Kevin T. Wills
Senior Vice President, Healthcare Territory Sales Manager
KSM Business Services
RWE Design Build
Ladies and gentlemen, I'd like to welcome you to today's event: What You Need to Know about Real Estate and Construction for Your Healthcare Practice. Today's web seminar is being recorded and you are currently in a listen-only mode.
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Now, without any further delay, let's begin today's event, What You Need to Know about Real Estate and Construction for Your Healthcare Practice. I would now like to introduce your moderator for today, and that is Kevin Wills, Senior Vice President, Healthcare Territory Practice Manager with PNC Bank. Kevin, you have the floor.
Thank you, Jessica, and hello, and great evening to everyone joining us on the webinar. I'm really excited to be tackling this topic today.
A lot of our webinar topics actually come from conversations that we are all out having with our clients and their trusted advisors on a regular basis, and one of the items that continues to come across, and it's really nationwide, is the topic of real estate. We hear it frequently. It ranges from, I'm -- you know, currently a single location practice, is now the right time to build out that second one? Hey, I've been in this building for 15 years as a tenant, I think I have an opportunity to purchase it, does it make sense? I'm looking at doing a startup -- should I own that real estate? You name it, there's many considerations to make.
We pulled together a group of experts that are going to help us walk through what should be considered in regards to real estate ownership, or really, the construction of the location. And our goal is to provide you with facts and insights so that you can all make informed decisions as you walk through that and your own practice decisions. We know that occupancy expense is usually the second-largest line item on most practices' profit and loss statements, and we realize that it's a complex decision that every practice will have to go through.
One of the things that I firmly believe, having been in healthcare for the last 20 years, is that healthcare is absolutely a team sport. And that's why I'm incredibly happy to have our three panelists joining us today. They're going to really help us walk through all the key considerations that go into this.
We have Jake Sciaudone, a manager at Katz, Sapper, Miller's Real Estate Services group. He's going to walk us through the framework of the lease-versus-buy, or even the construction decision tree.
Following Jake will be Ken Jorgenson. He's a National Director at CARR, and Ken's going to be discussing key considerations and strategy for all things real estate.
And finally, once that location has been identified, Jason Sanderson, the President of RWE Design Build, is going to lay out thoughts about the design and construction of new office space.
I don't want to delay any further. I really want to get into this, gentlemen. So without further do, Jake, please take the floor.
Hi, everyone. Thank you for having me today, and I'm really excited to be here to present for all of you today. I'm Jake Sciaudone. I'm a manager at Katz, Sapper, Miller, and I'm ready to dive right in, so let's do it.
So, quick agenda on what this presentation is going to cover, at least my portion. So the tax treatment on leases versus new construction, or acquisitions or renovation; cost segregation studies, which is a very valuable tool to people who are purchasing their own facilities or doing their own renovations; some of the green opportunities that may present themselves, should you build your own practice or acquire your own facility; and then finally, some key tax considerations on the passive versus active, and your grouping election, which is very vital should you end up acquiring your own real estate rather than leasing.
So to start with, we'll talk at a very high level about the treatment of a lease versus the treatment of your new construction or acquisition. So, a lease is pretty straight forward. You're going to deduct your monthly lease payment. You possibly have to negotiate different allowances for your improvements, whether you're first occupying the building or maybe you're 10 years in looking to renew, and you need to consider some type of negotiation to fund some of your future improvements. And then you will likely hold that lease on your operating entity side, rather than setting up your own real estate entity to hold that lease in.
The one complexity I would say that comes from the lease side is going to be the allowances for the improvements. It's always important if you are receiving some sort of sum of money, to do some type of improvement, that you consult your tax advisor to make sure you can avoid having to pick up that lump sum as taxable income. Because the last thing we want is for you to get a $500,000 allowance from your landlord and had it structured some sort of way where that $500,000 turns into a lump sum of income for you to recognize in the current year.
Now, away from the lease and on the having your own property side, things get a little more complex. So, to begin with, you end up having some type of depreciable basis. So if you buy a building for $1 million, you're going to depreciate that $1 million over a certain amount of years. Rather than having some type of monthly lease payment, your depreciation expense is a sort of monthly non-cash expense.
You will deduct your monthly principal payment, but the interest portion only. The principal amount will not be deductible. That's just a repayment of a loan. The interest portion, though, you may be subject to some type of limitation under Section 163(j). That alone could take two hours of our presentation, so I'll leave it at 163(j) is a very complex code section that you should always consider and discuss with your tax advisor.
And then you would deduct your depreciation expense. You will likely create a separate entity to hold the real estate; at least that's what we see most of our clients do. And then if you have those separate entities, an operating entity and a real estate entity, you will likely set up your operating entity to pay some type of rent to your real estate entity and typically we try to structure that rent in some type of way where your real estate entity is sort of breaking even.
And then finally, something to consider down the road would be the potential to sell this building that you now own, hopefully for a gain.
So, let's say you have gone out and you have acquired your own piece of real estate or you're getting ready to build a new construction or do a major renovation of property just acquired. What should be one of the first steps you consider?
