Commercial real estate for healthcare practices with Colin Carr

Dan King: [0:00] Hello everyone, excited to be here with another episode of your group practice and looking forward to a conversation today with Colin Carr, Dan King: [0:07] who's the founder of Carr Real Estate. Colin, welcome, would love you to tell the audience the basics of who you are and what you do. Colin Carr: [0:14] Yeah, thanks for having me. I appreciate it. So I am the CEO and founder of a commercial real estate firm that exclusively represents healthcare practices. We don't do any landlord or seller work, so we're never going to have a sign in front of a building. And we only advocate on the tenant or buyer side of the deal. So when you're looking at opening a location or practice, you're looking at scaling multiple locations, buying real estate, renegotiating a lease, Anything that has to do with real estate for your practice, we represent. Started in Colorado almost 17 years ago now, and today we are in all 50 states. We have over 5,000 healthcare practices that we're currently performing work and services for. So this is all we do. We're specialists at the highest level, and we have the privilege of protecting healthcare practices and helping them achieve the most favorable terms possible. Dan King: [1:05] So if I'm an owner of a mental health practice, let's say I've got some initial traction with my business, I'm a million to two million of revenue, let's say, what are the most important things I should be thinking about when it comes to real estate? Colin Carr: [1:18] So the first thing, and a lot of owners know this, but if you don't, real estate is typically going to be the second highest expense for your business or practice behind payroll. Every once in a while, some other costs will creep in there if you have huge capital equipment costs or something unusual. but typically real estate's the second highest expense. And the difference between a properly negotiated lease or a poorly negotiated lease, if you're leasing, can usually be a couple hundred thousand dollars over like a five, seven or 10 year period. And that one catches people off guard. They kind of go into these deals thinking there's like a generalized price that's fair. And if they get a good deal or an average deal, it's not going to make that much of a difference. But if you're in a couple thousand square foot space, let alone like an eight or a 10,000 foot space, and Colin Carr: [2:01] You are overpaying by, let's say, $3 or $4 a square foot, which is very easy to do. Even though the listing broker or landlord says, everyone's paying this, or here's what the asking rate is, we won't go lower. Those are statements that are not true. They're trying to get you at the highest rate possible. It's how they make money. And so if you're overpaying by $3 or $4 a square foot times a couple thousand square feet, it's not hard to overpay by a couple hundred thousand dollars over, again, a five, seven, or 10-year period. And then if you're not capturing the concessions that savvy tenants capture. Any lease you do should have several months of free rent. If you're going to give them a multi-year lease, which you're probably doing already, you should be capturing concessions like free rent, money to renovate or to dramatically improve or upgrade your space. There's a number of other economic and then business concessions that are on the table on every deal. And if you don't capture the height of those or as much as you should, you'll leave tens of thousands or literally hundreds of thousands of dollars on the table. And it's not going to put you out of business. It's not going to be a make or break for your practice, but it will mean that you're overpaying by $40,000 a year. Or you could have gotten a $60,000 or $80,000 free rent package that could have literally gone just to your bottom line or your own checkbook. Instead of paying rent, you could have paid yourself a bonus or a distribution to those several months of free rent. Colin Carr: [3:19] So it's concepts like that. If you miss it, it's not the end of the world for most people but it will hit you to the tune of 100-200 grand real quickly and if you can capitalize that it's a pretty big deal no question Dan King: [3:33] So how should I, if I'm a practice owner, how should I begin the process of trying to negotiate some of these points like free rent for a couple of months, Dan King: [3:41] renovation expenses? How should I negotiate those? Colin Carr: [3:44] So the first thing you should do is you should hire an expert. And the same reason that a patient would come to a provider for a specific service, I don't care if we're talking about mental health, we're talking about dentistry, we're talking about chiropractic, whatever it is, you go to the person that lives and breathes it, that's done it for their career. And then they're going to get superior results to the person that just tries it once every five years or 10 years or just dabbles. It doesn't mean you're not savvy. The savvy you are, the more intentionally you are with hiring the best people in every area. I don't know anyone who's successful that does their own taxes. You just don't do it. I don't know anybody that's their own attorney, unless you're an attorney by trade. You don't review your legal documents, you hire an attorney. So you start by hiring a really good real estate advisor or a broker or an agent. Synonymous terms based upon the state you're in. And then that person is going to come up with a strategy that helps you capitalize on your next transaction. A couple major pitfalls or areas where people make mistakes is they don't fully go to market. They don't have any idea what other landlords or sellers are offering. They just pick one property and they start negotiating. And the only The only basis they have for if it's a good deal or a bad deal is where that deal started, what they were asking as like the asking lease