1. Property has lost value. One strategy in owning property was to take advantage of rising property values, but Mr. Shuffler says this view was a chimera even when property values were rising. “Just as you wouldn’t regard your home as an investment, you can’t use your place of business as an investment because you’d never want to sell it,” he says. “You need to hold onto it to make your livelihood.” Mr. Shuffler says it is true when the real estate market was rising, an ASC could to refinance its mortgage at a higher rate and use the proceeds to fund a project. But those days are over, he says.
2. Property values will stay low. “I believe the economy has changed and will not go back to the way it was for many years to come,” Mr. Shuffler says. “We are in a new normal. Owning property is no longer an asset; it is a liability.” Property values, rather the enhancing the physician-owner’s portfolio, can now be added to devalued 401(k)s as a reason why physician-owners won’t be able to retire anytime soon, he says.
3. Real estate increases debt. It takes a great deal of money up-front to buy real estate rather than lease it. Physicians who own real estate are in greater debt, which makes it more difficult for them to take out new loans. “By paying rent instead of taking on more debt, you preserve debt capacity,” Mr. Shuffler says.
4. Harder to recruit physicians. The added debt burdens of owning real estate mean it costs more for prospective physicians to join the ASC. In addition, the ASC has to set up a separate corporation for the property it owns creating a more complicated ownership framework. Mr. Shuffler believes these added debts and extra business responsibilities would turn off many new physicians, in particular, because they are saddled with large medical school debts and just want to practice medicine.
5. Income tax advantages have diminished. When income taxes for high-income taxpayers were higher, the tax advantages of owning land were attractive. But Mr. Shuffler says the Bush tax cuts for high-income brackets have virtually wiped out that advantage.
6. Landlords becoming more cooperative. Physicians used to insist on owning ASC property because it gave them a sense of control. “There was a concern that you’re going to put a lot of money into this space that is not yours and then you might be thrown out,” Mr. Shuffler says. “But now the rental market is down and landlords are delighted to keep tenants happy.”
7. Landlords may pay to fit out. The landlord may agree to give the ASC owners, as tenants, an allowance to fit out the shell they are leasing. This would involve bringing in gas, electrical, internet and special medical lines and constructing interior walls. The landlord’s typical payment for this work would be $25 a square foot, which would be $250,000 for 10,000 square-foot facility.
8. Leases can be flexible. The ASC can negotiate a long-term lease or a shorter-term arrangement with an option to renew. One possibility is a 10-year lease with options to renew in five-year increments. Mr. Shuffler says landlords are willing to be flexible because they view ASCs as very desirable tenants with relatively low failure rates.
9. Rental payments are deductible. In addition to having lower debts because it didn’t borrow money to buy the real estate, the ASC can get a tax break on rental payments. Rent is deductible as a business expense, Mr. Shuffler says.
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