One of the first things you should consider is a cost segregation study. A cost segregation study, its whole goal is to shift depreciation from later tax years into the current tax year, or at least tax years that are coming up sooner than later. So, when you buy a building for $1 million, you're going to depreciate it over 39 years, typically. With a cost segregation study, we come in and provide a service where we break down that building into different components, and those components would be your tangible personal property which you depreciate over 5 or 7 years, your land improvements which would be over 15 years, or if you're doing a major renovation, qualified improvement property which would be over 15 years as well.
Now, personal property, land improvements, and qualified improvement property, not only do they have those shorter depreciable lives but they are also eligible for bonus depreciation, meaning you could potentially depreciate or expense 100% of those costs in year one if you do this in 2022.
Starting in 2023, bonus depreciation is going to start decreasing by 20% per year so 2023 it'll be 80%. But to put it into quick perspective, you buy a building for $1 million, we find you have $100,000 of personal property in the building in 2022. That $100,000 you expense in year one rather than expensing it over 39 years.
And finally, on the cost segregation side, you have a potential rate play where you're taking these depreciation deductions as ordinary deductions, meaning at your ordinary tax rate. But then on the back end, if you sell it enough years down the road, say three or four or more years down the road, you will recognize the gain as a capital gain rather than an ordinary gain.
Right here is a slide that just covers some of our steps in a cost segregation study. I'm not going to really weigh us down with this slide, but just to give you a quick overview, we have an engineer that comes in, analyzes the building or the drawings, the blueprints, the construction documents, and we perform a whole analysis to really start from that base information to work it down into a report. And then that report provides you your basis for allocating your assets. So you get the cost segregation report, your tax provider takes it, and the tax provider will then have their basis for breaking things up between building, land improvements, and personal property.
So, on the cost segregation side, you've heard me mention some of these terms so far. But just to give you an idea of what's going to be included within these terms, so, personal property, this is going to be items that you use in your business, your operations, your trade. And one of the basis for personal property is that it should be removable and usable elsewhere. A really easy example for this is going to be a piece of equipment.
You have an MRI machine, that's going to be personal property. Cost segregation provides a little more opportunity to get personal property, which is not as cut-and-dry, mainly with that being your mechanical, electrical, and plumbing, which feed existing personal property.
Land improvements are going to be extra improvements such as parking lots, sidewalks, landscaping, items like that. And then qualified improvement property is very important to consider when you're doing a major renovation, and it is truly an interior improvement to an existing, non-residential building, after that building has previously been placed in service. There's a few exceptions with it being if you're expanding the building. Those costs won't be QIP. Elevators or escalators, or the internal structural framework as the building, which we view strictly as load-bearing walls, piers, the wood, the steel holding the building up, anything that's vital to the building to stand.
Here, we can see two just very quick examples of the potential benefit that a cost segregation could provide you in year one, year two. So, on the one side, you have your outpatient surgery center, and this is an actual study that KSM performed. And this was on an acquisition and renovation. So you can see, they spent about just over $5 million on the acquisition and renovation, and without a cost segregation study, potentially you could have had just $27,000 of expense in the first year.
After the cost segregation study and us breaking down the different components, we can see $3.6 million of deduction in year one. So we typically just apply a straight 35% tax rate on that, looping Federal and State together, and you can see if this person ended up having a tax liability it could potentially save them $1.2 million in tax in year one.
On the other side, we have a dermatology practice, and this was new construction in the central Indianapolis area. And they spent about $2.6 million. We reviewed all the documents and we found out of that $2.6 million, over $900,000 being for personal property and land improvements. And again, you can see that 35% tax rate, saving about $300,000 in cash in tax the first year.
Now, moving beyond cost segregation studies, we have some green opportunities. So we may end up talking about a little bit later, or you may have heard a lot about it already, but the Inflation Reduction Act definitely threw a wrench into things for the better for some of our green incentives. But the Section [129(d)] deduction tends to be the most vital or I guess available deduction for owners of commercial properties. So this is a deduction that relates to the efficiency of your -- the shell of the building, your lighting, your plumbing and your HVAC, and can provide a deduction in 2022 of up to $1.88 per eligible square foot. But once the Inflation Reduction Act kind of takes place, and starting January 1, 2023, that deduction now increases to $5 per eligible square foot.
Now, there's a lot of new caveats that we have to consider and hit to get that $5 per square foot, but it's definitely possible. We're still getting more information about what exactly Congress and the IRS are going to be looking for for this deduction in 2023 and going beyond, but it's important to know, it may make sense now for the smaller square foot buildings to perform this type of study if it's built to some type of energy efficiency standard.
And then one other component of a green opportunity to consider is working with the different localities and states for the different credits and incentives. So, a lot of times, different utility companies, state governments are going to provide some type of credit for you know, if you're considering solar panels or some type of efficient system or geothermal energy. Items like that, you may be able to work with your local government to figure out what type of rebates and credits and incentives they can provide you. Maybe not the Federal level, but at least at the state level, for your tax return.
And then finally, we have the passive versus active versus grouping election section of the presentation. So, again, being passive or active is something we could spend hours on, so we're going to keep it at a very high level here.
So, backtracking a little bit, cost segregation studies and [inaudible] ID can result in major non-cash losses. So as you saw previously, you could end up with a $3 million depreciation deduction in year one, and that is a non-cash loss.
