Considering a Practice Sale and Own Your Medical RE?

If you're considering selling your medical practice but own the medical office building where you operate, you're facing a complex strategic decision that will significantly impact both the practice sale value and your long-term financial outcomes. The intersection of practice transition and real estate ownership requires careful planning to maximize value, minimize risk, and structure the optimal deal for your specific situation.

This article addresses the key considerations, strategic options, and common pitfalls physicians face when navigating practice sales while retaining real estate ownership.

Why This Situation Is So Common

Many physicians own their medical office buildings for sound financial reasons:

• Wealth Building: Real estate appreciation and mortgage paydown created substantial equity over decades
• Practice Stability: Owning the building provided location control and protection from landlord rent increases
• Tax Benefits: Depreciation and expense deductions provided tax advantages
• Retirement Income: Properties generate passive rental income in retirement

However, when practice sale time arrives, real estate ownership creates strategic complexity. Practice buyers and real estate investors are often different parties with different priorities, requiring physicians to make nuanced decisions about timing, structure, and negotiation strategy.

The Core Strategic Question

Physicians selling practices while owning real estate face a fundamental choice:

Option 1: Sell Practice and Property Simultaneously

Coordinate sale of both assets, either to the same buyer or separate parties in synchronized transactions.

Option 2: Sell Practice, Retain Property

Sell practice to buyer who will lease the space, maintaining real estate ownership for ongoing rental income.

Option 3: Sell Property First, Then Practice

Complete sale-leaseback of property before practice sale, simplifying practice transaction.

Each approach has distinct advantages, disadvantages, and suitability depending on your circumstances. Let's explore each in detail.

Option 1: Sell Practice and Property Simultaneously

How It Works

Coordinate practice and property sales to close together (same day or within weeks), either:

• Bundled Deal: Single buyer (often hospital system) acquires both practice and real estate
• Separate Synchronized Deals: Practice buyer and property buyer are different entities, but transactions are coordinated

Advantages

Maximized Total Value: Practice and property together are worth more than separately:

• Practice buyers value owned real estate (no lease negotiation risk, location stability)
• Property with operating practice tenant is more valuable than vacant building
• Combined sale often achieves 5-10% premium over separate sales

Clean Exit:

• Complete transition with no ongoing obligations
• Immediate liquidity from both assets
• No landlord responsibilities after retirement

Simplified for Buyer:

• Some buyers prefer acquiring both (especially hospital systems)
• Eliminates lease negotiations and landlord relationship
• May increase buyer pool

Disadvantages

Significant Tax Hit:

• Practice sale generates ordinary income (or capital gains if goodwill sale)
• Property sale generates capital gains + depreciation recapture
• Combined income may push into highest tax brackets (potentially 40-50%+ effective rate)
• May trigger alternative minimum tax, Medicare surtax, and other high-income penalties

Complex Coordination:

• Two transactions must close simultaneously—if either fails, may derail both
• Requires expert coordination among multiple parties
• Practice buyer and property buyer may have conflicting timeline needs

Bundled Deals Often Undervalue Real Estate:

• Hospital systems buying both typically offer below-market property pricing
• Buyers leverage physician's desire for convenience to negotiate property discount
• Physicians often accept bundled deals without testing property value through competitive process

Tax Mitigation Strategies

If pursuing simultaneous sale, implement tax-efficient structures:

• 1031 Exchange on Property: Defer property capital gains by exchanging into replacement property
• UPREIT Transaction: Contribute property to REIT for operating partnership units, deferring gains indefinitely
• Installment Sale: Structure property sale with payments over multiple years, spreading tax burden
• Charitable Remainder Trust: Donate property to CRT before sale for tax elimination and income stream

Best For: Physicians wanting complete exit; those with strong tax planning strategies; situations where practice buyer strongly prefers real estate acquisition.

Option 2: Sell Practice, Retain Property

How It Works

Sell practice to buyer who will lease the medical office space from you. You transition from practice owner to landlord of your former practice location.