rate. But you still don't know if it's a good deal or a bad deal if you don't go to market and look at multiple other properties, negotiate with multiple other landlords or sellers, and really get a feel for what's capable or what's possible if you're properly represented and you have a strategy. Okay. Dan King: [5:12] So get proper representation, get some local comps, develop a strategy based Dan King: [5:17] on the gathering of that data. That all makes sense. But let's even take a step back and ask the broader question of renting versus owning, leasing versus owning. In behavioral health, most practice owners that we work with, they do not own. How could you begin the process of walking a practice owner through the journey of deciding lease versus own? Colin Carr: [5:38] Yeah, it's a great question. It's one of the top questions that we get asked. Here's my philosophy. I think people should look at all their options. It doesn't take literally more than 15, 20 minutes to look at your top purchase opportunities. Like even if it was just like 10 minutes inside of each property, or even if you just previewed them online, like in a Zoom call and you start showing people what's available, it doesn't take more than a few minutes to at least consider what's available. So our philosophy, when a client says, I want to be in this area, I need this much square footage that cures the range. Colin Carr: [6:08] And then here's some criteria that are important to us. Here's the parking we need. Do you want signage? Do you want visibility? What's the access? Do you want any neighboring tenants? Do you want certain elements in a real estate transaction that are more unique? We gather all the information and then we go to market and we find all of your top options. We find your top options to lease and your top options to purchase. Colin Carr: [6:28] We're not going to show you 25 properties. We're going to whittle it down. Whether we start with 20 or 50, we're going to whittle it down to your top probably five or six properties. But part of that every time, if there's an option available to purchase, sometimes there's not, but if there is, we're going to show it to you and we're going to show you what the numbers look like. And then you can make an educated decision. If you have a strong practice and you have the ability to own and your real estate needs are not going to change dramatically in the foreseeable future, like you could see yourself being in this size space or this size building for the next, let's say seven or 10 years, let's look at owning. And you might find that ownership costs the exact same as leasing, or it might cost less, or even if it costs a little bit more, if every month you cut a check to a lender versus a landlord, and every month your net worth grows by three or four grand because you're paying down principal, and you're picking up significant tax deductions that drive your income up because you're paying less in taxes, you're losing less money to the government, and then you're finding other things that are unique, like the building appreciates every year by a couple percentage points, and you've got other attributes that you don't have when you lease, that's at least worth looking at. Now, you might look at it and say, I can't afford it. It's not worth it to me. I don't like the option to purchase. But then you're not wondering. The thing that haunts a lot of practice owners is they'll do a transaction and then they'll find out two years later, Colin Carr: [7:48] They didn't get a good deal, or they thought that they had the best property, but it's really not a good property for a number of reasons, or it's really poorly managed, or whatever it might be. We're just trying to eliminate any of the guesswork, and we're trying to eliminate the, I should have done this, or what else is out there, or what about this? If you go to market with an advisor, you look at the top, let's say six, seven properties, you negotiate simultaneously on a non-binding basis on three or four properties, and your broker advisor is doing all of that. You're not wasting any of your time. They're just doing it and then bringing back the summary for you. So you're maximizing your most valuable commodity time. And then you go three or four rounds of negotiations with three or four landlords and sellers. And then you look at best and final terms after you know that you've scraped every concession off the deal. You've got the absolute lowest lease rates available. You're not going to wonder if you did a good job with what you had in front of you. You're going to know I got the best property. It's the one that I want to move forward with. If I'm paying extras because it's worth it to me. if I'm paying the best rates because it's what's available. But you take away the guesswork and then you capture peace of mind and then you can move forward in confidence and you can sign a five, seven or 10 year lease or you can buy the building and you can know that you made the right decision for your practice. Dan King: [9:01] Nice. Nice. That's a very thoughtful, intentional approach. Curious if off the top of your head, you have a sense in behavioral and mental health for your customers you've worked with and that's in our space. Do you find that people who own are typically owning just the space in which their practice operates? Or if they own, are they more likely to actually be a true landlord where they have other tenants? Colin Carr: [9:24] Yeah, I would tell you both. Me personally, and I've done dozens and dozens of behavioral health, mental health facilities. I've done everything from the individual person that wants a 500-foot office to where we've done 10,000 square foot plus facilities that have 30 or 40 offices in them. So I've done everything in between. We've helped a lot of people lease. This thing is going to be way more prevalent in commercial real estate than purchasing just because it's what's