Commercial Real Estate Rookie Mistake?

[Ryan Cazares]

I'm an optometrist, and I recently purchased a piece of land $326K. I put down about $77K. The loan is for 5 years with an inflated payment at the end of the term.

The initial goal was to build a clinic (instead of renting like I currently am). I'd also rent out a space to a tenant or two. However, construction costs are atrocious, so much so that I'd rather stay where I am and invest in homes instead. My part of the mortgage would be triple my current rent.

What would you do with the land in this situation? I put it back on the market, but curious what others think.

[James Storey]

Hey Ryan,

As someone who works with clients in this situation all the time (I specialize in healthcare), construction cost, even today, rarely effect the decision to build. Since you and your partner took the initiative to purchase the land, you must have had some sore of business incentive for you to want to build your own clinic, correct? As an example, I am currently building a ambulatory surgery center for one of my clients in Indianapolis. By him leaving his current center, his share of revenue goes from less than 30% to almost 95% in the new center. Even with double the mortgage payment, the business is by far more profitable having its own center regardless of the construction cost. In other words, his alternative is to maintain as a micro share owner. Now, I agree, construction cost is currently out of this world but its just a mere fluctuation just like everything else with growing demand after the pandemic. 

My advice is that if the new clinic doesn't drastically improve the profitability, operations, or enjoyment of your business, I would sell off the land. However, if their is a big loss by not building the clinic, I would suggest reviewing and analyzing the alternatives.

James Storey, CCIM