Thinking of converting a building into a clinic?

The prospect of building an all-new practice facility is a daunting one, especially for veterinarians who have not owned a practice before. There are good reasons to be hesitant and thoughtful.

Much like the retirement-age couple who look at a beautiful vacant lot with an ocean view, a vet's initial excitement over a naked piece of commercial property can be huge: How would it look with my dream building on it, equipped with all the gadgets and colors that I have always envisioned? A vacant lot represents a blank slate, with only sufficient financing standing between the buyer and an environment he would love to inhabit every single day.

But then reality sets in — either at some loan officer's desk or in the privacy of the doctor's own kitchen where the "penciling" begins. The lot costs "X," the builder quotes a comfortable "Y," but — oh, man! — look at the variable "Z's!"

In this equation, "Z" equals about 130 percent of the sum of:

• Legal fees for zoning compliance

• Sewer and water hook-ups

• Driveway/parking paving

• Storm-water engineering charges

• Electrical service installation for HVAC and X-ray equipment

And so on. It never seems to end. In some municipalities, there is even a requirement for traffic-flow impact statements which may or may not lead to permission for entrances off the main road. And, local permission doesn't ensure state DOT approval if the main drag is a state or U.S. highway.

Worry and economic constraints may not stop the project in its tracks, but if they do the next stop often is a tidy-looking old pizza or muffler shop that "might work great for the new practice." That thought, of course, is our jumping-off point.

Converting an existing building into a veterinary practice can be an excellent alternative to new construction. But it is a project to be undertaken with no less circumspection and "penciling" than new construction.

Cost comparisons

I have built new buildings, and I have renovated old ones. What I know from these experiences is that it is entirely possible for the square-foot construction cost of a renovation to exceed that of building from scratch. How is that possible?

While new construction inevitably involves additional site-preparation work, external wall materials and so on, renovations are very labor-intensive. As we all know from reviewing our annual payroll, it is people — not materials — that generally are the most expensive part of any commercial enterprise. This includes overhauling some little former restaurant.

Any of you who have attended one of my CE lectures knows that I always use "muscle car" metaphors to clarify my points. That analogy couldn't be more apt than in the realm of clinic construction. Consider this comparison:

When GM built the 1970 GTO, it put the thing together and got it to the showroom with a sticker price of about $4,000. That's about $20,000 in 2009 dollars.

Assume that you inherit that same GTO from a relative but you want to restore it to make it safe and reliable. The restoring of that car to the condition in which it left the factory would include a labor charge alone of about $75,000 (or three times the cost of a brand-new 2009 car).

Veterinary clinics fashioned from former doughnut shops work the same way. When you wire a new building, there is no sheetrock to work around, just as wiring harnesses in cars are put in before the dashboard. When a restaurant is turned into a new use, asbestos may need removal because it is a safety hazard. Similarly, you need to replace the non-tinted windshield on a muscle car with one that has the 2009 mandatory tint for safety and legal compliance.

Rusted pipes certainly can be replaced with code-compliant PVC, but it sure would be easier if the ceiling weren't already there to work around. Easier means fewer man-hours. As we all know, man-hours are budget-killers.

Legally speaking, renovation expenses increase anytime a regulation or a regulator become involved.

Before you can even begin the "overhaul," you must step into the town or city offices to pick up your building permit. Even if you have adequate blueprints (architectural outlays) and electrical and HVAC specifications (engineering expenses) to qualify for the permit, you still place yourself into a world where the government is "on notice" of the changes. This is a world where "butting in" can be the mission statement.

In most jurisdictions, filing of the permit application now entitles the locality to bypass any grandfathering previously granted to the building. It may have to be brought up to current construction standards in some, if not all, respects.

Suddenly, perfectly good doors have to go because the new fire code demands it. New ones must be hung.

The septic system seems like it would work fine for the clinic, but who cares? You still have to replumb it to hook up to the new town sewer system (whether it is actually built yet or not). And, yes, you will have to pay your share of the annual debt service for that system from Day 1, even if it won't be installed for years.

That fuse box in the basement was dandy when a fast-food chain built the place in 1967, but your renovation is going on in the 21st century, so the authorities may well insist that a breaker panel be installed. And while you are at it, perhaps it would be best to retrofit the entire building with larger gauge wiring to meet the 2009 electrical code.

Objective overview

So now, perhaps that building you were looking to purchase may not be as ideal as it seemed. Now what? As with any business decision, the next step is to look at the project in an entirely objective way: Try to push emotion out the window no matter how much you had your heart set on this deal. Follow these steps:

• FIRST AND MOST IMPORTANT, evaluate renovation costs prior to purchase. I generally place clear and specific conditional language in my purchase contracts. For example, you might have a contingency that the contract will only remain in force if, within 30 days of due diligence, buyer determines that the cost of compliance for the new use is satisfactory to him. If the seller balks at such a term, consider purchasing only an option to buy or even a short-term right of first refusal.

Whatever you do, don't buy the building until you know the complete cost of bringing it into legal compliance for the anticipated use, as well as the cost of making it fit for that use.

• SECOND, if you have never renovated a building, get assistance from an attorney or architect who can walk you through the unanticipated costs and compliance homework. There is no substitute for trying to brainstorm any and all possible contingencies.

• THIRD, make sure your budget has room for errors. What you don't want is something I have seen veterinarians do in the past. A doctor will get excited, figure the building and renovations will cost "roughly" $200,000, then borrow $220,000 to be safe.

Then he discovers that there will be a few last-minute legal technicalities imposed by the city that will push his costs $15,000 beyond the original amount borrowed.

The only place left to get that dinero is from his Visa card, which because of his terrific credit rating is available at only 22.5 percent.

There is a lot to think about before jumping into any clinic construction or building rehab.

My suggestion is: Know enough about the true cost of your potential renovation that you don't just end up with a really, really expensive old chicken restaurant.

Dr. Allen is president of the Associates in Veterinary Law P.C., which provides legal and consulting services to veterinarians. Call (607) 754-1510 or e-mail info@veterinarylaw.com