Buy Versus Lease: The Case For and Against Owning the Practice’s Real Estate

Independent medical practices face rising costs and flat or declining reimbursement, and fewer physicians own the practices they work in. Occupancy is one of the few large expenses that a practice can restructure into an investment rather than absorb as a pure operating cost. MGMA data show that the median building and occupancy cost per full-time physician in physician-owned multispecialty groups rose 27% between 2013 and 2022. Many independent practices lease their space, and the rent paid over a medical lease, which commonly runs seven to ten years, builds equity for the landlord. When the physicians who own the practice also own the building, the same rent services a loan that the owners are paying down and supports an asset they control.

This article covers the current medical office leasing market, how ownership is typically structured and financed, an illustrative cost comparison, the tax treatment, and the uses and exit options that ownership provides.

The Medical Office Leasing Market in 2026

Medical office space is expensive and becoming more so. CBRE reported a record average asking rent of $25.40 per square foot for medical outpatient buildings in the first quarter of 2026, up 1.6% from a year earlier, and expects average rent to reach a new high this year as construction completions fall to their lowest level in a decade. JLL reports record occupancy of 92.7%, notes that landlords have gained pricing power and that lease structures are moving toward larger annual escalations and finds that rents in newly constructed buildings are running at nearly twice in-place rents. For a practice approaching renewal, those conditions mean few alternatives and limited negotiating leverage.

Build-out costs add to the problem. Standard clinical buildouts commonly cost $150 to $250 per square foot, and more with imaging, procedure rooms, or specialized plumbing; those costs are the main reason medical leases run seven to ten years rather than the three to five years typical of general office. Landlord improvement allowances seldom cover the full cost. In the Dallas-Fort Worth market, for example, allowances of $40 to $80 per square foot were reported in 2026, enough for basic finish work but not for specialty medical space. The practice funds the difference, in cash or with short-term financing, and the improvements belong to the landlord when the lease ends. A practice that relocates pays for them again.

How Ownership Is Typically Structured

The building is usually purchased by a separate entity, commonly an LLC, owned by the same physicians who own the practice and in the same proportions. The entity leases the space to the practice at market rent. The practice continues to pay and deduct rent, and the real estate entity uses that rent to pay the mortgage, property taxes, insurance, and maintenance.

The arrangement replaces an existing obligation rather than adding a new one. A multi-year lease is already a fixed commitment, which is why ASC 842 requires lessees to report it on the balance sheet, and medical leases sometimes even require personal guarantees. Ownership substitutes a loan for that commitment. Part of each loan payment reduces principal that the owners retain, and much of the payment can be fixed for the life of the loan, while rent under a lease escalates each year.

The risks that remain are specific. Lenders require personal guarantees; the SBA requires them from each owner of 20% or more. The owners bear major repairs (e.g., roofs, HVAC systems) that a landlord would otherwise cover. A larger share of the owners’ net worth is concentrated in a single property. Vacancy, the principal risk for an outside investor, is limited in an owner-occupied building because the tenant is the owners’ own practice.

Financing With an SBA 504 Loan

The SBA 504 program finances owner-occupied commercial real estate, including medical offices. A typical project is funded 50% by a bank first mortgage, 40% by an SBA-guaranteed loan through a certified development company, and 10% by the borrower, compared with down payments of 25% to 35% on conventional commercial mortgages. Closing and other soft costs can be included in the financed project, as can renovations, and program fees of roughly 2.5% to 3.5% of the SBA portion are financed into the loan rather than paid in cash. The SBA portion is capped at $5.5 million for most projects.

The SBA portion carries a rate that is fixed for the full term and set monthly from Treasury yields. The 25-year rate was 6.54% at the September 2026 pricing, up from 5.72% in March. The increase reflects higher long-term rates generally: the Federal Reserve raised its benchmark rate on September 16 for the first time since 2023, and the 10-year Treasury yield moved above 5%, its highest level since 2007. The bank portion is priced separately and is often fixed for a shorter initial period before adjusting, so the length of the fixed period is worth negotiating. Higher yields also affect purchase prices; the 10-year Treasury sets the floor for cap rates, and higher cap rates mean lower prices for a given rent.

