Featured Guest: Colin Carr
What he does: Colin is the Chief Executive Officer at CARR. During his career Colin has been active in local, regional, and national real estate transactions involving landlords, sellers, tenants, buyers, and investors.
On risk: "When it comes to risk, if you're looking at purchasing there are a number of lenders across the country that are willing to do 100% financing, but that does mean that you're borrowing more. And so you need to make sure that you're not overpaying for the property or that you don't go upside down when the market corrects … What's the motivation of the landlord to voluntarily reduce their cash flow, their income, and just give you free money? … Typically, the personal guarantees are going to go directly to only the owners. This plays a major role, people do get tripped up with personal guarantees. Can you get an auto loan without a personal guarantee? The answer is no. Can you get a student loan without a personal guarantee? No. Can you get a mortgage from a reputable lender without a personal guarantee? No. Can you get a credit card? Anytime someone's extending you credit or value you're going to guarantee it … Protect your interests and to make sure that you're mitigating risk at the highest level."
Scott Nelson 0:01
Welcome to The Risky Health Care Business Podcast, where we help you prepare for the future by sharing stories, insights, and skills from expert voices in and around the United States health care world with a mission to inform, educate, and help health care organizations and individuals, ranging from one doctor practices to large integrated systems and organizations throughout the dental, medical, and veterinary health care industry with risk, while hopefully having some fun along the way. I'm your host, Scott Nelson, a guy that grew up in Ohio and has been working all over the United States during my 20 plus year and counting career in the health care industry, with a commitment to accelerating health care performance through creativity, not just productivity. Let's dive in.
Health care is a dynamic environment for real estate. And it's not just about location, location, location. For years now, and increasing in speed, medical care has been experiencing a physical transition of services from an inpatient setting to an outpatient setting to a virtual setting. Dental and veterinary care are having similar transitional experiences that include virtual care. Physical space is just one consideration in health care real estate. Real estate is usually a top expense for any health care business. But real estate threats are not only financial, which elevates the level of risk awareness required. And with lease or mortgage commitments of 5, 7, 10 years or maybe longer, there might not be room for error, which means risk management in health care real estate has become increasingly important. Today we're speaking with Colin Carr, CEO of CARR, a health care real estate company with operations throughout the US that provides commercial real estate services for health care tenants and buyers. During his career, Colin has been active in local, regional, and national real estate transactions involving landlords, sellers, tenants, buyers, and investors. Let's talk with Colin about risk in health care real estate.
Colin, welcome to the show.
Colin Carr 2:02
Thanks for having me. I appreciate it.
Scott Nelson 2:03
Before we begin talking about risk in health care, let's go back to the beginning. How did you get into health care and where you are today?
Colin Carr 2:03
So I took a little bit of a different path than most people. I decided not to go to college and my first real job was managing apartment complexes at age 19. Got fascinated with real estate from there and so I kept managing apartments for a few more years. Early 20s I moved to Colorado from Michigan. And then I got my broker's license when I was 23 and I started working for a gentleman that did mostly large national retailers. So he did Walmarts, Wendy's, Blockbuster, like large retail tenants. I did that for a number of years, enjoyed it, but really wanted to work with individual business owners versus large corporate conglomerates, etc. So I moved firms and I started doing a lot more just office and industrial use, and long story short, a client that I did a bunch of industrial stuff with bought a medical office building and asked me to list it. So I started doing that, picked up a few more listings, and then over the course of a few years I had done a pretty healthy amount of medical deals, mostly on the landlord side. And I had a couple transactions that just really stuck out to me or stood out to me that I remember vividly where I was working on the landlord's behalf and I had I had a plastic surgeon deal, I had a dental deal, and I had an ENT deal. And in all three transactions, the doctors were unrepresented. They were trying to do their own deals themselves. Two were renewals, one was a new deal, and the outcome of all three of those transactions were the doctors got completely manhandled, that no idea that they were getting overcharged by significant amounts of money. They left a ton of money on the table, like literally $100/$200,000 per deal on the table. They weren't capturing the free rent, the tenant improvement allowance, they were overpaying on lease rates, they were missing all sorts of other negotiations. And just for me, I just realized like this is not really a fair fight. These doctors are getting completely just crushed in these deals. So for me, the light bulb came out that hey, the health care community needs representation. For whatever reason nobody was doing it in Colorado where I was located. The only people that were doing health care deals were on the landlord side. And so I just made a decision that I'm going to start doing a lot of tenant and buyer rep on the health care side. And I started making that move in 2008. And in 2009, I decided to start our company now which is called CARR and we have grown over the last almost 15 years to being in over 40-some states now and I think we have over 4,000 clients that we're actively doing work for, and it's exclusively tenant and buyer rep only in the health care space. So no conflicts of interest and our only clients are the health care community.
Scott Nelson 4:53
When you think about health care your verticals span when I say health care it goes medical with the physicians dental with a dentist and the dental specialties and then veterinary services. Is that correct?