Now, the problem with real estate is that as a default, it's treated as a past activity, thanks to the 1986 tax reform to really nail down on people taking advantage of real estate non-cash losses. So, one thing you may think to yourself, well, if I'm passive, you may not be able to use those huge losses that you're now generating. Now, that is true, and a typical real estate investor that has no tie to the real estate could be in a position where they have losses coming through and they don't get to actually use those losses on their tax returns. They're just trapped until you have other passive income to use them against.
In this case, though, you may remember me mentioning at the beginning where when you're buying your real estate, you may set up a separate real estate entity. And that real estate entity typically has the same ownership structure as your operating entity. Now, even though your real estate as a default is passive, we can make a grouping election under Section 469 to view the operating and real estate entities as one economic unit, meaning even though it's a real estate loss coming through and as a default should be passive, because it is the same ownership and the same structure and for the same trade or business as your operating entity, you can group those losses together.
So for example, if on your operating entity you have $200,000 of income, your real estate entity is producing a $500,000 loss. You'd make the grouping election and use the $500,000 loss to wipe out your $200,000 of income.
And then taking it one step further, that now $300,000 of extra loss you can continue to carry forward to future tax years, to offset future income.
Again, this is a very complex section of the tax code, and the grouping election is very vital. So, should you go down this route you should definitely talk with your current tax advisor to make sure that grouping election is being considered and will be made on your tax return. The IRS can and may come after different taxpayers who don't make that election. And as we have all seen before, the IRS sometimes is not that forgiving. So I'd highly recommend, if this is a path you go down, make sure you are considering this grouping election so that those future real estate losses you can actually utilize against your income.
Now, that it is for the portion of my presentation. Thank you all for listening to me today. I'm going to hand it over to Ken from CARR, and he has a lot of great information to share with you all as well. Thank you.
Hey. Thanks so much, Jake. I do think that I caught most of it, but if you could just start from the top one more time to make sure, then we'll be all set.
I'm joking. I'm joking.
Hey, everybody. Excited to be here tonight. My name is Ken Jorgenson; I'm one of the directors at a company called CARR. We are a healthcare-specific commercial real estate firm, so all we do is help medical practices, dental practices, optometry, anything related to healthcare. We help with leases and purchases and ground-up projects and stuff like that, on the negotiation side, the site selection side. And so tonight, I'm going to just take 15 minutes or so and kind of talk through some of the components of purchasing healthcare real estate, things you should be thinking about, considerations to process and walk through with your advisor, your team that's kind of surrounding you. But I believe Kevin mentioned it early on, but also good to hit here that the -- most of the consultants and the CPAs like Jake, they tell us when they're looking at a practice's -- a practice's profit and loss statement, their income, their expenses, usually everything that's rolled up inside of real estate is the second highest fixed expense. And so your mortgage, your lease payment, those are usually going to be on the top end, under payroll. Just under payroll. And you can only cut payroll so much, obviously, before you really start to impact your practice by the team that you have around you.
So, one of the things that you kind of take a look at is, you might have been in practice for many, many years. And you're thinking to yourself, okay, after 10, 15, 20 years of being in practice, my lease escalates every single year. Is this still a good spot for me to be in? Should I stay put and just sign another lease renewal, or should I start to kind of evaluate the market and see what's out there?
Usually, what we find is most leases after a number of years are significantly overpaying because of those annual escalations, and so it's great to look at what the considerations, what the options are, in your area, in your market. And it's also important because you only have one or two chances every five to 10 years to affect this line item. And so it's such an important determination, consideration, a piece of your practice that you really need to process through with a good team of advisors to make sure that you're making the best decision for your practice, and making sure you can maximize your profitability through your real estate.
So, let's jump in. One of the most common questions we get, is it better to purchase or lease? Many of you might say, hey, I own my house. I don't know -- I don't really think I should -- I don't want to rent my house or lease if I can get away with owning it. And I would think the same is true in my practice. I want to own my real estate.
The problem with that is, it's not really a simple one-size-fits-all answer. So, so many determinations that go into it. How does it affect your cash flow? What do the monthly figures look like? What is the annual figure, after tax, before tax? What are you cutting a check for? What can you expect on the back end after you do your taxes? What are your short-term and your long-term goals? How do those play into the discussion? What about principal paydown and equity? Obviously that's one of the benefits of ownership and we'll get into that in just a second.
But as you heard Jake just talked about some of the tax implications, and there are implications on both sides, the lease as well as the purchase. And so you want to make sure that you evaluate those in detail.
And then, what's the exit strategy? If you come to us and say, hey, I want to retire in two years, I don't know that we're going to suggest you look at a ground-up project. If you came to us and said, hey, I want to retire in 15 or 20 years, or 7 years, or whatever, and I might want to hold on to the real estate, sell my practice and become a landlord and just collect some of that rent payment afterwards, well, that discussion is a little bit different.
So I guess the bottom line here, is it better to purchase or lease? The answer is yes. We need to figure out what your situation, your scenario is, and kind of walk through the numbers that way.
So let's talk for a quick minute about principal paydown and some of the main reasons you would want to look at owning your real estate. The first would be, obviously, your balance sheet is increasing, in the equity that you are gaining each month. So not only is the market continuing to increase, and as you've seen and probably heard the headlines and what-not over the last number of months, that it fluctuates. So -- but typically you are going to be seeing an increase in the benefit, and the balance sheet increasing there when -- as the -- as the property continues to grow in value.
