April 6, 2021

I'm a sports enthusiast. I grew up in the UK playing football (I refuse to say soccer) and came to the U.S. to play the game I loved in college. Football – either version – is most definitely a team sport and I am a firm believer in the old adage ‘there is no “I” in team.’ Well, here's another one for you that I have learned in working with physician groups: if there is no “I” in team, there is most assuredly no "WE" in "RETIRED.”

Unfortunately, I have too often been witness to retired doctors, no longer active in the practice, taking or blocking actions that have devastating impacts upon the practice. How can this happen? Although they left the practice, they continue to hold ownership in the real estate and indirectly wield substantial power over the group.

The Divergent Interests Dilemma

As long as a doctor is a partner in the practice, that doctor’s self-interests should align with the best interests of the practice. As soon as that doctor leaves the practice (and stays a partner in the real estate), his or her own interests no longer align. Now they are based on what brings the most income for the real estate and not necessarily what is best for the practice. That doctor has now adopted a “landlord’s mentality” and the advantages of having partners who will make beneficial real estate decisions for the practice and the property have been severely degraded.

The Mess in the Mountains

A perfect example of how this issue can manifest itself took place recently in a western state where a successful and growing orthopedic practice was planning a new satellite facility. The group owned an existing facility with substantial equity, which they anticipated refinancing in order to fund the new facility. That is a sound strategy employed by many other physician groups in the same position. This group, however, had a few retired physicians who still had ownership in the original building. Hence, “A Divergent Interests Dilemma:”

  • Active doctors’ best interests – Refinance and use the equity to expand the practice and build a new facility. The expansion would fuel growth and profitability.
  • Retired doctors’ best interests – Do not refinance. An expansion brings risk and could diminish the creditworthiness of a good tenant (the practice). Additionally, they do not believe there are any impactful investment opportunities for the money received from the refinance.

In this scenario, the retired physicians banded together to block the refinance until the physicians in the practice agreed to a set of inequitable demands. These demands created additional risk to the active physicians and reduced the risk to the retired doctors.

This is NOT an isolated case and it is easy to envision many scenarios where interests may diverge between members of the practice. The divergence can lead to disagreements about matters such as lowering rent, accommodating practice cash flow issues, or affordably funding expansion projects.

“Avoidance” is Manageable – “Correction” can be Difficult

Retired partners having a continued interest in the real estate probably do so because the group needed those doctors while they were active in the practice to make the initial real estate project happen. It’s understandable. There are methods, however, to make that first investment attractive to retiring doctors without positioning the real estate to encounter problems in the future. Those might include grandfathering initial owners in for a specified period following retirement and/or restricting voting rights. It can be beneficial for both sides to consider these methods. You can view sample language from an Operating Agreement here that can be shared with your own attorney for his or her consideration.

Schedule a call with the CMAC team to discuss medical real estate solutions for your practice.