available. Like in residential, there's always another neighborhood. You could always drive a little further. There's always new construction happening somewhere for the most part. In commercial, like if you say, I want to be in this city or this area, there might not be any more land available. There might not be anything for sale. So supply and demand plays a big role in it. But we've done everything. We've helped people lease spaces that are small, lease large spaces. And then we've helped people buy just their individual space because you can buy office condos and a lot of commercial markets. So just like you would go and buy maybe like a three bedroom condo in a building, there are commercial properties where you can go buy a 1500 square foot space that has, let's say five offices and a conference room and a break room and buy just one portion of a building. We also people that buy, you know, larger buildings and they occupy the whole thing. And then we have people that buy buildings that have multiple spaces that they lease out and they are the true landlord. Like you said, maybe they occupy 5,000 square feet and then they have another 5,000 square feet that they lease to like two or three other tenants. Colin Carr: [10:50] So essentially everything. And that's what we look at. When we go to market, we look at every option and we can usually narrow down very quickly based upon what the client likes, Colin Carr: [10:59] What they have, the ability to afford, the different attributes of a property. Hey, that property, the money works, but I don't like the quality or I don't like the area, or I love that property, but I can't afford that building. It's just too expensive. And so we can usually show them their options, narrow down pretty quickly, and then target the top options that fit quality-wise, financially. From a longevity standpoint, I could see myself here for 10 years, but it's really everything that you just asked for. Dan King: [11:26] Our experience generally is that most of the practices we look at are leasing. When I do see ownership, once in a while, I will see a true landlord where they're almost excited about the fact that it's a separate business, right? Commercial real estate is not the same as behavioral health. You are a trained clinician. You don't know how to run a commercial real estate business. And yet, you know, some people do and they enjoy it. That's very much the minority. The vast majority of practices that we look at are leasing. Yeah. Colin Carr: [11:53] You know, it's one of those things where it's like a lot of topics that seem confusing or elusive until you get in there. And then you just learn kind of like, you know, just trial by fire, if you will. You might say, well, I don't want to manage my own property. There's really great property managers out there that will do it for very reasonable pricing. Colin Carr: [12:13] You might try it for a season and then realize like, hey, this is not that big of a deal. Or I already have an accounting staff that handles this or I already have an accountant or a controller. Colin Carr: [12:21] It's not that hard to get a direct deposit from two or three tenants every month. And as long as there's no major issues, it's not a big deal. I'm already taking care of all of the building maintenance for my practice because we occupy it. And then other people will get in there and just say, I don't want anything to do with this. I think a lot of it depends on strategy. Some people will say, I just want to stay focused on my main practice. Other people will realize that that in a lot of scenarios, the real estate will be worth more than your practice will be. And so you can get after it and you can find yourself in a place where you used your practice to capture the most favorable terms financing-wise. And over a 15, 20-year period of time, you have an asset paid off free and clear. Because commercial loans, by the way, are typically 15, 20 years, not like residentials 30 typically. So you pay off the building faster, you're paying down principal at a much higher rate, a lot more of your payment goes to actual equity. Colin Carr: [13:12] And every month, you see your net worth just going up and up and up. It can be pretty enticing to say, look, I got to pay rent somewhere. I can either pay a landlord or pay my lender. I've got to occupy somewhere. I can either be a tenant or be an owner. It might take a little bit of time to figure out how to run a property, but it's not a full-time job. It's not like you're running a portfolio of 25 properties or you have 100 tenants in a building or it's an apartment complex with 100 tenants. It's either just me or maybe me plus a few people. If you have an appetite for it. It's like a lot of things. If you're willing to diversify a little bit, it can end up being one of the greatest wealth trading mechanisms that you bring in there. Colin Carr: [13:50] It can just be another financial arrow in the quibber, if you will. Dan King: [13:53] Well, and this brings up two other subjects to dig into with our remaining time. One of them is, so let's say I'm an owner of a behavioral health practice. I see in my area the opportunity to own real estate that I'm either currently practicing out of or not yet. How do I qualify for a mortgage Does my personal credit score matter just like I would with a residential mortgage? What are the criteria that I need to think through in terms of qualification? Colin Carr: [14:20] Yeah, it's a great question. So you can reach a place eventually where if you have a large enough practice, they'll base it solely on the financials of the practice. But 95% of the time, you as the owner of the business are still going to have to be involved as a personal guarantor. It's very similar to a lot of things. It's very hard to get someone to give you money if there's not a personal signature. I don't care if it's an auto loan, a student loan, a credit card, a mortgage. If