1.1 Twelve Years of Education and Yet…

Twelve years of education went by and now you have fulfilled your dream of becoming a dermatologist! You know every minute detail about psoriasis, graft-vs-host disease (GVHD), acne vulgaris, and rhytid treatments. Yet, none of the high-powered, Nobel Prize-winning, medical scientists mentioned anything about business acumen. It feels as though someone taught you the most beautiful peanut butter and jelly-spreading technique but neglected to mention that you need bread. Most well-trained dermatologists successfully graduate from residency but are completely devoid of the knowledge required to open a practice.

Alternatively, you may be an established dermatologist who is in the process of adding new physician partners, or a professional who opened a practice sometime back that has been so wildly successful that your patient base and business offerings have outgrown the space that was sufficient for a young budding dermatologist. If you are to continue to grow, you need a larger location, a relocation, or an expansion. With real estate prices skyrocketing and the multitude of leasing options rising correspondingly, making the right decision has become an increasingly muddled proposition. Any self-made entrepreneur will tell you that you learn business dynamics on the go. However, there exists an opportunity to educate practitioners a little bit in advance about the nitty-gritty of the business of dermatology. This resource aims to carry out a discussion about the bricks and mortar of your practice.

1.2 Location, Location, Location

The location of your practice not only sets the tone but also defines many of the qualities of your practice; after all, it serves to be your stage, where your actors perform in front of your audience. Differences exist with regard to establishing a practice in a medical center, university town, urban mecca, or strip mall. Location determines the patient population to which you should cater. For example, if you are passionate about treating melasma, an ideal location would house a significant population with darker skin. Alternatively, a practice primarily focused on lasers and energy-based devices may benefit from an urban city environment to effectively fulfill practice demand. Neighborhood competitors should also influence decision-making. If every surrounding office performs the same procedures, then that market is likely to be saturated and will be less fruitful in terms of the growth of your practice.

While not impossible, relocating a practice requires time, money, and a potential loss of patient volume. On average, it costs thousands of dollars to move one clinic room to another state. These costs sequentially rise when considering the expenses required to move hefty lasers and other devices which form an integral part of the practice (see also Chapter 2). When you add in zoning for medical facilities or the pursuit of class A office space, these costs climb even further.

1.3 Buying versus Leasing 101

It is important to analyze the two forms of financing: buying or leasing. The eventual choice will instill different dynamics in your practice. Buying real estate can be very complex on account of the sizeable time, research, and planning required. However, it offers the opportunity to build equity, make your expenses more predictable, customize your business as it evolves, and even gain tax advantages. Owning a building is also a long-term investment that can one day be sold separately from the medical business or passed on to a prodigy. In some situations, it is also possible to become a partial owner of a building if you have relationships with international property companies. Alternatively, leasing allows flexibility, greater liquid assets over capital to divert to other areas of the practice, and fewer maintenance tasks for a busy dermatologist.

The decision to buy or to lease a property can be difficult for even the most business-savvy dermatologist because there is no one-size-fits-all formula. There are several key concepts to survey prior to pursuing any business decision, such as costs, risks, and specific practice needs. Although it may sound excessive, a team of experts may be the best choice to help in making an educated and informed decision. These experts include commercial brokers, mortgage brokers, accountants, and lawyers. ¹ Their firms may be local, regional or national. It is also advisable to choose firms that are experts in the medical field due to the unique laws surrounding medicine and medical practices that can impact endeavors such as renovation (i.e. there must be a sink in every room). Commercial brokers help to locate potential properties in your price range that meet your needs. Mortgage brokers can aid in financing needs and arm you with knowledge about down payment requirements, mortgage rates, commercial real estate loans, and so on. Accountants can assess practice revenue, help create an appropriate budget, provide insight on tax benefits, and forecast your operating budget. A legal representative can negotiate terms before you sign that contract and help complete the entire transaction. Overall, when considering the alternatives of buying versus leasing, it is important to keep the primary goal in mind: higher revenue, lower costs.

1.4 Are You Ready for Commitment? The Pros and Cons of Purchasing Office Space

Purchasing is a long-term commitment that requires a hefty down payment. ^{1 , 2} The cash upfront can range from 20 to 25% of the property value. In urban cities, estimated property value can be around $15 million without even considering Class A highly sought locations. For this reason alone, many early career dermatologists elect to lease their office space, as resident salaries have not quite adjusted for this. However, those electing to pursue their practices in suburban or lower traffic areas, this overhead is less prohibitive as the property values entail a lower cost per square foot. The cost of down payment in an urban city may equal the cost of an entire office space in the Midwest. In these places, purchasing may be a viable option but it may also cater to a different clientele. As such, practice goals and expertise are extremely relevant and intertwined.

Office real estate value is also subject to fluctuation and appreciation like any other real estate, in accordance with the general economic situation of the area. For example, during the financial crisis in 2008, consultants more frequently recommended purchasing property as values were significantly lower than in previous years. Typically, the office value will appreciate over a career lifetime and the appreciated value of the property can then be passed to subsequent generations. ³ However, due to the time factor, this asset should not be incorporated into a practice’s overall revenue. Times of financial crisis also increase the difficulty of obtaining loans if required which should also be taken into account.

A primary advantage of purchasing an office space is an increased understanding and control of total costs. Typically, commercial mortgage payments are locked-in for long-term periods. ² Moreover, you are provided with the property of flexibility in your space. You can also modify your office as the need arises rather than engaging in long-term wrestling with a property manager. Besides, you have the freedom of choosing any maintenance contract and insurance company without fear of violating a leasing contract. However, even though base costs are fixed, an owner is liable for all extraneous building-associated expenses. This includes operating, maintenance, capital improvement, real estate, alterations, insurance, landscaping costs, and other costs. ^{2 , 3 , 4} Luckily, these costs can incur benefits as well in the form of tax deductions. ^{2 , 4}

Another important factor to consider is the projected geographical future of your practice. Purchasing an office space becomes impractical if, for example, your family is in, or considering relocating to, a different state. Purchasing effectively grounds you to your office space unless a buyer or renter is easily accessible, making it an arduous task to then try to relocate again.

In summary, purchasing your office space is a big investment that requires a lot of capital upfront; however, the primary advantage involves the ability to establish your practice in your own way. You can create a business from the ground up, building, decorating, and operating without restraint. However, it is important to understand that the cash paid upfront is completely removed from the cash flow of your practice. If you do not possess the resources to fully invest both in acquiring an office space and in operating the said office space (staff, lasers, devices, etc.), and it is advisable to consider leasing options.