In addition to that, you are paying down that principal. So you're making your monthly payment, you're not just paying a lease payment. You're actually cutting into what you owe the bank for the mortgage. And so as that decreases, as the equity increases, the market value increases, that can substantially impact your profitability and your situation, your scenario, after 5, 7, 10 years.
One of the biggest benefits is, no more landlord negotiations. You don't have to deal with a landlord as you're trying to figure out, do I want to sell my practice? Can I expand in the space next door? Can I keep a competitor out? All those kinds of things. The landlord, you're not having to deal with any kind of landlord. Now, you become your own landlord, so you're having to deal with some of this stuff on your own. But there is a benefit there to not have to walk through those negotiations every few years.
And then, increased flexibility to choose when you sell. One surprise that you may or may not know about, is buried in the middle of a 50- or 60-page lease, many times, is a little clause that says that the landlord has the right and the ability to not assign the lease to whoever you're going to sell it to. And sometimes, they may want you to pay a fee to assign that lease. They might want the buyer of your practice to meet certain criteria, and so they potentially could stop the sale of a practice. That's pretty detrimental if you're trying to move along into the next stage or season of your life. And when you own your real estate, you don't have to deal with that.
In addition, you end up generating an additional sellable asset, and so many times, we see clients that end up holding on to the real estate. They might sell the practice. They hold onto the real estate and collect those rent payments. Or you could sell both, and in many cases, the purchase price of the property is equal to or greater than what you end up selling the practice for.
And then obviously, as long as you properly maintain your building, you've purchased property in a desirable area, a growing area, you're going to see increased value in your commercial real estate.
So some of the considerations, some of the questions that we should be asking: should I expand my current location or should I look at relocation? What do those costs look like? And right after me, we're going to turn it over to someone who is an expert in that field, who is going to be able to kind of walk through some of those questions, and some of the aspects, the areas, things you should be kind of asking yourself. But that's a really important one is, before I make the determination, hey, I'm going to leave and I'm going to relocate -- I'm going to go do a ground-up project -- or I'm just going to stay put, it's probably way too expensive.
Before you make any of those judgment calls, you want to actually be able to factually look at the information, and look at a comparison. Look at, here's what I'm paying now, here's what this would cost. Maybe on a monthly basis, it costs this. But after we take into account the tax and the principal pay-down and the equity over 10 years, I'm way ahead of where I would be if I just signed that lease renewal. But again, unless you have the data, you have the information, it's tough for you to really tell.
In addition to that, we have -- should I -- what are the needs versus the desires of the practice? So you might be needing to expand, but does it make the sense to expand right now? Maybe just lease out another 500 square feet? Or is now the right time to bite off that project and say, no, it's time to open that second location, or it's time to -- I'm done leasing, and I'm ready to own my real estate. I want to buy -- I want to build the practice of my dreams, and it's time to do that.
And so, looking through that, determining that, are all the questions you want to be asking yourself. Things like, ground-up versus existing building, and we're going to get into some of the pros and cons of, should I buy a condo? Should I buy a standalone building? Should I look at maybe doing a ground-up project and finding a piece of dirt in a desirable area, and going through that? And again, we're going to talk through some of that here myself. And then also, the next presenter.
But let's talk through -- as I mentioned, it's important to kind of look at and weigh apples to apples, your scenario. Not just making emotional decisions, or here's what I'm hearing from the peanut gallery, right? But actually making decisions that are based on -- that are based on what the current market is, and what is available in front of you.
So, how do you make the decision, making sure that you understand all of the costs and the benefits of the pros and cons of making those expenses, making those -- taking those steps now versus later in your career. So, make sure that you're making the factual and emotional. You want to love the property but you've got to do it with the right numbers. The numbers do have to make sense.
And we're in the real estate business, but we would always say, your property should not come before your practice. Your practice is the income generating tool you have. The best resource you have for increasing your income is not going to be your property in most cases. It's going to be your practice. And so we want to make sure that we put your practice ahead, and sometimes that means in certain areas, you may need to stay leasing and we may need to go find some satellite locations and build those out and do some construction projects there, where now you can stay in the highly-visible, high-traffic areas with the right demographics. But you don't have to -- you don't have to look at a one-size-fits-all, you-need-to-do-this, or you-need-to-do-that, which on a lot of the Facebook boards you're going to see that. Or the different messaging boards, you'll see some -- there are a lot of people with opinions out there, and you need to take those with a grain of salt. Your practice should always come first.
One of the things we do, and I would always suggest you do this with your team of advisors -- your CPA is going to be able to help you with this, your real estate agent will be able to help you with this -- but really run a true purchase-versus-lease analysis, and make sure the numbers make sense. This is one that we just pulled off of our system, one that we recently did. Numbers may be a little hard to see here, but as you go down this, you'll see in the blue line, the total initial cost for the purchase. Obviously it was higher than on the lease, right? But when you go into the green line, the total annual pre-tax costs, you will see that the mortgage payment was substantially less than the lease payment he was making. He was -- this doctor was paying, would have to pay, $58,000 a year for the mortgage, for the principal and interest, and the operating expenses and all that, versus $82,000 a year in the lease space that was on the same street.
