“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.” —William Arthur Ward
It’s that time of year again. At 6 p.m. on a Thursday in January, you dutifully look over the Profit & Loss statement your office manager placed on your desk earlier in the day.
Sales are good, up 10% over last year (plus $50K). Labor is decent, with some overtime, but nothing egregious, considering the increase in sales (minus $15K). Supplies and other expenses are up, but correspond nicely with the bottom line (minus $10K). And rent expenses have escalated 5% over last year, which equates to a .5% increase as a percentage of sales (minus $3K).
Rental expenses. You begin to reflect on the looming lease negotiation with your landlord. Hopefully, all will go down without a hitch and you won’t take a major hit with a substantial increase. Yes, it was a good year, with sales up 10%, profits up $22,000 and the potential to bring in that new associate as your business grows. But there’s always the sense that this one element of your business is out of your control.
lease·hold (noun): the holding of property by lease. “A form of leasehold.”
It’s called leasehold. Real estate gurus will tell you that this is the vehicle of choice for building wealth in real estate. But as a doctor, your primary focus has never been about building wealth in real estate. Perhaps to you, a leasehold simply represents the brick & mortar that encases your dreams, ambitions and your life’s work.
Real estate is an essential component of your business, but it also adds substantial costs to your bottom line. Indeed, real estate can make or break a practice’s profitability. Accountants classify this as a “fixed” cost—one that cannot be affected by a change in operations. For a doctor, it is probably best regarded as a strategic cost. In other words, if your primary business is Medicine, your real estate should complement and help facilitate your success. That means that price is by no means the only factor. Whether you lease or purchase, it has a lot to do with location, signage, lease rate, visibility, demographics, competition and complementary uses.
real estate: (noun) 1. property consisting of buildings and land.
Real estate. We live, work, shop and vacation in it. Most of us have a basic knowledge of real estate. How difficult can it be? Two parties, one document, one space… But then again, real estate is typically among the top three expenses for a doctor. Most other expenses in a practice can be improved methodically over time, either through better scheduling or control of inventory. But your property is different. Real estate lease rates & terms are only adjustable once every several years.
Real estate lease expenses represent a contractual line item on your P&L and require no oversight or management—but because it is a contractual expense, you most likely have escalations built into your lease. Unchecked, your real estate costs will steadily and inexorably increase over time. Although the economy is showing signs of improvement, we remain in a tenant’s market. It’s common today that a correctly negotiated lease can decrease a doctor’s total real estate expense by more than 30%, resulting in cost savings exceeding $300,000.
Amazing, right? Unfortunately, many fail to take advantage of these savings.