Building new facilities require liquidity

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Feb 01, 2005

ORLANDO — Is it economically feasible to build your own practice?

"The answer is 'Yes', with a but," says Mark R. Hafen, AIA, partner with design firm Animal Arts/Gates Hafen Cochrane.

"Your total practice income should be in the $1-million range if you are considering building a facility," he says during a seminar at The North American Veterinary Conference in January. "If you are dramatically higher, then you can afford a grander building with better architects."

One of the largest barriers to entry for a new facility is the cost of property. Though New York, San Francisco and Anchorage, Alaska, are the most expensive places to build, property demands hefty premiums from coast-to-coast.

"In the last four years, I have seen one or two projects where the land costs have been less than $100,000. It's almost impossible to pick up a piece of land for less than $250,000," he says. "When you start looking at ground like this, you should start looking at how to subdivide that land so that you can split something off and subsidize your investment. You need four to six times as much ground as your building, and that doesn't include expansion space, so you're probably going to need at least a half-acre to build something on."

Land costs aren't the only barrier. Soft goods can cost about 25 percent of the building price and many require out-of-pocket expenditures, Hafen says.

Some soft costs include:

  • Financing costs: $5,000,
  • Construction loan fees: $25,000,
  • Survey: $2,500,
  • Soil tests: $1,500,
  • Planning fees: $20,000,
  • Civil engineering fees: $5,000,
  • Legal fees: $5,000,
  • Design fees: $70,000 (8 percent to 10 percent of construction costs),
  • Development fees: $20,000,
  • Tap fees: $20,000,
  • Testing services: $3,000.

Furniture, fixture and equipment can add up, too, typically running about 8 percent to 10 percent of construction costs. But there is a bright spot in the equation: Curb appeal is cheap, by comparison, he says.

"The skin is about 20 percent of construction costs, so you can do a lot of things to your exterior and not drive up your expense too much," he says.

When it's all said and done, Hafen says hard costs are about $50 per square foot; soft costs are about $40 per square foot, and land will run about $150 per square foot. The total bill is about $270 per square foot.

Though Hafen says a new building likely will generate about 25 percent more revenue, he warns against making extravagant upgrades that might not pay for themselves before the property expires.

"Look at the balance between equity and leverage," he says. "This building is going to be thrown away in 30 years; the value of that building will have been used up, and you are going to have to do it again."