Colin Carr 5:10
Yeah, so yep, exactly. So we do we do the physician community, we do dental, veterinary, do a lot of optometry and vision. We do a lot of therapy as well, too. So physical, occupational, a lot of behavioral health. We also do chiropractic and then we you know, we have a whole segment that's, that's I call it wellness or well being, med spas, fitness, acupuncture, anything that's wellness related falls into that bucket. So, yeah, our world is health care related, wellness related. And, you know, our top focus is on helping our clients, health care providers, maximize their profitability through real estate. And that's kind of maybe an unusual combination. Well, how do you get into maximizing profitability through real estate, but the reality is, for most health care providers, real estate, or their facilities cost, typically out of their second highest expense behind payroll. And you start getting into these leases or these purchases, and it's very easy to lose or gain a couple $100,000 in one transaction, if you capitalize or if you miss out. So our focus is protecting health care providers interests. Their practice is typically their largest or second largest asset, as a whole or as a generalization, and then real estate comprises the second or third highest expense behind payroll typically. So a lot of money on the line. And if we do a great job, we can find them the best locations, the best properties, and then we can help them negotiate the most favorable terms which impacts their profitability, puts more money in their pocket, gives them more flexibility, more freedom to make decisions for themselves and for their future. And that's that's the game plan.
Scott Nelson 6:48
I'd like to start our conversation by putting some framing in place. Real estate as a topic could mean different things to different people. So we'll not be discussing real estate strictly as a health care investment, such as a real estate investment trust or a REIT. I think about it broadly, and include disciplines like architecture, design, construction, engineering, facilities, physical plant, property management, among other things. Today, we're essentially talking about risk involved in leasing, buying, and selling activities, with a goal to inform and help with identifying potential risk points, and how to anticipate and prepare. But first, Colin, from your perspective, what is and makes up the health care real estate market?
Colin Carr 7:26
So the health care real estate market is is anything that's facility related to your practice. So it could be the actual, it could be the actual location that you're practicing in, it could be additional locations, you know, some types of practices have to have back end offices or administrative offices, or they've got to have a satellite location that's near either hospital system or on a hospital campus. So it's really anything that facilities related to the practice, anything that's going to require you to have a lease agreement or if you to own the real estate.
Scott Nelson 7:55
That could cover anything like what people would typically think of as a standard doctor office, a standard facility. Whether or not it's retail, medical office building, a hospital, if it's medical in nature, but the same thing for dental or veterinary services.
Colin Carr 8:10
Yeah, I mean, inside of that we've got, like you said, you got the medical office building, which is a building that's solely dedicated to medical. You have hospital campus properties. And then you get into retail where you could have like a Chipotle or Starbucks, and then you could have an urgent care or a Med Spa. You could have a dental office. So could be retail, could be a power center, could be grocery anchored. So anything that's just drive up and walk into the space that has a sign. And then there's a lot of a lot of health care providers that choose to go into mixed use properties, where it might be some health care, some office, it could be retail on the first floor office on the second residential and the third, I mean, there's all sorts of other variations of properties. But most health care providers are not located just in a health care only medical office building your hospital campus. They're typically co-tenants with other retailers or non health care office tenants, etc. And that's that's where the majority of health care providers find themselves.
Scott Nelson 9:10
As far as transaction types within this market, primarily is it leasing so whether or not your first lease or renewal lease and then buying and selling predominantly those are the majority of the transactions that are in health care, real estate?
Colin Carr 9:24
Yeah, if you're, if you're getting ready to transact as as an occupant, so it's gonna be for your practice, you're gonna either be a tenant and you'll be leasing, or you'll be you know, a buyer or a future owner, and so you'll be purchasing. That being the case though, the most conservative numbers that I see are that they say less than 10% of all health care providers own their real estate, the most generous ones that I see it's around 20%. So it's really driven by the market you're going to find more people that own in markets that have land available for you to keep scaling and growing the cities like if you're in Tulsa, Oklahoma, and you can keep going further out and finding land that's that's one thing, if you're in Orange County, California, there's no more land like there's not land to be had. That's just waiting to be developed. So some markets ownership was higher than others. But you know, I think the most consistent numbers that I see are 10 to 20% of the most percentage of health care providers own the real estate. So you're we're typically talking about leasing, being the dominant transaction owning is a phenomenal way to build an additional asset to increase your net worth to pick up additional tax deductions. And that's available in most markets for most uses. But it's definitely the minority transaction.
Scott Nelson 10:33
Transitioning to risk, and talking about what is risk in health care real estate, where is it, who is involved, and how to address it. Real Estate, like you mentioned, is typically a big expense on the P&L which means there's potential for significant risk. As a health care real estate executive, how do you broadly think about risk in health care real estate? And what is it to you and your work?
