When cholesterol goes down in older people
Buying into premises is a great opportunity, says Dr John Couch here he explains why
is a great opportunity,
says Dr John Couch
Around 50 per cent of partnerships own their practice premises. There have always been mixed feelings among young GPs about the merits of this. In recent years, with trends for portfolio careers and the numbers of female GPs increasing, the 'ball and chain' view has multiplied.
For the new principal who has committed to a partnership, however, a share in business property is still very much of an opportunity. Provided it is approached with care you are unlikely to regret it.
So what are the disadvantages? Many new GPs are wary about committing to one practice for their whole career. With this in mind a premises share seems a commitment too far, complicated to set up and to exit.
In fact, provided two key features are in place this need not be a problem. The first is that a new partner should not be expected to buy in until at least after the mutual assessment period. The second is that there must be a clear 'buy-out' clause in the practice agreement which guarantees that a property-owning partner's share is purchased by the remaining partners (or incoming partner) within a defined interval after leaving, usually a minimum of one year.
The extra financial obligation can also seem a substantial burden. Buying in will cost on average around £150,000. A time of high monetary demand from mortgage, student debt and perhaps children makes this seem unsustainable. All principals buying a property share feel exactly like this, but most soon change their mind when the financial mists clear.
There are also the costs of repairs and improvements to consider. If a new roof or alterations are required the cost will fall on the property owners. The work required to meet the new Disability Discrimination Act (DDA) is another factor that has worried many practices. In fact, major repairs do not come up frequently and there are often improvement grants available for a large proportion of costs. Improvements usually generate extra rent reimbursement and once again grants may be available. A proportion of the cost of the DDA has also been funded via PCO grants.
The most important advantage is financial. I have yet to meet a property-owning GP who does not think that buying a premises share has been one of their best financial investments. This is given extra weight by the hordes of private investment companies vying to buy or build GP premises. They know that the guaranteed rental return is good business.
The keystone is rent reimbursement. The NHS pays the owner of a practice building a rent based on local rental values and floor area. This is revalued every three years and almost invariably rises. Therefore if the cost of a £150,000 standard repayment loan is £900 per month and each partner's share of the rent reimbursement is £1,000 per month, a new principal buying in is already making a profit. While this is not always the case these figures are realistic at current interest rates and rental values.
As time passes the rent reimbursement will slowly rise, thus increasing profits. Once the loan is paid off, the rent is all profit and in the example above a £12,000 annual rent on a £150,000 investment is an 8 per cent return. Where can you get that level of interest and security elsewhere?
Do not forget also that in the medium- to long-term the capital value of the property should increase. A long-term average of 4 per cent to 5 per cent per annum is not unlikely. This can make a very nice nest-egg if the share is held up to retirement. Capital gains tax will apply but allowances and reliefs reduce the effects. The only downside is the risk of short-term property value falls if a principal leaves after two or three years.
There are other advantages. Partnerships owning their own premises have more autonomy in terms of changes to the building and land. Property ownership may also engender greater partnership stability ('the mortar between the bricks' as my old senior partner used to say).
Prepare in advance
You should have been made aware of any obligation to buy a property share during the negotiations to join your new partnership. If so you should also have checked out the following, many of which should be covered in the existing practice agreement.
· When is buy-in expected to occur?
· What proportion are you expected to buy?
· What is the current level of rent reimbursement?
· What is the latest property valuation?
· What is the basis of valuation?
· Is there a set format for dealing with disagreements in valuation?
· Is there a set format for disposal of property shares on leaving?
If you have done this there should be no surprises when the time comes. Normally you will be expected to buy a share of the premises in proportion to your profit share. A fresh valuation will need to be commissioned either jointly with the vendor or, if you are unable to agree on a valuer, separately.
You should agree the basis of valuation (ie as a GP surgery, business premises or 'open market value') and the method of dealing with disagreements in valuation in advance if these are not already covered in the practice agreement.
You must also be certain that the format for disposal of property shares when you leave is stated in a legally watertight fashion in the practice agreement.
Consult the practice accountants for general advice but specifically about your loan. Many companies lend in this area and interest rates are competitive. The GPFC (General Practice Finance Corporation) and Royal Bank of Scotland are two of the most popular.
You may decide to have part or your entire loan on a fixed rate to protect against interest rate rises, but do check out penalty clauses for early redemption. You should not have to use your home as collateral; a charge on the practice premises is normally made.
You will also need to set up life assurance to cover the loan, particularly if you have dependants. Luckily this is currently cheap.
It is worth speaking to the last partner to buy in as they will most certainly give you tips that can save time and money.
You should allow about six months for the process which is very similar to buying a new house. You must commission a solicitor to handle your purchase and payment of stamp duty.
You need to arrange a valuation and for your loan to be in place. You should also consider a building survey to check that there are no major structural problems such as dry rot or subsidence!
Check that the building is adequately insured via the practice policy. This is often a useful time to consider whether the rent reimbursement is being maximised.
If you chose a specialist GP premises chartered surveyor to do the valuation they should also advise on the level of rent to be currently expected in your area when compared both with equivalent businesses and other practice premises.
This often shows that current rent could be markedly improved. If so, the partnership must ensure a robust case when the next triennial rent review takes place.
To mitigate delays keep in touch with the professionals working on your behalf and with the vendor. Deal with any paperwork promptly.
There will be fixed costs as with any property purchase. Many GPs take out a slightly larger loan to cover these costs. They include:
· arrangement fee for loan
· stamp duty
In general it is wise to allow £5,000. Much of this can be set against any capital gain when you sell so do keep all relevant paperwork.
John Couch is a GP in Ashford, Middlesex