20 yr time frame (I'm at 12 yrs and if I continue this path to early retirement will likely be there 3 years before hitting this requirement (it would then cause me to make a decision whether it is worth it to continue working just to remove this golden handcuff or not).

My biggest fear would be that say I surrender my shares at 5 yrs and later down the road the property does get sold, then others would profit on my initial risky investment.

Curious how others feel about this and any suggestions.

Thanks

[GasFIRE]

Obviously the assessed value and the true market value are significantly different. Has any partner previously retired and cashed out from the property? Per the bylaws, how is market value determined? It seems you’re better off if an independent property appraisal is required rather than some governmental assessed valuation metric. Regardless, it sounds like the group may need to re-examine how expenses are allocated.

[xrayvsn]

I believe some older doctors have retired but are still in the 5 year window where they can hold on to shares if they choose.  Some have chosen not to and redeemed them.

We have an independent appraisal done every 2 years (last one was this past April).

It definitely is an issue because the regular clinic partners have been conditioned to having lower general overhead expenses due to below market rent charges which were fixed for 10 yrs (I was no part of that decision).   It was a 10 year lease that just came to end and they renegotiated increase in rent but I would say still $1-2/sq foot below what would be low market comps (the proposal from the external buyout would increase these new rents probably $3 sq/foot which would significantly impact some practices with little margin

 

Purely from an investor standpoint I don't want to subsidize others and reduce my profits.  But it is such a fragile financial ecosystem that if it tips too far one way, people may leave, and the death spiral begins with less and less people sharing general overhead until it's too much and they leave too.

 

[CordMcNally]

I'd be inclined to sell. If a clinic is truly relying on below market rents to sustain itself, then that's a bad business plan and I wouldn't be too keen on subsidizing somebody so they can stay in business. Your concern for them is certainly altruistic. If you do decide to sell and the clinics subsequently fail, it is by no means your fault.

[Side Hustle Scrubs]

If you stand to make 7 figures, how much does that accelerate your FI date? I would imagine quite a bit.

I agree with CordMcnally - take the money and run.

[xrayvsn]

Yes with that kind of cash infusion even after capital gains taxes I would be pretty much on target right now for fat fire as pof puts it

Well both of you are preaching to the choir. I personally want to sell. The timing of where I am in my career and what I had as a number for fat fire would pretty much put this over the edge.

There are a few other physicians in my corner (most older than me) looking at the like a golden parachute exit.

Unfortunately there is a pretty big altruistic faction as well. It would come down to a vote and per by laws I think it has to be 75% (vote based on shares held).

But yeah I was glad to hear people responding along my lines of thinking

[Hatton]

Sell.  The offer might not be there later.

[ACN]

As a new employee coming into a group with a two-year partnership track, them selling out before I become partner scares me. I'd be soooo pissed.

[adventure]

I’d sell. Today.

[Kamban]

Put yourself in the shoes of the recent physicians renting from you, aka the property owners. Would you like it if it were you the renter and non owner, and one day the rug is suddenly pulled out of your feet without any warning or input.

Be honest to them. Let them know that you intend to sell and that the rental prices, that were artificially low, will slowly or suddenly rise to the market rates. Let them decide if they want to stay or go. But don't do it surreptitiously.

The new property owners would want the renters to stay so that they can derive an income and profit and if the newish renters leave the group it might go into a death spiral, as you alluded to earlier. Is that what they want. Or maybe they might have alternative renters in their minds.

In this forum we decry corporate people buying us out and putting us on the hamster wheel but yet we encourage this behavior from a physician to fellow physicians. Go ahead and make hay. I am only a jaded old coot.

[CordMcNally]

ACN wrote:

As a new employee coming into a group with a two-year partnership track, them selling out before I become partner scares me. I’d be soooo pissed.

Click to expand...

Depending on your specialty, the sale of a property is much different than the sale of the actual group.

[CordMcNally]

Kamban wrote:

 

In this forum we decry corporate people buying us out and putting us on the hamster wheel but yet we encourage this behavior from a physician to fellow physicians. Go ahead and make hay. I am only a jaded old coot.

Click to expand...

I'm about as against corporate medicine as you can get but I feel this scenario is much different since it involves the sale of a property and not the sale of a group. Buying a property is generally regarded as an investment whereas I see being a part of a group as your livelihood. It would be much different if the OP was wanting to sell out the group. In the group scenarios, I am always against selling out. I say that as a young partner and I'll be saying that when I'm an old partner.

[PhysicianOnFIRE]

If the practices can't remain viable without subsidized rent, they need to change their practice. What would I do?

 



 

Good luck!

-PoF

[q-school]

It seems an opportunity to examine the culture of the group.
If the Clinic cannot survive then I would not sell (personally).  I would not think less of anyone who chose to recommend selling however.
You have some profits already, just not as much as possible with this new offer.
Perhaps it is an opportunity to reprice the shares and reward original investors with some profits while ensuring all members participate in righting the under market situation.

Any idea why the valuations are so far off? Likely to be one time offer?

Yes I can do math. I understand there would be some lost opportunity for original investors potentially. But there may be long term significant loss to community if clinics fold or physicians leave. I understand that optimally some clinics need to be run more efficiently but most multispecialty groups encounter the situation that somewhat arbitrarily determined specialties are more profitable and subsidize others. It’s not that different to me than technical fees, insurance profits, or other sources of revenues being used to keep smaller specialties afloat that can’t make it economically but are good for community in place. Ymmv.

[Ray]

This seems like too much money to walk away from based on the idea that it might cause the clinic to implode.  If the new owners raised the rents to the market rate, or even slightly above the market rate, why would that cause a mass exodus of tenants?  The "market rate" should be close to the rents other buildings in the area are charging.  I'd take the offer while its on the table.

Hope everything works out well for you.

- Ray