Colin Carr 10:54
Yeah, I mean, when it comes to the economics, like you said, on the P&L, it's going to affect cash flow, it's going to affect profitability, it's going to determine how much you have to work to net the same amount of money. So if you go into a transaction, and you overpay by a couple dollars per square foot because you weren't properly represented, or you didn't have a real strategy and posture and you just found yourself in a place where you accepted the terms, you know, if you overpay by, let's say $3/$4 a square foot on a couple 1,000 foot space, that equals you know, it can equal $1,000 a month real quickly. It could equal $12,000 a year. It could equal $120,000 over 10 years. And then you take the idea of let's say, you didn't get enough tenant improvement allowance, and you have to borrow more money or you have to use more cash to pay for build out or other costs, you start looking at all the different areas where you can lose or win money, and it adds up to a couple $100,000 real quickly. And so if you capture that money, that's going to mean increased profitability, it means that you can work less hours to net the same amount, it means that you can reinvest money in a nicer location, in more or better staff, in more or better equipment and technology, you can put it more into marketing to grow the practice. So it gives you choices and freedom. And it gives you leverage when you capture it. And on the flip side, when you don't capture that money, it means that you might have to have a leaner staff, or pay people less, or not hire as as qualified of people as you'd like. It means you might have to choose an inferior location to what you'd ideally like to have, or that you can't invest in the marketing or the technology that you want. So really, it's not just like, am I paying more, it's do I have to see an additional 40 patients per month or X number of patients per day or per week just to pay for the additional cost of the mistake that I made. And it truly is exponential. We're not trying to make more out of it than it is. But if you miss a negotiation deal point like the tenant improvement allowance and you leave 10s of 1,000s of dollars on the table, it's not just that amount of money. It's how much are you paying in interest over the next 10 years that you could have avoided? And all these costs add up. Individually, someone might say, well, that's not that big of a deal. It's only $800 here or $500 here or $1,000 there. But you start to add up those costs and it's pretty significant.
Scott Nelson 13:10
Are there variations based on cycle time? When I'm saying cycle time, I'm thinking things such as career, business, or calendar. So for example, you're starting out with new space, whether or not you are starting a practice, or you're in an existing practice that you're looking to grow or expand, and then you're transitioning through to retirement or sale and transitioning out of practice. How should risk be factored into a real estate decision based on time?
Colin Carr 13:37
Well, I think you know, when it comes to risk, if you're looking at purchasing, there are a number of lenders across the country that are willing to do 100% financing. But that does mean that you're borrowing more. And so you need to make sure that you're not overpaying for the property or that you don't go upside down when the market corrects. If you are putting capital into a property, that's capital that you can't access, typically, it's going to be locked in that property for a while. So I think really what it comes down to is like if you're looking at buying real estate, can you see yourself in that property for the next 10 plus years? Is it going to is it going to affect your cash flow significantly to where if you have a you know, if you got a tight month or two or things change in the economy, are you going to be upside down or in a bad position? And I think if the answer is maybe or yes in those things you need to be more careful that you don't, you know, give up your only source of a nest egg or cash on hand or that you don't over leverage yourself. If the answer is no, this doesn't affect my cash flow hardly at all I can afford the building. It's not the only cash I have. I'm comfortable with where I'm at. I'm comfortable with where the practice is at. Then I think owning real estate is a phenomenal opportunity. And I don't care as much as far as where they're at in their career, whether they're, you know, five years in or they have five years left. For me, it's just the overall picture. If you have a doctor that says hey, I'm gonna probably sell my practice in you know, three to five years, owning real estate is not off the table because the person who buys your practice, if you have a saleable asset, is going to need that lease. And them signing up for a new 10 year or 12 year lease is going to be a contingency of them buying your practice. So, if you're going to practice for, let's say, maybe five more years, you're gonna probably have a 20 year mortgage, you're gonna get five years knocked out yourself, you sell the practice, make them sign a 10 year lease, well you've got three fourths of that asset paid off by the time you know that lease is up. So I'm great with people that are further in their career, even if they're getting ready to retire, still buying real estate, because they're going to have a very saleable asset if it's done properly. And I'm also great with people early in their career buying real estate, but you've got to make sure that it's gonna fit their needs for the next you know, 10 plus years, you do not want to buy real estate, if you're a year or two in if you think it's gonna meet your needs for two or three years, you cannot get in and out of commercial real estate the same way you get in and out of residential real estate. It's much more expensive, it's much more cumbersome. And only a very, very small percentage of the business market wants your type of property, where everyone needs a bedroom, needs a kitchen, needs a living room, a garage, etc. When you build out a space specialized for your practice, you're narrowing down who would be a potential buyer to a very small to very small margin. So I know I'm giving you a mouthful there. But for me, if it's not if you're young, it's not if you're old, it's really you know, what is what is your cashflow? What's your position? How comfortable are you financially? And then a bunch of other variables as we just described.
Scott Nelson 16:32
This is the pitfalls and threats question. What real estate areas should be of concern to health care professionals and organizations? Where are the key areas to keep in mind and why is there risk in those areas? Recently, there's been a lot of talk about interest rates. I came up with several potentials to get us started and then head from there. You had mentioned leasing versus owning, and some of the benefits and potential things to keep in mind in terms of years out and cash and leverage, versus leasing, versus owning, but in terms of planning, and when I say planning, I'm thinking about approach and strategy and tactics, and then as well as a process, things such as, you know, searching for the identifying the space, touring the space, inspecting the space, going all the way through negotiation, or offering negotiation, and then closing. What are some pitfalls and some threats within that piece right there? And then why is that a factor?