you're capturing credit or financing, typically it's tied to at least one person. And so your personal credit score, your personal financial statement will impact it. The stronger the practice, the easier it becomes. So if you have no practice and you're getting ready to start, it's going to be 100% based upon who you are as an individual. If you have a healthy practice, it's going to be weighted practice and you personally. But here's the deal. Most lenders that focus on any realm of healthcare, they love healthcare. They want healthcare deals at a higher rate than they want a restaurant or some other random use. The success rate of healthcare practices and providers, depending on the industry, Colin Carr: [15:24] Is so much higher than most commercial businesses, whether it's industrial, office, retail, et cetera. And so there's really favorable financing available. Here's where it gets interesting. If you know which banks to talk to, the process is very simple. If you don't, it can be like just hitting your head against a wall. And so like a lot of things, if you know who to go to and who to talk to, you can turn the process of what seems confusing into a very simple, very straightforward process. And it depends on who you are. Like there's certain types of transactions for healthcare practices where if you have a robust practice, there's 100% financing available to you. If you have a very healthy practice that kicks off a very healthy profit each year and there's equity in your practice, you either have little or no debt in your practice. We have a couple of lenders that you probably are never going to find. You don't know who they are because they're very specialized, but they'll do 100% financing. They'll use the equity of your practice as collateral for the loan and they'll lend you 100% of the purchase price plus money to build out the space plus working capital. Colin Carr: [16:27] And so if you just walk into like the corner, like bank branch on a corner street in your area, they may or may not be a good fit. Most banks will offer financing, but there's a huge difference between a specialized lender that really understands it and then the generic lender that says, yeah, we lend to healthcare. We love healthcare practices, but they don't really specialize. You're just one of 50 types of uses. And so long story short there is, and I'm not trying to make this mysterious, but there are specific lenders for specific types of transactions in specific markets. Like I'm in Colorado. If you were an individual owner in Colorado of a mental health or behavioral health practice, I would put you in touch with two or three specialized lenders that if you Googled, you're not going to find them in the top 10 or 15. They're really unique. They're not a depository like a Chase or like a Bank of America. They're going to be specialized. They're going to be one, two, or three branch locations. They're going to take a much more relational approach towards the loan, but they do a really good job with individual business owners. Whereas the large banks, they want deposits. They want you to check in and say, these are them. They want to do a car loan for you. They want to do your HSA loan. They want your 529 plan for your kid's college. Dan King: [17:37] And your firstborn. Colin Carr: [17:39] Yeah. These banks don't want that. These are specialized banks that say, look, we want real estate loans for high caliber business owners. We're not looking for a national business. We're looking for localized business. That's who they want to do business with. And so then those guys put together loans that are unique. And it goes from where you think you can't own to all of a sudden being like, I should have looked at this 10 years ago, or if I would have only known this was available and it changes the game. Dan King: [18:04] Awesome. Well, that's, that's huge value adds. So definitely something for folks to look at. And do you have the ability to, had you had lender relationships nationwide for folks that are all over the country? Colin Carr: [18:14] We do. Yeah. Cause there's, I mean, like in Colorado, I can think of three lenders right now that are only in Colorado. Like they just, they're just Colorado specialized banks. One's a credit union, other two are smaller. They're great banks. And, but that's what they do. Now, if you were a veterinarian and you were doing a startup, I'd have different lenders for you. If you were a dentist or certain types of uses and you were doing a certain transaction, it changes the narrative. Like there's some banks, if real estate's not involved, you should not be talking to them. They're real estate lenders. 99% of their loans are real estate. Anything besides real estate, they're not going to be a good player. And so... There's times when you have to go SBA. There's times when you should never go SBA. It just depends on the type of transaction. So it's pretty simple. Most of our advisors are pretty savvy in this area. And they're not going to pick for you, by the way. They're going to introduce you to two or three lenders. They're going to encourage you to go through the process. Rates change. Lenders motivations change. The loans on their books, their balances change. And so you'll find lenders that shift even on different months of the year. They're more competitive than other months. And so it's always best practice, just like real estate. Don't just choose one up front. Go look at two or three lenders, talk to two or three people, and then see what they have to offer. And then when you choose one and you move forward, you don't have to wonder if it was the best deal possible. Dan King: [19:31] Absolutely. It makes total sense. And last substantive question for you here. You mentioned a little while ago about how if you're a behavioral health practice owner, you buy the real estate, that could be an asset that's worth more than your practice. That's a really important