Understanding the Hidden Costs: Beyond the Purchase Price
When purchasing a dental practice building, the purchase price is just the beginning. While the initial purchase price is often the most visible expense, numerous hidden costs can significantly impact your budget and cashflow planning. Understanding these hidden costs is crucial to avoid financial strain and ensure that your property investment remains sound in the long term. In this blog, we will explore the often-overlooked expenses associated with purchasing a practice building, helping you prepare for a smooth and financially stable acquisition.
The Real Cost of Ownership
The true cost of owning a practice building extends far beyond the initial purchase price. These additional costs can vary depending on factors such as location, the building’s condition, and your specific practice needs. By understanding and planning for these expenses, you can avoid surprises and make more informed financial decisions.
Key Hidden Costs to Consider
1. Closing Costs
Closing costs are an inevitable part of purchasing a building, often adding 2%-5% of the purchase price. These costs include a variety of fees associated with finalizing the real estate transaction.
Property Inspection: Immediately after you have a signed purchase contract from the seller you will want to order a property inspection report. This very thorough report should review the exterior and interior of the subject property. The report will help you understand the effective current condition of the property, and its component systems: the effective age of everything from the concrete to the roof, to the internal electrical and HVAC systems. This report will also help you understand any needed repairs or replacements. The cost of these repairs should be negotiated and deducted from the purchase price.
Legal Fees: You’ll need to hire an attorney to review contracts, handle legal paperwork, and ensure the transaction complies with local laws. Legal fees can vary depending on the complexity of the transaction and the attorney’s experience. Most often they are charged hourly with a deposit often called a “retainer”. If you pay a “retainer” confirm in advance that it is refundable if the hours equal to the “retainer” are not used. Ask for detailed hourly billing to confirm your billing is fair and accurate.
Land Survey: A survey is necessary to confirm the boundaries of the property you are purchasing. It also outlines any easements or encroachments onto your future property. In addition, it confirms the physical location of your building on the actual real estate. Which can help you understand if the property was constructed according to local ordinances and building codes. For example, it may show the presence of a water, power, or sewer line running under a portion of your property where you had previously planned to expand your building. It may also show that a neighbor’s fence has been built on your property in error.
Title Insurance: This insurance protects you and the bank from any legal claims against the property, such as undisclosed liens or disputes over ownership. The cost is typically based on the value of the property.
Appraisal and Inspection Fees: Before receiving your final underwriting approval, a bank ordered property appraisal is required to confirm its value. You will need to confirm the appraised value with the bank. It is recommended that you have a clause in your purchase contract to pay the lower of the negotiated purchase price or the current appraised value. This protects you as a purchaser from overpaying for a property and may commit the seller contractually in advance to a fair price.
Recording Fees: These are fees charged by local government offices to record the change of ownership in public records.
2. Renovation and Repair Costs
Even if a building appears move-in ready, there may be hidden issues that require attention before you can fully utilize the space. This is one of the reasons a property inspection report is so important.
Structural Repairs: Issues such as a leaky roof, outdated plumbing, or foundation problems can lead to significant repair costs. It’s important to factor in these potential expenses when budgeting for your building purchase.
Interior Renovations: Customizing the interior to suit your practice’s needs—whether it’s creating additional treatment rooms, upgrading electrical systems, or improving patient waiting areas—can also add significantly to the overall cost. Even minor updates, like repainting walls or replacing flooring, can add up quickly. It is important to have a detailed design budget if you already know you will be conducting more than cosmetic renovations.
Compliance Upgrades: Dental/medical practices must adhere to strict regulations regarding patient privacy, accessibility, and safety. Ensuring that your building meets these standards may require additional renovations, such as installing ramps for accessibility or updating facilities to meet HIPAA compliance standards.
3. Maintenance and Operational Costs
Owning a building comes with ongoing maintenance and operational expenses that are often underestimated.
Routine Maintenance: Regular upkeep, such as HVAC servicing, plumbing maintenance, and landscaping, including snow or water removal, is essential to keep the building in good condition. Neglecting these tasks can lead to more significant, costly repairs down the line. Many maintenance costs like landscaping are monthly recurring costs that should be added to an ongoing practice budget accordingly.
Utility Costs: Heating, cooling, electricity, water, and waste disposal are significant ongoing expenses, especially in larger buildings. It’s important to budget for these operational costs, which will vary based on the building’s size, age, and efficiency.
Insurance: Property insurance is a must to protect your investment against damage from fire, theft, or natural disasters. The bank will require that you maintain a policy equal to or greater than the purchase price. Depending on your location, you may also need additional coverage, such as flood insurance.
4. Property Taxes
Property taxes are a significant annual expense, particularly in high-value areas. The amount you owe will depend on the property’s assessed value and the local tax rate, which can fluctuate over time.
Assessment Increases: Be aware that property taxes can increase if the local government reassesses your property’s value. This is particularly common after significant renovations or in areas where property values are rapidly increasing.
Budgeting for Taxes: It’s important to include property taxes in your long-term business financial planning. Because taxes are most often not escrowed with commercial property loan payments, it is important to remember and save for that large annual or semi-annual bill.
5. Financing Costs
If you are financing your building purchase with a loan, the cost of borrowing will add to your total expenses.
Interest Payments: Over the life of a loan, interest payments are significant. The total interest paid depends on the loan’s interest rate, term length, and the amount borrowed. In addition, be sure to review the maturity of the interest rate in your loan documents. Loans can have an amortization term that is much longer than the period in which their initial interest rate is fixed. For example, you can have a building with a 20 or 25 year amortization where the interest rate matures in a shorter amount of time, like 5, 10, or 15 years. This is called a “rate call”. The new interest rate can be either higher or lower than the current interest rate. This has a direct impact on your interest payments.
Loan Fees: Lenders may charge various fees, such as origination fees, application fees, and prepayment penalties. These fees can increase the overall cost of financing your purchase.
Preparing for the Hidden Costs
Understanding and preparing for these hidden costs is essential to ensure your practice remains financially stable after purchasing a building. Here are some steps you can take to prepare:
Conduct a Thorough Inspection: Before purchasing, have the building thoroughly inspected by professionals to identify potential repair and renovation costs. This information can help you negotiate the purchase price or plan your budget accordingly.
Get Multiple Quotes: For any anticipated repairs or renovations, obtain multiple quotes from contractors to ensure you’re getting a fair price. This will also help you budget more accurately.
Plan for the Long Term: Include all potential costs—such as taxes, maintenance, and utilities—in your long-term cash flow budgeting. Setting aside a contingency fund for unexpected expenses can also help protect your practice’s financial health.
Consult Business Financial Consultants: Work with business advisors who specialize in dental/healthcare practices to create a comprehensive business plan that accounts for both the visible and hidden costs of ownership.
Conclusion
Purchasing a practice building is a significant investment, and understanding the hidden costs beyond the purchase price is important in making an informed decision. By thoroughly evaluating these additional expenses—such as closing costs, renovation and repair costs, maintenance, property taxes, and financing—you can create a realistic budget and avoid financial surprises. This comprehensive approach will help ensure that your new building is not only a great place to practice, but also a sound real estate investment for your future financial wellbeing.