Colin Carr 17:25
Yeah, so let me let me start with the first one as far as interest rates. Interest rates are definitely a lot higher today than they were a year ago or two years ago, etc. If you look at interest rates as where they stand now over the last 20 years, we've actually been here before, so they're way higher today than they were last year. If your paradigm as the last five years, then yes, they feel like they're, you know, several times higher than they are. But if you go back to people that were doing deals in 2007 or '08 or early 2000s, they were seeing the same rates that we're seeing right now. So it's all relative. What I'm telling people right now is if you find the right property to purchase, rate should not stop you from buying because the reality is like a lot of things you're going to refinance. Will you pay more today than you will maybe in two years? Most likely because most likely rates will come back down again. But you shouldn't avoid purchasing the right asset if you find it and if you can make the transaction happen just because the rates are higher. Yes, you'll pay more now but you should be able to refinance. And that's been the constant theme over the last 15 plus years. When it comes to you know, if you're doing a lease, if you're if you're doing a practice loan, same thing, you're going to have higher rates today. But if you ask most people that started a practice or bought real estate 2007 and say, do you regret that do you wish you would have waited seven more years for the rates to go down or five more years? Most of those people that I know, because I was doing deals back then would say absolutely not. There's no reason I should have waited or not transacted. And it was, you know, hindsight, it was it was a phenomenal time to do something. And then yeah, just refinanced a few years later. So rates could stop you from being able to afford it. They could stop you from being able to make the margins, the ratios, if that's the case, it is what it is. But I don't see rates being a pitfall right now. They're not as ideal as they were a year ago, but they're still transactable rates, and it's still relatively relatively normal if you were looking at other seasons we've been through in the past 20 years. Going on to the next topic, as far as where do we see health care providers making mistakes, I can hit a couple really quickly. I'll list them and then we can break them down. A lot of health care providers make the mistake of trying to do it themselves. They ask the question, well, you know, can I go find a property? Can I call on properties? Can I negotiate? The answer to every one of those is well of course you can. You're capable of using a phone and you're capable of sending an email or marking up a document. But that doesn't mean it's a good choice. So doing it yourself is the top mistake health care providers make. The next one is they don't go into transactions with a real strategy or posture. They're just kind of winging it. And then coupled with that is they're not typically negotiating on three or four properties simultaneously. So second issue is no strategy, no posture, and they don't, they don't go at the transaction, the way that the, you know, professional companies and Fortune 500 companies go after it. And then the third thing I would tell you that they do very often is, they don't time the transactions properly. They start way too early or way too late. And that is a posture killer as well. So all three of those get fixed when you fix the first, when you hire professional representation, you don't do it yourself. But when you start out a transaction, doing it yourself, you typically make like another three or four mistakes that just continually weakened your position, step by step, so happy to break any of those down further, but those are the top three that I see providers making.
Scott Nelson 20:47
I had the timing as a question I was going to ask here in a second, in terms of when should somebody start, whether or not it's just coming to a decision and saying like, okay, yes, we're looking to transact a real estate deal. Or they're looking to actually act on that and move into that process. So what does that kind of look like? What is too early and what is too late to begin thinking about something like that?
Colin Carr 21:14
Sure. So too early, is going to be any timeframe where the landlord doesn't have a real risk of losing you as a tenant. For instance, let's say that you signed a 10 year lease and you've got three years left. And then you say, well, I'm trying to cut my overhead and you go to your landlord and try to renegotiate, the question you have to ask yourself is, what's the motivation of the landlord to voluntarily reduce their cash flow, their income, and just give you free money by lowering your lease rate? There's zero motivation there. And, you know, I don't mean this disrespectful, but a lot of times, if you're, if you're not in the industry, it just doesn't make sense. And so you just you go about things in a manner to which it makes sense to you but to nobody else. Going to a landlord and asking them to, like, give you money for a renovation, or to lower your lease rate, three years before your lease expires, I mean, you're literally just saying would you please give me free money for no reason besides I'm asking you to do it. And I mean, this is the equivalent of someone walking up to you as a health care provider saying, Hey, would you give me $50,000? You'd say, Well, why would I do that? You say, Well, because I'm asking you. Your response would be well, no, that's, that's a really bad reason. So if you're too far in advance, and there's not a fear of the landlord losing you, then you're not going to get anything meaningful. Or if they do give you something meaningful, like, Yeah, I'll give you a lower lease rate, I'll do this and do that. They're going to be capturing on the back-end. They're going to be locking up, you know, a longer lease, or capturing some benefit to where they're still winning. And you're getting the illusion of savings, but you're probably gonna end up paying way more. The right timeframe, if you're getting ready to renew your lease, is typically around 12 months. That's the timeframe where you have enough time to relocate, to go find other properties, negotiate, design them, build them out, etc. And at that point, the landlord has to start marketing your space because your space is going to sit vacant, even if you move out. And it's a great space, and they'll still sit vacant, typically for six months to a year before it gets released. So at that, at that timeframe, that 12 month window, typically, landlords have the reality that if they don't come with a good deal, or if you truly are looking to other properties, and you have a real posture, you have real strategy, that they can be losing a ton of money, if you vacate their space. It could cost them two, three times as much money to release that