The borrower must occupy at least 51% of an existing building, which permits up to 49% to be leased to other tenants; new construction requires 60% owner occupancy at the outset, rising to 80% within ten years. One rule deserving early attention: 504 loans carry prepayment penalties during the first ten years of a 25-year term, which affects the timing of any sale or refinance.

An Illustrative Cost Comparison

The following example uses assumptions that a specific practice should replace with its own figures. A practice needs 10,000 square feet. It can lease the space at $25.00 per square foot on a triple-net basis ($250,000 in the first year) with 3% annual escalators, or it can buy an equivalent building for $3.6 million, a 6.9% cap rate on that rent and in line with the national average reported by CBRE. The purchase is financed with $360,000 down, a $1.8 million bank loan at 7.5%, and a $1.44 million SBA loan at the September 2026 rate of 6.54%, both amortized over 25 years and assumed fixed for the period shown. Under a triple-net lease the practice pays property taxes, insurance, and most maintenance in either case, so those costs are excluded from both columns, as are build-out costs.

Illustrative comparison: 10,000 square feet over ten years (figures rounded)

In the first year, loan payments exceed rent by about $26,700, but about $49,100 of those payments reduces principal. Rent overtakes the loan payments in year five, and the difference widens every year after that. Over ten years, ownership requires about $261,000 more cash, including the down payment, and leaves the owners with about $1.05 million of equity before any appreciation. If the building’s value grows at the same 3% as rent, equity at year ten is about $2.3 million.

Taxes widen the difference in the first year. Assuming a 20% allocation to land and a cost segregation study that reclassifies 25% of the building cost, first-year deductions under ownership total roughly $1.0 million, compared with $250,000 of rent under the lease. At a 40% combined marginal rate, the difference defers to about $300,000 of tax, most of the down payment. Different inputs will move the crossover year and the totals, and those are the figures a practice-specific model should test.

Tax Treatment

Rent paid by a practice to an entity owned by its physicians falls under the self-rental rule. Net rental income from property used in a business in which the owners materially participate is treated as nonpassive, while net losses from the same property remain passive unless the rental is grouped with the practice. When each owner holds the same proportionate interest in the practice and the building, the portion of the rental activity involving property rented to the practice may be grouped with the practice through a grouping election, which allows depreciation and interest on that portion to offset practice income. Space leased to third parties remains a separate rental activity.

The 2025 tax law made 100% bonus depreciation permanent for property acquired after January 19, 2025. Cost segregation studies often reclassify roughly 30% to 35% of a building’s cost basis into shorter-lived property eligible for bonus depreciation, according to one national cost segregation firm; the example above uses a more conservative 25%. The benefit is one of timing. Depreciation is recaptured on a taxable sale, and the extent to which an exchange or a step-up in basis at death defers or eliminates that recapture depends on the facts.

Improvements to leased space receive similar treatment, since qualified improvement property is also eligible for bonus depreciation. The difference between leasing and owning is therefore not the size of the deduction; it is that leasehold improvements become the landlord’s property at the end of the term.

Rent between the practice and the real estate entity should be set at fair market value and documented in a written lease. Market rent supports the practice’s deduction, prevents disputes among owners as ownership changes, and holds up if the practice is later sold.

Using the Property to Expand the Practice

Ownership also determines what a practice can do with its space. A tenant generally needs landlord approval to expand, reconfigure, or add services, and some leases restrict services that compete with the landlord (use restrictions in some hospital-owned buildings, for example). An owner can plan the building around the practice’s growth.

The most direct use is capacity: additional exam rooms for new physicians or advanced practice providers, extended hours, or room for a recruit who would otherwise require a second location. Ancillary services are the next category. Imaging (e.g., X-ray, ultrasound, DEXA, CT, MRI), laboratory, physical therapy, infusion, and sleep testing all require dedicated space, and several require shielding, plumbing, or electrical work that is costly to install in a leased suite and lost at relocation. Retail lines such as optical, hearing aids, and durable medical equipment benefit from visible, accessible space that an owner controls.