Then you go a little bit further down, and you see, okay, now that we take some of the tax benefits into account, we're at $36,000 for this doctor on a lease versus $64,000 on a purchase. And then again, after you take into account what you're reducing in that principal each year, and what you owe on the mortgage each year, over that 10-year period you can see it was almost a $300,000 difference. And that was to purchase a building that, at the very beginning, looked like it was going to be a lot more. But in the end, it ended up being a lot less.
And so not only a lot less, it ended up being -- it ended up almost costing him $300,000 because he was planning on just renewing that lease. So again, you need to be looking at the entire market, and what are all the options out there. Not just I'm only going to look at leases, or I'm only going to look at purchases, or there's just too much out there, I'm just going to renew my lease. No, you need to get a good team of advisors around you to help kind of walk you through some of these questions.
But how do you decide which location or where you should open up, or where you should be looking for a building or for land? Obviously, you want to look at the demographics. You want to make sure that you're in an area that's growing. You can look at the income, you can look at the age range. Are these families with kids? Are they more of a senior area? What kind of growth plans are there with the county? Are they going to be opening up new schools? Are they planning new roads? What's going on? So, a good, detailed demographic analysis can be really helpful to make sure that when you're making this move, that you're making it in a -- you're making the most informed decision, that it's going to end up being a profitable decision down the road.
What about competition analysis, or maybe you're not concerned about competition? Maybe you're concerned about where my referrals are coming in from. And so, taking a look at a mapping service that can help you, we do that and a number of other firms that are doing mapping and demographics, you can take a look at some of those reports to be able to help determine where the best locations, what are the best ZIP codes, or areas, cross-streets, would be for you to open up your practice.
Things like zoning and permitting, you can't -- in most places you can't just pick a building and say, I want to open up whatever I want to open up there. No, most cities are going to say, and planning development committees, they're going to have it all mapped out. And they're going to say, here's where you can put a healthcare office. And if you're in an area where that is not an option, what does that look like, walking through that process and going through?
You might be looking at a longer process, pre-application meetings, or meetings with the city or the development, the traffic folks, environmental folks, to make sure that you're going to be able to do the building and do the construction, open the office that you want to open.
And then obviously, if you're looking at ground-up, what is the site review? What are you looking at when you're looking at a piece of dirt? And Jason is going to get into this a little bit more in detail here in just a couple minutes, but what does that process look like? Is there infrastructure to the site? When we drive a new client around who's looking for land to build a building, we're going to be asking, okay, what kind of utilities are run to this site? What kind of -- we're likely going to be looking at traffic studies, and environmental studies. We're going to want to have some idea, and that's why working in conjunction with your team of advisors, your CPA, your lender, your design build firm, we're going to want to be talking through all of this as a team so that we can make sure that we're crossing all the T's and dotting all the I's. But what are some of those soft costs versus hard costs, which Jason will get to here in just a few minutes.
But let's talk briefly about the appropriate time frame. If you're looking at a new lease, again, 6 to -- oh, sorry, 9-to-12 months, that's going to be roughly the same for a building purchase. We usually say you want about a year for that whole process, and sometimes we can go a little faster. Sometimes it takes a little longer, depending on where you're at. But somewhere in that 9-to-12. A lease renewal, 12 months gives us the strongest posture.
A land purchase, that's a bigger project in terms of the due diligence you're going to have to do on the front end. And there are more parties that are involved in that. And so usually, we say somewhere between 18 to 24 months is the right, appropriate time frame to be thinking about, okay, from when I start touring properties to when I think I can be open, what does that time frame look like?
And then a practice acquisition, we don't need too much time on that. Most of the time you're going to do a lot of your due diligence on the practice elements, and then we'll come in and help get that lease assigned or that purchase added into that transaction.
Last couple points here, a couple common mistakes we see people make a lot. One, believing that the seller or the landlord will simply give you the best terms. They're in the business to make as much money as they can from real estate, and so if you could make an extra $300,000 on your house and selling your house, would you do it? Yes, of course you would. Would you feel bad? No, you wouldn't feel bad. You'd be high-fiving your friend, your buddies at the barbecue over the weekend because you just made an extra $300,000 even if it was that much over market. You wouldn't feel bad about it. And in the same way, they don't feel bad.
So you want to make sure that you understand, while they might be nice people, they might be cordial, they're in the business to make the most. There are two parties to the transaction and you want to make sure you know you're on opposing sides of that table.
Another common mistake is allowing the landlord or the seller to initiate those negotiations. We want to be the ones to say, hey, here's what we want, here's what we need, here are the concessions we're asking for, and here's why this makes sense for you. We want to set the table for them. We want to present you and the offer on a silver platter, saying, we've got everything all done and ready to go, and here's why this deal makes the most sense for you -- you should take it, or you're an idiot. And so we can do that by being the ones to initiate that negotiation.
Another mistake, determining what the market value is by asking your neighbors or relying for advice from patients or friends or colleagues. Like I mentioned before, there are a lot of people with opinions, not a lot of people with authority. So you want to make sure, if you're taking advice from somebody who has only done one or two or three real estate transactions in their career versus somebody that does it on a -- that'll do three this week or three this month, that's a very different level of knowledge and understanding and background for that second person. So you want to make sure that you weigh that, that your uncle, your friend, your colleague giving you advice, they might be well-meaning but you want to make sure you don't make the same mistakes they did.