space between downtime, build out periods, free rent, all the costs that go into doing a deal. If they don't make your deal, they can end up in a place where it costs them two or three times the amount of money to make your deal versus, you know, making the next deal. So that's the timeframe where landlords are more aware of, hey, I don't want to mess this deal up or miss this. And if the tenant truly has other options, and they're getting aggressive with other landlords or sellers, I've got to come to the table with a real offer. Now that's again, predicated upon having representation, having a real strategy, having a real posture. If you're the tenant, you just say, hey, send me send me an offer. What are you willing to do? Well, that just says the landlord, by the way, I have no clue what I'm doing. Very important key words, you're like, if you're a tenant, and you're getting ready to renew your lease and you say, send me an offer. You have just told the landlord, I have no clue what I'm doing. And I'll probably take whatever you give me. A sophisticated tenant that's been in the market, that's looked at three or four or five of their properties, that's negotiated with three or four other landlords doesn't say send me an offer. They say I'll send you an offer. And here's the terms that you're going to have to match or meet if you want to consider having me stay as a tenant. I already have three or four properties, I'm not going to be taken advantage of. I don't care what you think's market. I'll tell you what's market based upon my other options. And so, terminology gets really important. So but original question, timeframe typically 12 months in advance is the sweet spot. An alternative timeframe is if you're looking at buying a piece of ground and building your own building, developing your own property, you've got to start that process 18 to 24 months in advance, because it takes 18 to 24 months to build your own building, believe it or not, that's just the timeframe it takes new commercial development. So if that's the case, then your posture is I've got an option to buy a piece of ground, development my own propertym and this, you know, this ship is leaving the harbor very soon. So you either have a chance to renew me now and capitalize, or I'm going to go buy a piece of ground. And once that happens, you're not going to get me back. I'm going to be too committed to the next deal. And so you're going to have a vacant space coming one way or the other. So 12 months, ideally, unless it's new construction, then it's 18 to 24 months.
Scott Nelson 25:39
You had mentioned terms and terminology, which is actually something I had on my paper to ask you about because there are two specific ones that always seem to come up in my conversations. The first one is Triple Net. And that is always my example when you brought up the point about doing it themselves versus having an advisor. Triple Net is always the one that I use as an example to say this is one that you need the experts, you need the advisor who does this on a regular basis. The other one is typcally with clients or potential clients that I have that are going through a sale transaction and if they have a lease, whether or not it's a first lease or a renewal lease, personal guarantees seem to be one that nobody's ever happy about and it's one that we have a lot of conversations about. So those are two typical ones that come up in conversations for me are those big ones that you see as people having issues or having to address or are there others that you usually like to highlight or have people include or factor into their deals?
Colin Carr 26:44
Yeah, so there's, there's a lot of terminology that comes up that we could hit on. But I think those are two great ones to cap on for a minute. So let's talk about that. The first one Triple Net, and the Triple Net stands for three different forms of Net. Net, Net, Net. The three Nets stand for property taxes, property insurance, and then either common area maintenance, or the operating expenses. And essentially, if we break this down very simple, these are the costs of what it takes to run a property outside of a landlord's mortgage or other costs of like commissions or attorneys fees. These are the costs of what it means to own the property and run the property. So property taxes, property insurance, and then operating expenses. So what that means, essentially, is that the landlord takes all of the line item expenses to run the property, snow removal, utilities, landscaping, you know, lighting, elevator maintenance, anything it takes to run the property, and they break it down, and then you pay your proportionate share of those expenses. And when I say proportionate, it's based upon the amount of square footage that you're occupying. So if you wanted to use like, super, super simple numbers, if we had a 20,000 foot building, and you were in 2,000 square feet, you would represent 10% of the property, you'd be paying 10% of the operating expenses. So there's nothing wrong with a triple net lease. Where people come up with issues or they have heartburn on these deals is they didn't know what was their responsibility versus the landlord. So there's that you don't run from a triple net lease. That's the dominant type of lease. But the biggest thing is you just have to know what you're expected to do or pay for, and what the landlord is expected to do and pay for, and if you clarify those things ahead of time there's nothing wrong with that. Another thing that comes into play with the triple net lease and this is not a constant, but it's there is some triple net leases have you paying for all utilities. Some have you paying for some utilities. Some have you paying for your janitorial, some has it included. And so again, it just gets back to expectations. What are you paying for? What is the landlord paying for? And if you define those costs of the habit time, you'll be in good shape. One other question that comes up is people say, well, should we negotiate the triple net? And the answer is, it's not really a negotiable deal point. If you have a landlord that has a multi-tenant property with 10 tenants in it, they're not going to give you a different lease form than the other 10 or nine are paying. You just, again, you just have to know what you're getting into. Lease structure is very important, whether it's triple net, whether it's full service, whether it's modified gross, I will tell you this, you don't need to spend a lot of time becoming an expert on all the lease types. What you need to know is what am I expected to pay for? What's the landlord going to pay for? What happens if something breaks? Like if the HVAC goes out? Who's paying for that? If they need a new parking lot, am I paying for it or proportionate share of it? And it's more important to simply just define who does what, in which circumstances, and then that way you're not blindsided, you can you can prepare for those things in advance.