point. And I run an acquisition firm, so we're investing in practices. We're buying practices. We don't look at real estate, but many do. There's a range of buyers and investors that are going to be more interested in your business if you have the real estate as well. And so the range of financing options available to buyers and investors is going to be greater if you have that real estate. Speak to that a little bit. Colin Carr: [20:09] Yeah, you know, it's a great point because... There's two philosophies. When it comes to larger acquisitions or service organizations that are acquiring or syndicating lots of practices, a lot of those groups don't want to own the real estate. They just want to buy the practice and they want to keep as much capital for the practice as possible, but you have a lot of options. Let's say that you own the real estate and then you sold your practice to a larger group. You can either keep that real estate and just cash flow it or even pay it off and have a tremendous asset, or you can sell it on the investment market. it. If anyone buys your practice, you're going to write at least a five-year, if not a seven, 10, 12, 15-year lease to the group that buys your practice. That's how it works. And so if you want to hold the real estate, you can. If you want to flip it to an investment group, you can. It's very marketable. Almost every Chick-fil-A you drive by is not owned by Chick-fil-A. It was built by Chick-fil-A or a developer, and then they sold it to an investment group. Same thing that Starbucks does, same thing that almost every fast food does. A lot of the banks do the same things. Colin Carr: [21:09] There's always an extra strategy. You can sell the real estate to the person who buys the practice if they want it, because some groups do. You can hold on to it and it can just be another annuity or another income stream, or you can sell it to a large group. As far as the philosophy, we see it across the board. We see some groups say, I have to own the real estate with the practice. That's a smaller group, but there are groups out there that they won't buy the practice with the real estate. Most of the groups will say, I'm open either way. If it comes with it, I'll buy it. If not, we'll do just the practice. And then there's everything in between. So I would tell you this, it's not going to hurt you to own the real estate. And I'm not pushing you to own the real estate. You might say, I like the flexibility of leasing. Colin Carr: [21:47] I like the free rent. I like the fact if I want to move, it's easier. I like the fact that I can just show up and then go home or I don't have to touch anything from a maintenance or management. It's just way easier on my lifestyle. But I would tell you to look at your options and then if owning makes the most sense or you have an appetite for it, you're gonna have an exit strategy, the buyer of the practice, you hold it or you sell it on the investment market. But it's very rare that you end up in a place where you just have a building that no one wants. Like that's probably not gonna happen. Dan King: [22:13] Just quickly, because I'm curious, why would the norm for Starbucks or Chick-fil-A be to sell that real estate rather than hang on to it? Colin Carr: [22:20] It just all comes out of capital. It just comes out. So what they'll do is a developer will build them. So if Chick-fil-A wants to be in a specific location and there's nothing else available, a developer owns it, they have no choice. The developer will build it. They'll do a 20-year lease with like X number of options or they'll do a land lease. And then they'll monetize that lease and they'll sell it with a huge capitalization rate to where that real estate plus that building is worth a certain amount. But if there's a 20-year lease to Chick-fil-A and Chick-fil-A corporate backs it, all of a sudden that real estate is worth two or three times more than it is just in its current state. So if the developer owns it, they're going to flip it and they're going to sell it for the highest margin they can through a capitalization rate. So you capitalize a practice. If Chick-fil-A does it themselves, they will hold on to some, but typically they're going to flip it because they know that they can make a ton of money. They buy a piece of ground, they build a building, and then they write a 20-year lease with themselves with X number of options. Colin Carr: [23:17] And again, they can turn around and they can make $2 million on a sale on real estate. And so it's a capitalization game. So the whole idea, it's an income producing asset that you can put a multiplier on. So just like you buy a practice, it's not the building with office spaces there. It's the fact there's a building with office spaces there that kicks off X number of million in revenue and X number of dollars in profit. When these practices sell, it's a multiplier. It could be the gross revenue, but it's usually a multiplier of EBITDA for a reason. It's a multiplier of the net operating income for these practices. The higher the net operating income, the higher the sale price, Colin Carr: [23:53] the higher the multiplier. It's all a capitalization game. Dan King: [23:56] Makes sense. Colin, this has been super educational. I am very confident mental health practice owners will learn a ton from this. We always like to end on a human note. We've been talking about real estate. When you're not busy with your healthcare real estate business, what do you do for fun? Colin Carr: [24:12] Yeah, I appreciate that. I've got an amazing wife and two awesome kids, 14-year-olds and 17-year-olds. Love to travel, love to spend time with them. Coming up on Thanksgiving right now, we'll probably play no less than 200 games of ping pong and other things this week. It's going to be a family week, a lot of family time. Dan King: [24:31] Awesome. Enjoy. And it was great having you. Colin Carr: [24:33] Thanks, man. I appreciate it.