And so, in closing -- and then I'm going to hand this over to Jason -- our suggestion, we would say, please make sure you protect yourself; you hire representation; that you have a good team of advisors around you. You want to make sure that your agent has no conflicts of interest, that they're not also a listing agent, they're not selling property or leasing property. You want somebody that's just on your side, just in your corner. You want to make sure that they're specialized. You want to make sure that you have somebody tracking your important dates. The worst thing to do would be to get into a lease, and then not know when your lease expires and what those trigger points, what those dates, are. Because that can get you in a world of hurt.
Make sure you give yourself enough time that you understand the market and your top options, and that your agent has a solid game plan to deliver the results that you need. So that's -- that's my time. You can jump on CARR.us. We have hundreds of pages of case studies and glossaries and FAQs and stuff on due diligence, and competition, all that kind of stuff. You can get a lot of resources there. But I am going to hand it over to Jason, now that we've kind of looked at the -- the how you choose purchase versus lease, and what you should be looking at. Now you've got to get into the actual design and build of it. and so, Jason, take it away.
I guess first off, let me say, thank you guys for joining us tonight. I'm honored to share the stage here with these experts in their industries. Again, introducing myself, Jason Sanderson, President of RWE Design Build. We specialize in designing and building medical facilities across the country. And so I've had, personally I've had the pleasure of working with all the firms that you've been hearing from tonight, including PNC, KSA and CARR, as well. So, a real pleasure to have the opportunity to speak to you guys tonight.
You know, hearing the different presenters, I can tell you that all of our businesses and what we do dovetail together. So, as far as Jake speaking with the cost segregations, we -- as a company, as a builder, we partner with our clients' accountants, and accounting firms, and try to help them with these products to make sure that our clients -- I guess part of the point here is, you know, all the people you're hearing from tonight, we have a vested interest in your success. And you know, the title of this webinar here, is Building Your Practice. And all these firms will come together and help you get to the success of building that practice. So, some good information so far.
I will -- tonight, I'm going to focus on the two parts that I think are really important when it comes to planning and design, and it's probably the two biggest buckets. It's the timing and the cost. So, as builders and designers, those are usually our areas of expertise, where we're trying to keep our clients within a budget and keep them on schedule. And so you'll hear me talk about how to build a good timeline, and how to build a good budget, and how to keep on track with those as you progress through the project process.
So, first here, you know, the success of the practice and success of the build really starts with developing a good plan. And when we first meet clients, we'll try to ask them, what is your immediate need? And where they're at, there's usually a current pain point. They've outgrown their space. They can't get to terms with their landlord on negotiations, and it almost feels like it's an immediate need, or they're ready to start their practice. And we certainly help them get past that immediate need, but we also -- part of our job is to help them prepare for the future, whether it's with PNC or whoever, you know, your loan, your project is going to go on for much longer than just one or five years. So we try to get our clients to think about a 3- and a 10-year plan, of where do they see their practice beyond the next 5 years. So when you're looking at spaces, you're not just focused on what your current need is, but where you think your practice will grow to with the success.
So, once we start understanding the needs there, we'll get into establishing the timeline and then a budget. So I'll jump into that part of it.
The creating a project timeline is where we start off in, and what you'll see us do there is when planning your project, we want to make sure we're planning for the future growth, right, beyond the 1- and 3- and the 10-, as I just mentioned there before. When we get into that timeline, and we're talking about what that future growth really means, we want to talk about where you plan on seeing that growth, right. Sometimes it's hard to grow your lobbies, but we want to talk about exam rooms, treatment areas, these profit centers that you will use as you add on more staff. Maybe you add on more doctors and they need those spaces to help you, again, generate more growth. Those are the areas that we want to think about when we're thinking about the growth plan and the additional space that may be needed beyond the immediate time.
Where we see some clients get stuck is, in that initial planning process, going after perfection. And so, we try to encourage our clients that this is a process, you know. You're going to hire professionals and they're going to assist you to answer some of the questions that you may not understand, whether it's the size of the space -- you know, Ken just talked about some of the zoning and some of the timing, and landlord. So, we've seen clients kind of stall out trying to solve all these issues and questions on their own. And from our side, we'll say, you know, take the first step and you'll count on these professionals to help carry you through that entire process.
The next part to that is, once you've done some planning, some thought processing on your vision, you know, jot that down. Share that with your project team. Share it with your entire project team, your banker, your accountant, your real estate agent, even your associates within your practice, employees. It's important for everybody to kind of understand where you're going and what you see beyond just where you're at today.
So, in this creating a project timeline, we kind of break a project down into three distinct areas. And again, Ken touched on the due diligence process, and the timing on which that can take. And that really depends on if you're doing an interior build-out, a ground-up, and municipal requirements. But we try to tell clients, you know, 2 to 12 months. And in that timeline for the due diligence, this is where we go after financial projections. Again, working with PNC, or your accountant, and trying to get how you see your business growing and the financial aspects of that. The land, due diligence, whether it's soil borings, and environmental studies, that a lender will require, and part protection for the property owner as well. So, there's a lot that goes into that due diligence. The site selection and space planning, and then the zoning and land entitlements.