Advantages

Ongoing Rental Income:

• Generates passive income in retirement (typically 6-8% of property value annually)
• More tax-efficient than lump sum (income spread over years at lower rates)
• Provides inflation-protected income stream with lease escalations

Continued Property Appreciation:

• Benefit from future real estate value increases
• Can sell property later when timing is optimal (market conditions, tax planning)
• Participate in healthcare real estate market growth without management burden if professional management hired

Estate Planning Benefits:

• Hold until death for basis step-up, eliminating capital gains for heirs
• Example: $8M property with $3M basis = $5M gain. Hold until death, heirs receive at $8M basis, zero tax
• Generates income during life, passes tax-free appreciation to beneficiaries

Simplified Practice Sale:

• Practice buyers often prefer leasing (less capital required, more flexibility)
• Simpler transaction documentation
• Faster closing timelines

Maintains Relationship and Influence:

• As landlord, maintain some connection to practice location
• Can include lease provisions protecting property value and your legacy

Disadvantages

Ongoing Management Responsibility:

• Remain landlord with maintenance, repair, and capital expenditure obligations
• Tenant relations with your practice successor (can become uncomfortable)
• Time commitment continues into retirement
• Late-night emergency calls, contractor coordination, lease administration

Tenant Risk:

• If practice buyer fails or vacates, you face finding new tenant
• Medical office space may be difficult to re-lease, especially in smaller markets
• Tenant improvements for new tenants can be costly ($40-80/SF+)
• Vacancy periods create negative cash flow

Reduced Practice Sale Value:

• Practice without owned real estate typically sells for 5-10% less
• Buyers value location control and rent certainty that ownership provides
• Lease negotiations can be contentious, sometimes derailing practice sale

Illiquid Asset:

• Capital remains tied up in property rather than liquid investments
• Difficult to access if cash needs arise (health issues, opportunities, etc.)
• Selling occupied building with tenant may be challenging

Capital Expenditure Obligations:

• Roof replacements: $100,000-$300,000
• HVAC system replacements: $150,000-$400,000
• Parking lot repaving: $50,000-$200,000
• Building systems and infrastructure repairs

These unexpected costs can significantly impact retirement cash flow.

Critical Lease Negotiation Points

If retaining property, negotiate comprehensive lease with practice buyer addressing:

Lease Term and Renewals:

• Initial term: 10-15 years (provides stability for both parties)
• Renewal options: 2-3 five-year options at tenant's discretion
• Rent determination for renewals (fixed escalation vs. fair market value)

Rent Structure:

• Base rent should reflect market rates (don't subsidize buyer with below-market rent)
• Annual escalations: 2.5-3.0% typical
• Triple-net vs. modified gross (define expense responsibilities clearly)

Maintenance and Capital:

• Define precisely who pays for what (roof, HVAC, structural, parking lot)
• Consider capital reserve structure ($0.15-$0.30/SF annually)
• Maintenance standards and property condition requirements

Assignment and Subletting:

• If buyer sells practice again, can they assign lease? (Important for liquidity)
• Consent requirements (should not be unreasonably withheld)
• Protections if practice fails (personal guarantees, security deposits)

Property Sale Rights:

• Can you sell property to third party? (Should be yes, with tenant protections)
• Right of first refusal for tenant if you decide to sell
• Non-disturbance agreements protecting tenant if property sold

Best For: Physicians wanting ongoing income; those with estate planning motivations; younger retirees comfortable with property management; situations where property has high potential appreciation.

Option 3: Sell Property First (Sale-Leaseback), Then Practice

How It Works

Complete sale-leaseback transaction 1-3 years before practice sale:

1. Sell property to institutional investor
2. Lease back space for practice operations
3. Later sell practice to buyer who inherits your lease

Advantages

Immediate Real Estate Liquidity:

• Extract property equity years before practice sale
• Diversify out of concentrated real estate position
• Use proceeds for debt payoff, investments, or major purchases
• Spread property and practice sale income across different tax years

Simplified Practice Sale:

• Practice buyer inherits institutional-quality lease (professionally negotiated, market terms)
• No real estate negotiations—simplifies transaction
• Buyers comfortable leasing from professional landlords
• Faster practice sale timelines

Eliminates Property Management:

• Institutional landlord handles all property management
• No maintenance, capital expenditure, or tenant coordination burden
• More time to focus on practice transition planning

Professional Lease Terms:

