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Sunday / April 14.
HomemifinanceBe Prepared Buying or Leasing Practice Premises

Be Prepared Buying or Leasing Practice Premises

Deciding between buying or leasing your practice premises is a significant decision that requires careful consideration. Both options come with their own set of benefits and considerations, and understanding these factors is crucial for making an informed choice.

Buy or lease? Sometimes, the stage you’re at in your career or the location you are eyeing off may make that decision for you. But whatever your next move, whether that’s exploring options to purchase premises, signing a new lease, or extending an existing one, according to the experts, two points are key.

Does it make sense now to carry your mortgage payment plus your fitout costs?

1. Be Prepared.

2. Seek Expert Advice.

Purchasing

Paul McKinley, Managing Director of Optometry Finance Australia, said there are a lot of factors that need to be considered before deciding to purchase premises.

“How long do you think you’ll be in that location? What stage are you in your career? “What is the surrounding competition like? Is it a new building or an old building? What are the plans for infrastructure and development in the area? Is there a big construction happening 5km away that is going to draw a lot of business away? There are just so many variables.

“Let’s say it is a 30-year-old optometrist and they have a fairly young practice, and they are saying, ‘we live nearby, and I can see us here for the next 30 years’, then if it was me, I’d probably be buying. But then if I’m towards the end of my career, maybe not, unless I want that as an income producing passive asset,” Mr McKinley said.

He said buying practice premises was a significant commitment, but “because it is bricks and mortar, it is a commitment that is going to give a rental yield and hopefully a capital return”.

Credabl’s Commercial Financial Consultant Teresa Nguyen, who has specialised in medical finance for the past 17 years, said sometimes the numbers make the decision for you.

“Depending on the location, what we do find at times is that with the cost of fitout and everything going up, the entry point might be quite high,” she said.

“If they are someone a bit more established and they have been leasing their premises for a while, then it makes sense for them to try to secure their own property, to ensure the longevity of their business.

“We work with the client on the feasibility. Does it make sense now to carry your mortgage payment plus your fitout costs? What does that look like in terms of your cashflow for the next 12 months?”

The Loan Structure

If the numbers do stack up on the decision to buy, both Mr McKinley and Ms Nguyen said there were often tax advantages to purchasing business property within a self-managed superannuation fund (SMSF). However, loans needed to be structured correctly.

“If you need to borrow, borrow for business purposes. That is tax deductible debt, as opposed to personal debt that is not deductible. It is making the tax system and tax deductions work for us,” Mr McKinley said.

Both stressed the need to seek independent financial advice, before taking on a mortgage.

“We can present options. Our job as a finance broker is to do all the work around the finance – a broker has avenues to a whole range of lenders and can find competitive solutions,” Mr McKinley explained.

Finance brokers generally don’t charge the client for their services, but rather are paid a commission by the bank when a loan settles. But they can’t provide financial advice so you will also need the services of an accountant and a lawyer.

Ms Nguyen said it was also often advantageous to involve the fitout company you plan to use before signing on the dotted line.

“With my clients, I always ask whether they have taken their fitout company to the site to see if what you want is possible… some medical specialist fitout companies can also liaise with council around any permits that are required.”

She said due diligence around council regulations was particularly crucial if you were planning to buy in a residential area, as councils may have to approve the scope and size of your business in advance. This is a factor, especially with ophthalmology practices, however we often see optometry practices are set up in commercial retail areas, Ms Nguyen said.

Financial Hygiene

Whether purchasing practice premises is a short- or long-term goal, it is worth thinking now about your financial hygiene.

Lenders will find you a more attractive prospect if you have a track record of stability and some asset backing.

“Some deposit or equity will help give the bank additional comfort. The bank is going to ask for bank statements, personal tax returns, and your credit file,” Mr McKinley said.

“Make sure your conduct on your credit file is sound, that there are no late payments. And banks don’t want to see any buy now / pay later borrowing activity. Zip Pay, Afterpay…those sorts of things are a warning sign for lenders because it is unregulated credit. It can be enough to have a deal declined,” he said.

