April 24, 2017
Turnkey Solution Developed
A worst-case scenario came true for an orthopedic practice in Washington state when 8 of the 11 partners told the remaining 3 who owned the real estate that they would rather move the group’s office than pay rent to those physician owners.
These kinds of situations can rip at the fabric of an otherwise cohesive practice and there is not a single good reason to allow it to occur. Too often, partners opt for the wrong answer and sell the real estate to a third party, depriving everyone of multiple benefits of ownership. The right answer is to integrate the new members into the real estate. But to do that, there are several hurdles that seem difficult for many groups to clear.
CMAC has worked with clients in implementing a turnkey solution that addresses the three common hurdles.
Hurdle 1 – Satisfying the Current Real Estate Partners
While most physician-partners can see the benefit of diluting their own interest and giving up some future returns to achieve a balanced ownership, they want to know that they have received full value for their interest. Under the plan, the partners selling any portion of their interest would receive the full market value as if selling to an unrelated third party. The value is not based upon an appraised value but upon a formula that yields a better sales price and is fair to all and can be reused into the future.
Hurdle 2 – Satisfying the Incoming Real Estate Partners
Incoming partners need to know that 1) the returns on their investments will produce a better yield than any other options of similar credit and 2) they will be able to afford the investment. With this program, the Return on Equity is shown in double digits and affordability is created through reduced equity requirements combined with availability of financing.
Hurdle 3 – Securing the Financing to Support the Purchase and Sale Structure
The final piece in the solution is putting the right financing or combination of financings in place that will accommodate the first two pieces. This means creating a structure that will provide the optimal cash flow for the entity while keeping the equity piece minimized. Additionally, the repayment of any loans to incoming partners must be structured to provide a positive cash flow after considerations for payment of debt service and income taxes. CMAC has structured solutions time and time again which make the third leg work with the first two.