Scott Nelson 29:49
We've talked about landlord and tenant, in terms of stakeholders and actors that are typically involved, how do they or how can they address risk in those roles, and then part of that is though, who should be involved when you're talking about people that are potentially doing this themselves? Who are the stakeholders and the actors that should be involved to make sure the risk is addressed? I have in mind roles such as the lessor and the landlord, and the lessee and the tenant, the buyer, the seller as the main players, and supporting functions like agent, attorney, architect, but there could be others such as financial institutions, what are your thoughts?
Colin Carr 30:26
Yeah, so let me couple this question with with so you mentioned a second ago personal guarantees as well, because typically, the personal guarantees are going to go directly to only the owners. This plays a major role in it so let's let's start personal guarantees and I'll roll into the second part of that question. People do get tripped up with personal guarantees, and then you're going to have a lot of attorneys say, Well, you should personally guarantee it. I agree. In an ideal world, you wouldn't have to have a personal guarantee. But here's the questions that I would ask you as a consumer, can you get an auto loan without a personal guarantee? And the answer is no. Can you get a student loan without a personal guarantee? No. Can you get a mortgage from a reputable lender without a personal guarantee? No. Can you get a credit card without, so you get my point. Anytime someone's extending you credit or value, you're going to guarantee it. Again, look at look at the fine print on your credit card, your mortgage, your auto, your student loan, I don't care what you're buying, if you're buying a timeshare and financing, if you're financing an airplane, or an RV, or it doesn't matter what you're doing. You are signing on the dotted line. Even if you put your company's name on it, it's coming back to you personally. There's not any bank out there, unless it is a huge group practice that's been operating for a very long time with a considerable number of owners, that's not looking for somebody to put a personal guarantee on there. So it's the same in real estate. If a landlord's gonna give you, you know, a 5 or 7 or 10 year lease, the question is, what is the value of that lease? So let's just say it's a million dollars. Well, they're giving you a million dollar loan. You're gonna pay them back over a 10 year period, or 5 year period, monthly, but they've given you a million dollars of credit. And then, especially if they're going to be giving you money to build out the space or free rent, just realize this is a loan. It's structured as a lease, it's structured as a rent payment, but it is truly a loan. So don't be don't be dismayed by a personal guarantee. And if you have an attorney say, Well, you shouldn't personally guarantee it. Ask them if they would give anybody a million dollars of credit and not ask for a personal guarantee. They would say there's no way they would do that. And so let's not have a double standard there. Let's not kill deals over a personal guarantee, when it's very common. A better approach would say, can we limit the personal guarantee? Or can I get it removed after I've proven that I'm worth the risk or I've given you enough value. That's a much better approach than just trying to get rid of a personal guarantee. Removing a personal guarantee is going to kill the vast majority of deals unless you're a large, like, private equity based group or you're a large multi-doctor group that's got a huge track record and a big financial statement. That's a different story. But individual, one or two owner practice, you're gonna have personal guarantee. So questions are, who's going to personally guarantee it? It's gonna be the owners, it's going to be the people that are making the decisions. And so that one's coming up. The biggest thing to know with personal guarantees, if you're selling your practice, that gets into what we call an assignability clause. If you have a lease, and you think you might want to sell your practice, or even just to protect you, even if you're not thinking about that, you still want to get an assign ability clause, which gives you the right to assign the lease interest to someone who would buy your practice or who you transfer your practice to. And then you've got to go one step further with the assignability clause, you have to have a trigger or a mechanism to get off that lease. And a lot of people have been fooled by this, they're like, well I have an assignability clause. But the assignability clause doesn't say a thing about you being removed. And so landlords will hold selling doctors hostage and say sure, you can sell it, but you're gonna stay on the lease for the next three years, or you're going to pay me a big fee to get off. And so that's where a lot of people get tripped up. So you need an assignability clause and you need to have a trigger to get off that lease. And then that, again, that ties into the personal guarantee. So summary here, you're going to personally guarantee most leases, you're better to try to limit the guarantee to like let's say maybe the first five years of a 10 year lease, or after you've paid a certain amount of money, it goes down each year, or your maximum out of pocket, you know, liability goes down each year that you pay down and at least that's a better game plan, in my opinion. So going into your your next question, like you know, who are the stakeholders, you got the landlord, they've got partners, they've got financial backers, but it's typically that who is the main person for the landlord. The lenders are usually behind the scenes, you're not going to have any interaction with the landlord's lender, hardly ever. This was a refinance last year to sign a document or they get a new loan. Simply just The landlord, and it's gonna be just you. Each party is going to have attorneys to protect them, each party is going to have CPAs behind the scenes, but they're just they're not getting involved in the deals typically. It's usually it's the principal owner of the practice dealing with the with the landlord's representative or the landlord's, you know, primary point of contact, these parties have legal, each parties have lenders, each parties have, you know, CPAs, and so forth. But those people are usually only getting filtered through the principal. And it's usually landlord versus tenant. And that's it.
