Owning Your Building: Sale-Leaseback and the Doctor Lease Back Model

Most physicians rent their office space for their entire careers. Every month, a large check goes to a landlord, and at the end of the lease the practice owns nothing. In The Dark Side of Medicine, Dr. Siddiqui lists rent or mortgage among the top expenses of any practice and is clear about his preference.

“Ideally, you’ll want to own your own building, of course.”

This guide explains why physicians consider owning their real estate, how the lease-back structure works, what a sale-leaseback is, and the legal and tax caveats that go with both.

Why physicians consider owning their building

• Control. In the book, Dr. Siddiqui points out that when you own the building, you can knock out a wall to add a treatment room without asking a landlord's permission or renegotiating a lease.
• Equity instead of rent. Mortgage payments reduce debt on an asset that may appreciate. Rent builds nothing for the tenant.
• A second source of income. If the building has more space than the practice needs, it can be leased to other physicians. The book describes building space out to suit and renting it to doctors who cannot afford, or do not want, to own their own.
• Options at the end of a career. When you retire or sell the practice, the building can continue to produce rent from a new tenant, or be sold separately.

Ownership is not right for everyone. Early in a career, cash is scarce and the practice's needs may change quickly. The book acknowledges that a starting physician may have to rent until ownership is financially feasible.

The lease-back structure

The structure Dr. Siddiqui describes is straightforward in concept: the physician owns the property through one company and leases it back to the medical practice, which is a different company. In the book he explains it as a lease-back to yourself through two different corporations, to limit risk and to make the most of legitimate deductions.

In general terms, the separation does several things:

• Liability. If the practice is sued or runs into financial trouble, a building held in a separate, properly maintained entity is generally better insulated, and the reverse is also true. How much protection you actually get depends on state law and on respecting the separation in practice.
• Flexibility. The practice can be sold, merged or joined by new partners without transferring the real estate, and the building can have different owners from the practice.
• Clarity. The practice pays rent as an ordinary business expense and the property company reports rental income and its own expenses, such as mortgage interest, depreciation, property taxes and maintenance.

Dr. Siddiqui founded the Doctor Lease Back program, which grew from this idea and helped physicians strengthen their practices and their personal finances. The details of any individual arrangement depend on the property, the practice, the physician's other plans and state law, which is why the structure always starts with advisors rather than a template.

Sale-leaseback: unlocking equity you already have

A sale-leaseback is the mirror image. A practice or physician that already owns its building sells it, often to a real-estate investor, and simultaneously signs a long-term lease to stay in the space. The practice gets cash from the sale and keeps operating in the same location.

Physicians consider a sale-leaseback to fund an expansion, buy equipment, pay down debt, buy out a retiring partner or prepare for retirement. The book also notes that a building with a reliable medical tenant can attract buyers when the owner is ready to step away.

The trade-offs are real:

• You give up future appreciation and control of the property.
• Investor leases are often long and “net,” making the tenant responsible for taxes, insurance and maintenance, with scheduled rent increases.
• The sale may trigger taxable gain, including recapture of depreciation already taken.
• If the practice later shrinks or moves, the lease obligation remains.

Read a sale-leaseback offer the way you would read an employment contract: as if you will need to leave before the lease ends.

Fair market value, tax and the fraud-and-abuse laws

Rent should be at fair market value. When you are on both sides of a lease, it is tempting to set rent wherever it is convenient. Resist that. Rent that is too high or too low can be challenged for tax purposes and can be unfair to co-owners. Many physicians obtain an independent appraisal or broker's opinion of market rent and document it.

Self-rental has special tax rules. Rental income is ordinarily treated as passive for federal income tax purposes, but special rules can recharacterize rent from property leased to a business in which you materially participate. Depreciation, interest and entity choice also affect the result. This is squarely a question for your CPA.

Stark and the Anti-Kickback Statute can apply. If the people on one side of a lease are in a position to refer patients to the other, for example a building owned by physicians and leased to a hospital, imaging center or another practice they refer to, federal law requires care. Both the Stark Law's rental-of-office-space exception and the Anti-Kickback Statute's space-rental safe harbor look for similar features: a written, signed lease of at least one year that specifies the premises, rent set in advance at fair market value, and rent that does not take into account the volume or value of referrals. Rent per patient or per procedure is a red flag. Healthcare counsel should review any lease between parties who refer to each other.

Financing and practical risks

• Financing. Owner-occupied commercial property is often financed with a conventional commercial mortgage. The U.S. Small Business Administration's 504 loan program is designed for owner-occupied commercial real estate and major equipment. Lenders will look at both the practice's cash flow and your personal finances.
• Concentration. Your income and a large share of your net worth would depend on the same location and the same business. Think about what happens if the practice moves or the local market changes.
• Operating responsibilities. Owners deal with roofs, parking lots, code compliance, insurance and vacancies. Budget for capital repairs and consider professional property management.
• Brokerage costs. The book describes Dr. Siddiqui's surprise at the commission on his first office purchase, which led him to study real-estate brokerage himself. You do not need to go that far, but you should understand every fee in a transaction.

Educational information only — not legal, financial, tax or billing advice. Consult qualified advisors. Laws and payer rules differ by state and change often; the descriptions here are general.