Should I lease land but own the freestanding building?

By Sarah A. Chadwick, assistant editor

Q. I want to move my veterinary practice from a strip-mall leasehold to an adjacent property that the mall owner recently bought to expand the shopping center. I can either rent a larger leasehold in the new shopping center or lease part of the land. Is it wise for me to lease the land while owning the freestanding building on it?

A. While not the most common arrangement, you can lease land and own the building on it. Usually such property is held for lease only because the land is in a prime retail location, says Mark J. Schmidt, AIA, principal of Knapp Schmidt Architects LLC in Madison, Wis. He suggests you focus on the financial considerations when making this decision.

For example, because it usually costs much more to build a new hospital on leased land than it does to make improvements on a leased building, the lease on the land must be for a longer term--ideally 99 years--to make the investment worthwhile, Schmidt says. Make sure the lease runs at least as long as the construction loan, typically 25 years.

Then determine whether the growth of the practice that comes from a better practice location will more than compensate for the lack of real-estate equity. "You must ask yourself one question," says Schmidt. "At the end of the lease term, would the net value of the real estate you could have purchased somewhere else be less or more than the value of other potential investments during the same time period?"

If basic finances seem to work out, move on to analyze the market opportunity and costs of development, Schmidt recommends "There's no easy answer, but with careful consideration you can identify the best business opportunity," he says.

June 2000 Veterinary Economics