And there's a whole host of variations in that first phase, and so we encourage our clients, get the information. It's pretty accessible to get that information through local villages or community development personnel, as well as your experts such as real estate agent or attorneys help out as well. So we -- you know, the first thing we want to do is find out, is this a viable project, before we start to invest money. As we move through that due diligence, and we get a feeling that we understand the time, the path, then we'll move into the design and the design starts with that vision that you created -- maybe written down -- and now we want to start to take that, and put that to paper.
And so there's some inspiration boards that we'll do for clients, talk about some material selections, site plans, floor plans. And once we kind of get the space defined, maybe the site if it's a new build, we will again touch back to the communities that are involved and make sure that we understand fire department access, or traffic patterns, if there's any concerns there. So we're constantly keeping in touch with the municipal approval process, so that way any changes that need to be made were incorporated in those as early as we can into the design.
And once we get a pretty good feel for the floor plan, that we've incorporated the functionality of your needs, the flow is optimal, then we'll move into what we call design development and we'll start developing how the building will look on the outside. We'll get into the permit plans that we'll use to secure building permits, municipal approvals, and once we get the design development done, permit drawings, we then turn those into what we call the bid documents. And we use those documents to get competitive pricing from plumbers and electricians, and those ultimately will become the contract documents that the lender will want to see, and that you will use ultimately to enter into a contract with your builder, developer, whoever you choose to hire to do the construction.
And then, from there, we go right into the construction timeline, right. So you're -- we say 6 to 18 months, depending on the size of the building, the complexity of the project. And that's just normal construction, if you've seen it, where we mobilize, we build the building. Then we run into the closing out of the project, is just as important as the construction. So, we identify a punch list, this commissioning process, and then ultimately, the warranty.
So for us, there's three processes there: the due diligence, the design, and the construction. That's how we chunk apart a new build.
So I -- some of these common pitfalls, I touched on a little bit. And again, I know Ken touched on some of them as well. You know, thinking you need all the answers to get started, right? Begin with the first step. Count on your experts. Not working backwards, you know.
So Stephen Covey, if you guys are familiar with them, big fan, and it's "Begin with the end in mind," right? So, think about where you're going, and where you want to ultimately end up. And you don't have to have all the answers, but put a little effort in thinking, where do you see this further out than just the current need.
Another common pitfall, and I touched on this, not understanding municipal approval process. We're finishing up a permit process in Denver right now, and it's taken us over 12 months just to get the municipal approval. So it's a really simple call to a community development director, and just to ask them, hey, here's what I'm thinking about doing; can I just walk through the process with you?
Not understanding lender requirements including SBA, and we really didn't touch too much on the SBA process. I've done a number of deals with PNC that go through the SBA, so trying to understand all your approvals, not just building permits, but also your lender's requirements.
Forgetting to leverage your team, right? Thinking you've got to go at it alone. And then not coming back and revisiting that timeline. As you get more information, we kind of want to keep updating that project timeline.
And then, one of the big ones I've seen when I'm dealing with small business owners, is they want to kind of try to do it all and control the whole process. And when we do work for large corporations, there'll be a dedicated person that is our -- almost like our owner's representative. And so, as a practicing doctor, your days are long as it is. So try to get a team member to help you out, at least be the liaison, and help to keep the process moving forward. We've seen a real benefit from that, to keep you on track with your timeline.
And now, the second part of what I was speaking -- planning to speak with you guys tonight about, is building a budget. And so the two are hand-in-hand. I mean, time is money for us, and so for us, we try to balance the two out. And so, you know, just like the timeline, we break a budget into three groups. And it's soft cost, it's equipment, and it's hard cost. And some of the soft costs -- so when you're talking to builders, and we'll get this question frequently, is, how much is it going to cost? And if you've never built before, these are these costs that are outside your contractor's scope of work that can add up to easily 10% of the project cost.
So we want to make sure that we create a checklist for our clients, and say, hey, even though they're not covered under our cost, we want to make sure you're not forgetting about these costs and you're talking to your different consultants and experts on what to budget for these line items. So, I listed a few across there: design fees, real estate acquisition fees, municipal fees, insurance, due diligence, FF&E.
And then the equipment, again, depending on what you're building -- I mean, there's -- [inaudible] accelerators are out there that are in the millions. So, making sure you have a good equipment budget, and there's definitely experts out there that can help with that. And then we get into the hard costs, and we get into the construction, which again, probably the more familiar of the three there. But you know, we try to break those, the budget, a total project budget, down into those three buckets.
Again, getting into some of those common pitfalls with the budget, not coordinating your soft costs and your equipment with your construction budget. And what I mean by that is, when we get into the design, it's -- the design, many times, is based on the equipment you're going to use within your space. And so, plumbing needs, electrical needs, are based on your equipment. So the sooner you can get your equipment selected, the better coordinated it can be with the drawings. And then the better chance you have of not getting into additional cost once that equipment is selected. So we like to get that out on the table as soon as we can.
The -- you know, understanding the municipal fee structure, and we talked about tap fees, road impact fees, building permit fees, and I know Ken mentioned a couple of these. We've seen water tap fees in the $170,000 range, right? Typically we would tell somebody, building permit fees are 2%, 1% to 2% of the construction cost. But you need to verify that with the local municipalities, because that can have a major impact on the budget.