Procedure space is a larger step. In-office procedure rooms can be built into the practice’s own footprint, and a property with sufficient land can accommodate an ambulatory surgery center or office-based lab, either within the building or on an adjacent parcel. Zoning, state licensure, and certificate-of-need requirements, where they apply, should be confirmed before closing.

Space the practice does not yet need can be leased to others. An existing building financed with a 504 loan can have up to 49% leased to other tenants, which produces rental income while the practice grows into the space; that income is passive and can absorb passive losses from other investments. Complementary tenants, such as physical therapy, a pharmacy, or practices in other specialties, add patient convenience as well as rent. Leases with tenants that refer patients to the practice, or receive referrals from it, should be at fair market value and prepared by healthcare counsel. Where land is available, buying more than current needs require preserves room for a second building or additional parking.

Liquidity and Exit Options

An owned building is less permanent than it appears. A ten-year lease with a personal guarantee and several hundred thousand dollars of practice-funded improvements is also difficult to leave, and it provides no way to convert occupancy costs into cash. Ownership provides several.

A sale-leaseback sells the building to an investor while the practice remains as tenant under a new long-term lease. Investor demand for medical office is strong: CBRE reported that medical outpatient investment volume rose 78% in the first quarter of 2026 to $2.9 billion and that the average cap rate fell to 6.9%, a price of roughly 14.5 times annual rent. Pricing is strongest with a lease term longer than seven years and a creditworthy tenant, both of which an established practice can provide. A cash-out refinance produces liquidity without a sale. When the practice itself is sold, buyers often prefer to lease the real estate rather than buy it, which leaves the physicians with a separate asset and a market lease. A Section 1031 exchange defers gain when the owners trade into a different property, and holding the building until death provides heirs with a step-up in basis. Timing should account for the 504-prepayment penalty period.

The rent level matters in each of these transactions. In a practice sale, each dollar of rent reduces EBITDA, which is valued at the practice’s multiple; in a sale-leaseback, each dollar of rent is valued at the inverse of the cap rate, about $14.50 at 6.9%. Buyers adjust rent that is above or below market, so setting it at market from the outset avoids renegotiating it at the point of sale.

When Leasing Remains the Better Choice

Ownership does not fit every practice. Leasing is usually preferable when the owners’ time horizons differ significantly (e.g., senior partners planning to retire within five years and associates unwilling to buy in), when the capital would earn more inside the practice (e.g., an ancillary service line or an ASC interest), when space needs are likely to change substantially, when the group cannot use SBA financing and conventional terms do not work, or when a landlord offers a large improvement allowance or a below-market renewal. Outside those circumstances, current rents, available financing, and the tax treatment generally favor ownership for a practice that expects to remain in its market for ten years or more.

Planning the Process

The process should begin 18 to 24 months before the current lease expires. That allows time to identify property, complete due diligence, and close a 504 loan, which takes longer than conventional financing because two lenders review it. Eligibility, including the citizenship rule, should be confirmed before property is identified. The practice and real estate operating agreements should contain matching buy-in and buy-out provisions so that ownership of the two entities remains identical as physicians join and leave; the grouping treatment and the partners’ economics both depend on it.

The comparison should then be modeled on the practice’s own numbers: current and projected rent, debt service at current rates, the crossover year, equity at ten years, and the tax effect for each owner. For many independent practices, the rent already being paid is sufficient to support ownership.

Sources

• American Medical Association, Physician Practice Characteristics in 2024 (Policy Research Perspectives, 2025)
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• MGMA Stat, Medical practice operating costs are still rising in 2025 (June 2025)
• Becker’s ASC Review, Average practice costs per provider: 10-year change (MGMA DataDive)
• American Academy of Family Physicians, Medicare physician fee schedule proposal includes changes to G2211, other codes (July 2026)
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