How much office space can we afford?

ByJohn B. Pinto

Facility costs include base rent or mortgage costs, utilities, maintenance and upkeep, and taxes. If you own your own building, these costs are offset over time by any appreciation or depreciation in value.

A reasonable cost ratio for facilities in a general ophthalmology practice is 4% to 6% of practice collections. In pricier urban and suburban markets, facility costs will skew somewhat higher: Demand is higher, and land, vendor, tax and even utility costs can be much higher. What’s more, urban patients expect more lavish surroundings. It’s not unusual to pay 8% to 10% or more of revenue for retail-oriented facilities in the urban core.

By contrast, rural facility costs are lower, as little as 2% or 3% of collections. Because contractor and land costs are lower in the country, owning your own office is far more common in rural America than in the big city.

Many practices are now trapped in a squeeze. As professional fees fall, ophthalmologists need more office space to be able to maintain revenue, yet the cost for more space can exceed the increase in revenue. Here’s what you can do to help contain facility costs:

If you’re running out of space, consider a temporal expansion rather than a physical expansion by increasing office hours.
Rather than immediately building more office space to accommodate an associate doctor you’re adding, start a part-time satellite (for example, in an optometrist’s office) to take the pressure off. If the associate doesn’t work out, it will be much easier to pull in the reins on practice expenses.
Convert personal doctor office space into patient care space. Move the doctors to a single bullpen office, or “hot desk” doctors at small workstations.
Review your office’s actual square footage with the contracted footage. Errors are more often than not in the landlord’s favor and may allow you to reduce future expenses as well as get a refund check. (Note that an increasing number of lease contracts have a blanket clause forgiving the landlord of any measuring errors. Get an accurate measurement before you sign such contracts.)
Review your property taxes. If your facility’s market value has dropped, it may be possible to appeal your tax bill.

Of course, the easiest way to reduce the percentile cost of occupancy is to improve the top line of your practice. In future blogs, we’ll cover numerous financial and volume performance benchmarks to help you do just that. Please leave a comment if you have any topics you would like to see covered or if you have a story to share about your practice.