Realistic FFE budgets, so window treatments, office furniture, signage. We want all that to be accounted for in that budget. Understanding the accuracy of the budget -- so, one of the first questions we'll get from a client is, how much will it cost, without having any information really to price. And we can tell you industry averages, but once -- the more detail we get, the more accurate that pricing becomes. So, going back and updating the budget, just like updating that timeline, is really important.
Site selection, based off sale price, not development costs. So you know, in that one specifically, you can find a lot that's $50,000 or $100,000, but the $50,000 lot may require deep foundations, soil remediation -- and so you know, we would advise to get experts involved sooner than later. And so when we do these, we talked about due diligence on the site. Really, we're talking about the soil borings, and having a contractor or architect engineer look at those soil borings, to make sure that it's capable of supporting your structure.
So there's some important parts there where you're -- I've had clients buy land, cash, and then bring that to us. And I'll get a -- they call it a Phase I, it's an environmental site assessment, and they'll say that it was a gas station right on that site prior to. And so we try to advise clients, even if you're buying cash, you know, get some experts involved to make sure we know what we're buying.
So, building a budget, you know, I put in here a slide about construction costs and hard costs, and building versus site cost. And not all sites are created equal. When it comes to the building, actual physical building, it's a bit of a commodity. There's not as much variation in the actual building structure cost as there is in the site cost. And so, when we talk about stormwater management, topography, whether you've got to haul soils off the site, local building codes, whether it's a sprinkled building or not, those are all parts that can have major impacts on your budget. And so, put something in there -- I've never had a client come to me and say, you know, this dirt's really pretty, right? So it's what's underneath the dirt that we want to help you evaluate, and what's in the municipal code books.
Although there's national codes, many municipalities adopt amendments that can change what you need to do there. So we want to make sure we're looking at that and understanding if you build in one town versus the other, you know, is there a major difference in that cost?
So, common pitfalls, again, assuming the architect and engineer are understanding municipal requirements, understanding the relationships between the consultants. So we have a geotechnical engineer, generally works for the property owner. And so if you get that report, we want to make sure you're sharing it with the other consultants. Not reading the reports -- I have plenty of clients that don't read the geotechnical reports when they get them, and there's a lot of information that's in there just from the summary level, that's worth reading.
The final pitfall there, being an active participant in the site selection process, including the meetings with consultants and municipal representatives. We just want to make sure that you're being involved in the meetings that your architect and consultants are having with the local municipalities there.
You know, the building a budget, the construction versus hard costs versus soft costs, we really want to look at the land, as the building is more of a commodity and the land can vary greatly as far as storm water and hauling cost, and soil remediation. So we really want you to pay attention to the site costs as much as you can. And again, some of the common pitfalls there, is we've seen customers not read the reports that they're getting during the due diligence process. And in those reports are some hidden gems of soil issues, or existing environmental issues. So we really want to encourage you guys to take your time and read those reports, and be an active participant.
The last part to that, the building of the budget, is getting into the finishes. And from our side, this is an area you have a lot of impact. You really don't have a choice in picking what type of studs or framing materials are used, but you do have a say in using granite, or quartz, or other types of finish material. And so, make sure you're keeping your finish selections aligned with your budget.
And again, the common pitfalls there are not asking your builder or designer what they based their initial budgets on, so -- or asking for alternates, or maybe getting into challenging your municipality and whether you need to sprinkle a building, or add a fire alarm system. So we want you to be your own advocate there.
So, my lasting thoughts here are, you are your best advocate. Ask questions until you understand the process. In the end, you are responsible. This is your project and you've hired consultants, but when the project's over, the final product will be yours. You will own it.
Schedule time each week to meet with your project team. Keep yourself updated as to the progress and make sure you're tracking to your schedule. Update your budget and your schedule after each milestone. I discussed earlier these phases of due diligence, and design and permitting. And so after you get through each one of those, make sure you're revisiting your budget and your timeline, and keeping that current. Understand what you are buying. Take the time to do the necessary research and your due diligence.
And then lastly, enjoy the process, right? It's -- could be 18 to 24 months, and it should be fun. It's probably where you spend most of your time, and you know, it can be stressful at times. You're dealing with big dollars. But remember to enjoy it.
Thank you for your time tonight. I enjoyed being part of the panel.
Thank you. Wow. Jake, Ken, Jason, really awesome information. I knew we were ambitious trying to tackle this discussion in just an hour segment. I think we hit on the right topic this time. The chat box has been lighting up with a boatload of questions. I know we're tight on time at this point. We do -- we definitely want to get to questions. We'll have to do it outside of the confines of this webinar. But based on the number of them, it probably would have been another hour worth of Q&A.
Thank you for participating, again, Jake, Ken, and Jason. You guys were absolutely fantastic. Thank you for everyone tuning in this evening, as well. We appreciate all of the participants for taking time out of their day.
At this point, Jessica, I'd like to go ahead and turn it back to you to wrap us up.
Great. Thank you so much, Kevin, and thanks again to all of our speakers today, and thanks to all of you for joining us. We hope you found today's webinar useful and informative.
If you could please fill out the post-event survey that will pop up on your screen after the event's conclusion, that would be greatly appreciated.
Thank you again, and have a great day.