October 9, 2020
Buying out the old and bringing in the new
In the beginning, it was easy. The practice partners decided to own their medical office building and, in turn, they all became real estate partners and “paid themselves” the rent. Years go by and some doctors retire but retain their real estate partnership. Many of the new practice doctors have never been offered a partnership in the real estate or can't afford the sizeable investment. When these ‘practice partners’ are paying ‘real estate partners’ rent, disagreements can occur. The asset that was holding partners together is suddenly driving them apart as arguments arise over “fair rents” or “equitable payoffs” on retirement.
These difficulties arise because of two primary factors:
- The equity portion of the real estate ownership increases because of principal repayment and appreciation, and
- There is not a source of funds that would either reduce the equity or provide the money for the buy-in to be used to pay off the retiring members without losing established low-cost debt or creating a negative tax consequence.
Unfortunately, after ending up without a viable solution, some practices arrive at the conclusion that they would be better off selling the property than creating discord. All partners then lose a great source of investment income.
The fact is that there are a variety of solutions available and the right one depends on the factors and objectives unique to each case. Is there a large equity gap? How many members will be retiring in the coming years and how many new members will be joining? The list goes on. Once those factors have been taken into account, it remains a challenge to arrange a source of funding that will be consistent and not result in a negative cash flow to the incoming partners.
Finding those solutions most often will involve some amount of expertise but once the framework is set, the outcome can be a more successful and cohesive group.