Rent or own?

If You're About To Open A Practice, you're faced with literally hundreds of questions. For example, should you rent space or buy or build your own facility? It's a relatively simple question with no particularly simple answers. Certainly economic factors come into play, as do practical business issues. The short answer: It depends, of course. Here's a look at what you should consider.

How much cash do you have on hand?

When you rent, you'll sometimes need first and last month's rent, and you'll be locked into a lease. But you don't need a down payment. For this reason, Dr. Bob Froehlich, MBA, of Summit Veterinary Advisors in Littleton, Colo., says renting can offer easier entry to practice. "If rent is fair for the market area, you can generally start a practice with a lower initial investment," he says.

Location, location, location

How much space do you need?

"Start-up practices can really struggle when they overbuild," Dr. Froehlich says. "A start-up practice that builds a 10,000 or more square-foot building won't be appropriately sized until that practice is five to 10 years old, so owners are paying more than they should for their facility in the meantime."

That's money you could be spending on new equipment, marketing, or employee development—all things that could help build your practice. "If you begin by leasing a 2,000 square-foot space, if and when your practice grows, it might be easier to build or buy a larger space to match your practice's growth," Dr. Froehlich says.

To figure out how much space you need, Dan Chapel, AIA, Veterinary Economics Editorial Advisory Board member and owner of Chapel Associates Architects Inc. in Little Rock, Ark., says you can do some educated guesswork. "First, decide how many exam rooms you need—ideally, two for every veterinarian that will be actively using them," he says. "This way, doctors can be working in one exam room while technicians and assistants clean and prepare the other one for the next appointment. Then multiply the number of exam rooms you need by 1,000 to 1,200 square feet. So if a hospital needed four, you'd estimate total square footage of 4,000 to 4,800 square feet." The actual exam rooms usually run about 100 square feet each, Chapel says.

When he uses this formula, Chapel says he's assuming that the practice will incorporate fairly standard equipment, runs, and so on. "If you want something out of the ordinary, such as a gigantic grooming area, then you'll need more room," he says.

Where's the perfect location for your practice?

If you can't find a building for sale in your ideal location, then you could consider renting until the perfect space becomes available. Whether you rent or own, location is crucial, says board member Wayne Usiak, AIA, a senior partner with BDA Architecture in Albuquerque, N.M. "So research your choices carefully," he says. (See "Location, Location, Location" for site selection considerations.)

Figure 1. Pros and cons of renting

What's your investment and return potential?

Dr. Christine Merle, MBA, CVPM, a consultant in Zionsville, Ind., for Brakke Consulting Inc., says the largest advantage to owning the building and real estate is that your investment could appreciate. "We often see practice owners sell the business first, and then sell the real estate up to 10 years later. So the investment in the land and facility could generate income for longer than their practice does."

Figure 2. Pros and cons of owning

If you're a potential buyer, Dr. Merle recommends not purchasing without some reassurance that you can also buy the land in the future. "Otherwise, you're placing yourself in a long-term rental situation," she says.

While Dr. Merle says most often the buyer of your practice also buys your real estate—though not necessarily at the same time—it's possible that the buyer of your practice won't want to remain at the same site, so you could be looking for a buyer who's not a veterinarian. And veterinary practices tend to be single-use structures, which could hurt your re-sale potential. In other words, the floor plan, plumbing, wiring, and so on might not work well for, say, a dentist's office.

Although Dr. Merle thinks buying your own practice space as an investment is a reasonable plan, she acknowledges that this approach has limitations. "You're putting a lot of your investment into one area—your real estate and your practice—so you aren't diversifying your portfolio," she says.

Do you want control?

Economic issues aside, the decision to own or rent may come down to an issue of control. "The biggest advantage of ownership is that you become the landlord; you exercise control over your future costs," says Dr. Froehlich. "You aren't bound to the increasing costs that a landlord might pass through to you."

Consider a 1031 exchange

Of course, as an owner, you'll face maintenance issues. But for many of your colleagues, the trade-off is worth it.

What are your target clients looking for?

As an owner, you aren't bound to aesthetic decisions that a landlord might force on you as a renter. And pet owners' perceptions of your practice make a difference in whether or not they'll choose to visit.

"Clients also tend to view a freestanding veterinary clinic as a more full-service hospital," says Dr. Merle. "They assume the practice teams in freestanding facilities offer a higher level of experience and ability compared to a leasehold storefront." This perception might not be fair, she says, yet it's something practice owners should consider when looking at renting in a retail center.

The final analysis

While you may have reasons—and good ones—for renting, there are more long-term advantages to owning, says Gary Glassman, CPA, a financial consultant and partner with Burzenski and Co. PC in East Haven, Conn. Glassman outlines the pros and cons of each approach in Figures 1 and 2.

"But even though the ultimate goal is to own, the reality is that because of the cost, square footage requirement, and down payment, it's usually not the best way to start a practice. Most start in a leasehold and work up to a free-standing building," Glassman says.

The bottom line

As an owner of your facility and land, you stand to gain from an investment perspective—as long as you're sure your site has re-sale value. Other advantages to owning: more control over your business expenses and clients' perceptions of your practice.

Mark Terry is a freelance writer in Oxford, Mich. Send questions or comments to: ve@advanstar.com