Ms Nguyen said lenders will also want to see a business plan.

“Most practitioners have a plan in mind and it’s not often that we see it translated on paper.

Identify the location you want your business to be in, who your target patients are, what service offerings you want to provide, and also address the competition in the area.

“A written plan will help you deep dive further into your business and look at the different roles and responsibilities within your business, for example, people and processes, marketing and budgeting costs. It is also a plan that can be used as a feasibility study for the future growth of the business.

“A well-thought-out business plan will help the lender understand the plans you have for your business and will, in turn, strengthen your credit application,” Ms Nguyen advised.

A New Lease

As a commercial leasing expert, ProVision’s Mark Corduff advises and negotiates leases on behalf of ProVision members and keeps a database of key timings to help members be proactive. ProVision estimates the service has saved its members over AU$1.8m in the past year alone.

One of the advantages of leasing, Mr Corduff said, was flexibility.

“There’s the location itself – do you want to jump into a medical centre, or a shopping centre, or a strip shop mall scenario? Each of them are quite different.

“You can tailor a lease around your business requirements. You might look at structuring the length of the lease. The longer you lock in for, the landlord will generally offer a better deal.

“But, for example, if you are setting up a greenfield practice, you might prefer a three-year option, with the option to extend, rather than signing a five-year lease because obviously, once you sign a lease you are committed.

“The market plays a big part, without a doubt. But you do have a number of different things you can negotiate at the start of a lease.

“You can look for a rent-free period. Most shopping centres will offer you a fitout incentive and that can be anything from three months to 12 months of base rent. And you want to look at all the core terms including the annual increases and what your outgoings are.

“The key is being across your numbers; across any data you can obtain, so you can ensure you’re sitting at market or better.”

Ms Nguyen said it was vital to ensure you have a secured lease to operate your business.

“If the practice is not inside a mall or a shopping centre, you would want the first right of refusal on your lease. This means if the landlord wants to sell the property, you are given the first right to refuse or the first opportunity to purchase it.”

Renewing Your Lease

For Mr Corduff, the frantic phone call about the impending expiration of a practice lease is always a concern because it limits the negotiation power of a tenant.

“The commercial landscape is the most challenging I have seen it for several years” he explained.

“Landlords are pushing hard to recoup lost earnings caused by the pandemic, so the increases I am seeing applied to renewals have been extraordinary.

“When members are hit with a base rent that is well above what they were paying previously, you can imagine the stress and anxiety that follows.

“If they’ve got their head in the sand and they leave it to the last minute, there’s less opportunity to negotiate… they can do so much better if they’re prepared.

“I recommend engaging with the landlord between nine and 12 months out. At the same time, too, you should be looking at your other options; maybe purchasing or relocating.”

He said because most eye health professionals were focussed on patient care, their lease was often, not surprisingly, relegated to back of mind.

As rent is typically the second largest business expense behind wages, it is worth paying attention.

“Make sure you diarise things. Be on the front foot.

“Sometimes the landlord will say we don’t want to talk just yet, it’s too far out but that’s OK. You’ve started the dialogue. Put a reminder in your calendar, and next month; ask the same question,” Mr Corduff said.

Your Lease Team

If you do get hit with large rent increases, it helps to be completely across your numbers and use that as a basis to start negotiations with your landlord, Mr Corduff said. For instance, if you are located in a shopping centre, being acutely aware of your occupancy cost is critical.

“You have to work in partnership. If you approach negotiations unreasonably, you won’t get too far. It is about being fair and reasonable. You are essentially business partners, so as challenging as it can be, try to maintain that relationship with your landlord.”

If you are comfortable handling negotiations yourself, he said a lease advisor who is across the market can provide advice in the background. Or they can step in and do it all on your behalf.

Once the core terms of the lease or renewal are settled, the lease advisor will hand over to your lawyer to review the language of the lease agreement, Mr Corduff said.