Understanding Total Cost of Occupancy

Richard Campbell discusses a property plan with a client.

There are many questions to consider when determining where to locate or move a practice. Richard Campbell, III, CCIM, principal of Veritas Medical Real Estate Advisors listed some: "Do we go out and buy something? Or do we lease? When do we expand? When do we rework the efficiency of our current space? How is all this affected when we have one partner versus 30 partners and anything in between?"

Campbell says the most important thing is to calculate the total occupancy cost, a figure very different from the basic mortgage or rent payment.

"Doctors like to talk about what they are paying per square foot," he said. "But there are other factors. For example, one doctor might be paying $23 per square foot, while another is paying $20. However, the $20 per square foot doctor may have may have 50 percent more space than he needs, so his total cost of occupancy is higher."

To figure the total occupancy cost for a practice, add the base rent or mortgage to the cost of common area maintenance, property taxes, and property insurance. Include utilities and janitorial fees. That total is the total occupancy cost for the first year.

"When you get that annual number, divide it by the square feet, and then you are comparing apples to apples," Campbell said. "Doctors and practice managers talk amongst themselves. They hear someone is paying less, but they don't know the rent structure, the overall deal, or the length of the lease. There are so many different factors. I would encourage physician groups to focus on total occupancy cost as opposed to per square foot rates."

Physicians can also divide that total by 12 to know the monthly cost to stay in a space. "How does that fit with your budget?" Campbell asked. "Once you know the true cost, you know that one space may cost $50,000 more over five years than another."

Don't assume the cheaper option is the better one, however. "If the cheaper one is two blocks off the main road with sub-par parking, you may decide on the more expensive choice," Campbell said. "Greater visibility, abundant parking and easy access for your patients may be worth the extra money. Only the practice can make that decision, but they need the facts to compare accurately."

Campbell also urged practices to be aware of different rent structures when making property decisions. "A landlord in more of a retail setting will offer a base rent and the tenant pays everything on top of that - power bill, water bill, taxes, the property insurance, everything. The rent only allows you to be there. Often, the true number is not put out there for the doctor to see.

"The other end of the spectrum is a full service lease. Rental rate in this case includes power, water, common area maintenance, taxes, and insurance."

While the total occupancy cost is an important number, there are still other expenses that are not included in that figure, such as data, phone, and practice-specific items including furniture. A move will also necessitate new business cards and letterhead in addition to the actual moving fees.

Campbell believes every practice should know its total occupancy cost, whether they lease or buy, and whether or not they are anticipating a move. "You can own your own space and think you don't need to care. But if you built at the peak of the market and you are paying something out of whack with the going rate, you can lease a cheaper space and sell the building you own. You need to know where you sit in the market."

Once you know your total occupancy cost, the next question is what to do with the information. "What percentage of your revenue is it? Do you add another doctor or a nurse practitioner, which doesn't increase the occupancy cost, but adds to the revenue?" Campbell asked. "You also now understand, when another practice manager calls to say they got a great deal, how to assess your situation."


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