Scott Nelson 35:32
And from your example, in your conversation about the personal guarantees, would I be correct or would you agree with, with me stating that an agent and an attorney are incredibly important roles or positions for the tenant at any point in time because of things such as an assignability clause?
Colin Carr 35:52
Absolutely. So you do need both in a transaction, that's another misunderstanding, or another mistake that health care providers make. They'll say, well, I'm not going to use a real estate agent because I have an attorney. The landlord knows the attorney is not a market expert in real estate, and that they deal with the legal points, not the economic negotiations. And then you'll see people make the other side of the coin mistake, which is, they'll say, well, I'm not going to hire an attorney, because I've got an agent, and they see contracts all the time and they can just tell me what's going on. And that's a really bad decision, too, because real estate agents or brokers are not legally allowed to give legal advice if they're not an attorney. And that's what happens if a broker and an agent looks at a lease and starts giving you advice, they're practicing law, that's that's not what they're allowed to do. They'll lose their real estate license for that if it's reported and it's true, but also even if it wasn't like you don't want, you don't want a real estate agent giving you legal advice. Just like you don't want a real estate attorney, you know, telling you what a market lease rate is or a market T.I. allowance is. You want both parties. The real estate agent, you're not going to pay them if you're a tenant or buyer, commissions are paid by the landlord or the seller just like in residential real estate. You should not be paying your agent, if you are an occupier of space. If you're a tenant or buyer health care provider, the listing agents going to give that that agent half the commission or the landlord will pay them half the commission, but you're not coming out of pocket for that person. You will, however, pay your attorney but you're gonna pay them a reasonable amount of money to protect your interest. So people say what's a reasonable amount of money? Depends on the complexity of the deal, depends on how many questions you have, depends on how clean or unclean the lease is when you first get it. But typically, it's going to be, you know, a couple $1,000, maybe, maybe $5/$6,000 at the most on a lease. Purchase contract could be you know, $4/$5,000 up to $10,000, depending on how complex it is. But you just had to look at it as this as an insurance policy. Nobody wants to pay an insurance policy until they have a claim. Nobody wants to pay $4/$5,000 a year to insure their house, you know, until you have a pipe break and then you know, you need $100,000 for a new basement. And that's that's when it comes into play. You're going to be in this lease for 5, 7, 10 years, maybe 20 years, if you're a new. Pay a couple $1,000 for a really good real estate attorney to protect your interests and to make sure that you're mitigating risk at the highest level. Hopefully nothing comes into play, and if nothing comes into play, then that means your attorney probably did a good job.
Scott Nelson 38:19
How should risk be planned for in real estate? So what have you learned from your experiences and how do you approach risk in your work? So thinking if a doctor or health care organizations looking to lease, buy, or sell real estate, what are one, two or three actions they can do to decrease risk? Going through some of the examples that you have touched on already, is there a way to kind of plan an approach so that you may be able to make sure that you can strengthen vulnerabilities that you may be open to?
Colin Carr 38:45
Yeah, absolutely. So we've hit a couple, and I'll hit those quickly, but you should have a good real estate attorney review any purchase contract or lease agreement and try to you know, try to try to eliminate the landlord having more access to you than you should or you having more liability than you should as a tenant, so good real estate attorney is one. Number two, you should be properly insured. Like there's just you can't get around it. You've got malpractice insurance, stuff like that on the practice side. But you need to also have personal content insurance you need to have you need to have other forms of insurance. Like for instance, if if there's a huge rainstorm, like in Denver we just had, we've had literally like a month of monsoons almost every day. It's the highest rainfall we ever we've seen in decades in May and June is following suit. Well, I don't care how, how new or old the building is, roofs are leaking like crazy. You put four or five inches of rain on a roof, on a flat building, it's gonna leak in most scenarios. So, you know, if water comes into your space and blows out some technology, are you insured? You might say, well, I don't have any, any loans on this technology. It doesn't matter. You need to have proper insurance. So that's a big one. And then, ultimately, I think I think one of the best insurances you can get or the best protections is having representation. It's knowing what are the top properties that are available? Should I lease? Should I purchase? Could I have paid a lot less if I would have capitalized on this deal. That's not the same thing as having an insurance policy, but if you do it right in advance, it's going to protect your interests, it's going to save you a lot of time, it will save you a lot of money. A good agent will help avoid all sorts of pitfalls and complications and delays that people that do it themselves encounter on a regular basis. And it's like anything else, I mean, why would a patient come to a health care provider? Well, you're trying to eliminate an issue, you're trying to recover faster, you're trying to stop bad habits or behaviors that maybe you don't even know that you're doing, or you're trying to, you know, eliminate a life threatening issue. I mean, a patient could say, well, I'll just wing it and figure it out myself, like, sure, you can do that but that's not best practice. Best practice is go to the person that's trained and specialized in the area of health care that you have a need, or a desire to see a change in, it's the same thing in real estate. You could self diagnose and figure it out yourself but that's probably not the best game plan, especially if it's a serious health issue. And with commercial real estate, it's a serious financial issue. Like it's not, it's not a matter of like, if you overpay on buying a box of rubber gloves, you'll just try to get a better price next month. You typically only get one crack at the apple every 5, 7, or 10 years if it's a lease. And if it's a purchase, you're probably doing it once maybe in your career or maybe once every 15/20 years. So you know, I think best practice there is just do it right the first time, hire representation, and try to avoid the obvious pitfalls that people that are just kind of floundering through the process encounter on a regular basis.
