One Size Does Not Fit All

A couple years ago, I had an eye-opening conversation with a physician at a prestigious orthopedic conference.

We were discussing the way the group handles its buy-ins and buyouts as one of their legacy partners was getting close to retirement. This physician was somewhat concerned about the amount of distributions they would have to let go to buy this partner out, given that the current structure was a note to the retired partner to be paid over three years, and the equity per partner was sitting at over $1MM, with just six partners in total.

With the very limited time we had at the conference, we couldn’t get into the details of the capacity of the entity to fund this upcoming buyout, so we decided it was best to schedule a video conference when we were both back in our respective offices.

Once I returned, I ran our 30-year economic model to factor in their existing rental income and corresponding debt obligations so I might ascertain the forecasted distributions. This process revealed that executing a three-year buyout plan would severely strain the financial viability of the entity. Given that the forecasted distributions were insufficient to cover the buyout note, the partners would find themselves obliged to cover the buyout costs personally - a burdensome prospect, particularly for those still grappling with student debt.

Upon recognizing this deficiency, the group wanted to amend the buyout provisions, proposing an extension of the buyout period. However, objections from senior physicians nearing retirement impeded this course of action. Subsequently, when the time arrived, the retired physician was bought out and the remaining partners had no other choice but to issue personal checks to fulfill the buyout obligations.

How could this have been avoided?

This situation stemmed from a lack of thorough financial evaluation at the time the Operating Agreement was drafted. The legal counsel engaged then, who had considerable experience in Commercial Real Estate, replicated provisions akin to those employed by the firm over the past several years.

But physician-owned medical real estate ventures are unique entities that demand meticulous attention to detail in their operational framework. Unlike conventional real estate ventures, these properties intertwine the ingress and egress of physicians and the ability to create affordable and attractive investment propositions, thereby necessitating a tailored approach in their governance.

CMAC has developed a guide to address the intricacies of these investments. Drawing from a repository of hundreds of operating agreements from independent practices nationwide, this guide incorporates over 75 pertinent questions, ensuring comprehensive coverage of various scenarios. It is organized into distinct categories covering valuation methodologies, buy-ins and buyouts, voting rights, and events of sale. Serving as the cornerstone of the investment, this document delineates not only the legal framework but also the economic considerations critical to the success and sustainability of physician-owned real estate.

We invite you and your partners to answer the following questions:

• Is our operating agreement aligned with our group’s specific objectives and philosophies?
• Have we evaluated the economic implications of the provisions within the operating agreement?
• Will the existing provisions contribute to the long-term sustainability of our investments?

These questions, among others, can be addressed through CMAC's interactive guide and economic models, facilitating informed decision-making and fostering sustainable owner-occupied real estate investments. Email solutions@cmacpartners.com for a link to the guide.