• Sale-leaseback leases are institutional-quality documents
• Practice buyer inherits well-drafted, market-standard lease
• Reduces friction in practice sale negotiations

Tax Planning Flexibility:

• Property sale and practice sale in different tax years
• Can use 1031 exchange or UPREIT on property
• Spreads income to avoid single-year tax spike

Disadvantages

Reduced Combined Value:

• Selling property before practice reduces total value by 5-10%
• Practice with owned real estate is worth more than leased practice
• Give up potential appreciation between property sale and practice sale

Lease Commitment:

• Locked into 10-15 year lease term
• If practice sale takes longer than expected, you're responsible for rent
• Lease terms may not perfectly align with practice transition timeline

Market Risk on Practice Sale:

• If practice sale falls through or is delayed, still obligated on lease
• Can't adjust property strategy if practice sale circumstances change

Best For: Physicians needing liquidity before practice exit; those wanting to eliminate property management 2-3 years before retirement; situations where practice sale timeline is uncertain.

How to Decide: Key Questions

Financial Needs

Do you need immediate liquidity from both assets?

• If yes: Simultaneous sale or property-first sale-leaseback
• If no: Consider retaining property for ongoing income

Management Tolerance

Are you comfortable being a landlord in retirement?

• If yes: Retaining property may make sense
• If no: Simultaneous sale or sale-leaseback

Tax Situation

What is your tax liability on combined sale?

• High tax burden (40%+): Consider tax-deferred structures (1031, UPREIT) or multi-year strategies
• Moderate tax burden: May be acceptable to pay tax for clean exit

Estate Planning Goals

Do you want to pass property to heirs with step-up basis?

• If yes: Retain property until death
• If no: Sell property and invest proceeds for more liquid estate

Timeline

When do you plan to exit?

• 3+ years out: Time for sale-leaseback first, then practice sale
• 1-2 years out: Simultaneous or retain property strategies
• Immediate: Likely need to retain property or accept bundled deal

Common Mistakes to Avoid

1. Accepting Bundled Offers Without Testing Property Value

Hospital systems often offer to buy both practice and property together—typically at below-market real estate pricing. Always test property value through competitive process with real estate investors before accepting bundled deal.

2. Poor Lease Negotiation When Retaining Property

Physicians retaining property often accept practice buyer's lease terms without proper negotiation, creating unfavorable long-term arrangements. Engage real estate attorney to negotiate institutional-quality lease.

3. Ignoring Tax Planning

Combined practice and property sale can create 40-50%+ tax burden. Failing to implement tax-deferred structures costs hundreds of thousands. Engage CPA early in planning.

4. Underestimating Ongoing Management Burden

Many physicians retain property thinking "it's just one tenant" and are surprised by time commitment and capital expenditure obligations. Be realistic about management tolerance.

5. Starting Too Late

Beginning planning 1-2 years before exit limits options. Start 3-5 years out to maximize flexibility and value.

The Advisory Team You Need

Successfully navigating practice sale while owning real estate requires coordinated expertise:

• Healthcare Real Estate Advisor: Values property, structures transactions, negotiates leases, identifies institutional buyers
• Practice Transition Consultant: Values practice, identifies practice buyers, negotiates practice sale
• CPA with Healthcare Expertise: Models tax scenarios, implements tax-efficient structures
• Real Estate Attorney: Drafts leases, reviews sale agreements, protects your interests
• Financial Advisor: Integrates with overall financial and retirement planning

These advisors should collaborate to ensure coordinated strategy optimizing total outcome.

Conclusion: Plan Strategically, Act Deliberately

Selling your practice while owning the medical office building requires careful strategic planning to maximize total value while minimizing tax liability and risk exposure.

There is no universally "correct" approach—the optimal strategy depends on your financial needs, tax situation, management tolerance, timeline, and estate planning goals. What matters is understanding your options, modeling the financial outcomes of each approach, and making a deliberate decision aligned with your priorities.

Physicians who plan strategically 3-5 years before exit consistently achieve better outcomes than those who wait until practice sale is imminent and have limited flexibility.

If you're contemplating practice sale and own your medical office building, begin planning now. The earlier you engage specialized advisors and develop a comprehensive strategy, the more value you'll preserve and the better your retirement outcomes will be.