Top Things to Look For When Investing in Medical Offices & How to Find Tenants

Commercial Real Estate Investing From A-Z

How to invest in medical office? How to find your tenants? What's the average TI (tenant improvement) for a small to medium size office? William Pozo, a podcast listener that has been investing in medical offices for several years, shares his knowledge.

Read this entire interview here: https://tinyurl.com/mjbhu6fm

How do you find your tenants?

First, it's the size of the space. Larger spaces tend to be more sophisticated tenants that want to have leasing agents. Tenant reps inflate all my costs so they're dangerous from a landlord's perspective. The size of the space warrants it, or the sophistication of the tenant, because their build-outs can be complicated and the doctors don't really know what they want. Their spouses tend to be the ones making some of these decisions, it's very difficult when you have a very expensive lease combined with a sophisticated build-out and there's an education process. I've done the leasing with reps, and I've done it with brokers. If the broker is a good broker, you won't have an issue, and I'll be happy to pay their fee.

Anything less than two or 3,000 square feet, I'm advertising it in front of the building. I'm putting the word out with existing doctors. There's a small group of community folks, these doctors tend to have a point person at their front desk, and they have a few important business people. If you put out the word out to a few of the larger ones, all these doctors, if they like your building, they bring those doctors with them because if you're an orthopod, or a pediatrician, or one of these sophisticated cancer doctors, they're looking for those physicians to be very close so they'll spread the word. But the larger ones that require hundreds of dollars per foot in additional capital tend to go to the reps or the brokers that can deal with that level of sophistication. I've done a few of those.

What's an average TI for a small office and the largest office that you have given?

If the doctor is willing to sign a long lease, and it's a reputable doctor, there is virtually no limit that I would not put them in, I will draw the tenant. In other words, I'll start at 10, I'll start to drive down at $20 to $30m but I'll go all the way up to 150, within reason. But if it's a reputable doctor that I know will draw his own clients and other doctors, it's worth it. The leases should not be less than three years, and that would be with no build-out or with near zero build-out. In the 5-10 years leases, I'm starting to spend money on the build-out. You'll have odd requests, special MRIs, or special PET scan scanners and those cost the building a lot of money, not the machine, I'm only talking about the build-out around the machine (the copper or the or the radiation field) that cost is very expensive. But once they've installed that equipment, it’s like a carwash, you can't take the carwash, it's the same thing for a doctor. Once a practice installs a machine, they will stay for 10 to 20 years, they're not willing to give up on their equipment.

What should we keep in mind with regards to medical office leases?

A lot of smaller guys are afraid of the lease, they're afraid of negotiating or structuring the lease. Don't be afraid of that, especially if you have direct contact with a doctor. You just come up with a form, go to the area's market and see if anyone has the forms. Don't let that be a challenge. That's the number one reason people don't invest in medical offices, they see it as something scary that they have to have these contracts, it's not an issue. Let's face it, these doctors are unsophisticated and straightforward.

William Pozo

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