Scott Nelson 41:42
Looking back through recent history, from a risk standpoint, what was expected versus unexpected in health care real estate and what could have been done differently? Whether or not we're looking at occupancy rates, a different type of delivery model that health care businesses and health care providers are beginning to deliver now. What were some of those potential issues or some of those unexpected issues and what could have been done differently?
Colin Carr 42:07
Yeah, I think it comes down to just knowing who's responsible for what. If you're in a multi-tenant office building, and the HVAC goes out, like the landlord supposed to be paying for that. If you're in a retail center, and you have your own individual storefront, you're probably responsible for that HVAC unit, whether you like it or not. Well, you need to have it inspected before you lease the space. If you're going into a retail center, and it's a 20 year old center, and it's the original HVAC unit, and it's on its last leg and you don't have it inspected, and that thing goes out, you know, six months into your lease, your lease probably says you're responsible for it. So that should have been addressed or figured out ahead of time. So looking at property inspections, getting people inside the space to determine do you have enough power, that's a big one. People will assume there's enough power. They'll get into a space, start designing it, and then the GC will get the electrician in there. And they'll say there's there's no more room in the panel or even if a panel says you have 200 amps coming into the space, you don't. And there's no more power coming into the building. And so you need to then get a hold the utility company and upgrade the panel for $50,000 or whatever the number is. So due diligence ahead of time is does the space have that have enough water? Is the water tap large enough? Does it have enough power? Who's responsible in case the HVAC goes out? There's just things like that you can do ahead of time in your due diligence that will help you know. Outside of that, I mean, you just have to hope for the best. And that's not like a just a whatever will be will be but you could sign a lease and then the market could go down and you might have a lease that's higher than market but you don't control that. You could also sign a lease and the market could skyrocket or spike, which is what's happened last couple years, though rates, they're still way higher than they were four or five years ago. And so if you signed the lease four or five years ago, you're probably in a much better place then people that are signing leases today. That's the market. So you do the best you can with what you're faced with with what's available currently. And then really the common theme, which I keep saying, is it's due diligence, it's preparation, it's hiring qualified partners and partnerships to make sure that you're doing the best you can to eliminate problems or at least cut them off at the pass.
Scott Nelson 44:19
With the idea of of interest rates, and you know, looking at them back four or five years ago, people are thinking about if they're looking into transact something today, if they're looking forward during this next year, maybe even beyond, what are some things they could potentially entertain or you see as a potential issue in that health care real estate transaction and how those individuals and organizations can anticipate and be prepared?
Colin Carr 44:41
Well, one of the questions comes up with rates right now people say well, should I be buying down my rate or, you know, how do I time it properly? And you can look at what the Federal Reserve has said they're going to do I mean, they they decided not to raise rates, you know, a few days ago, but they did say they're probably going to be doing two more quarter point increases. So you can assume that the Federal Reserve rate is going to go up, which is going to affect your loan interest rate. But, again, I don't think anybody assumes that rates are going to stay this at this level for more than a certain period of time. So you might have to have a higher interest rate, and then refinance it in two or three years. The question should I buy down, you know, my rate and so forth? For me, that's a great question and I can give a very simple answer, it's how long will it take you to break-even on the cost of buying down the rate versus just keeping it higher. And so like, for instance, again, just use super simple math, if it costs you $10,000 to buy down the rate and then you're going to break even on that $10,000 investment in year two, you know, what are the odds that you would want to refinance it for two years? Or what are the odds that it would go beyond there? That's where you get into should I do it now? Should I do it should do it later? Each of those questions requires like a specialized evaluation of all the other factors there. If you could break-even in six months, like, great, that's kind of a no-brainer. If it's going to take you three and a half years to break-even I'd say keep the money in your pocket, and hope that you're gonna refinance within say, three and a half years. Keep the cash, pay more per month, but don't pay it all upfront. So again, I think interest rates are just part of the equation. It's like, what if reimbursement rates are lower this year than they are next or last year? It's, you just have to do the best you can with what you have. And then you're gonna do what everyone else does, which is constantly re-evaluate, constantly adjust, and you're gonna pivot multiple times.
Scott Nelson 46:36
Well, that's a great point to conclude our conversation. Colin, thank you very much for your time and sharing your thoughts and experiences today. I really appreciate it.
Colin Carr 46:43
Absolutely. Thanks for having me.
Scott Nelson 46:46
Thank you for listening to The Risky Health Care Business Podcast. You can listen to all episodes from the resource center page of the SpringParker website, springparker.com, or click the Listen link in the show notes to listen and subscribe for free on your platform of choice. And remember, accelerating health care performance is achieved through creativity, not just productivity.