Medical Office Building Ownership for Orthopedic Surgeons

Most orthopedic surgeons write a rent check every month and never ask whether they should be writing a mortgage payment instead. For practice owners in the right situation, buying your building converts a pure expense into a wealth-building asset — the building appreciates, your practice's rent payments build equity rather than enriching a landlord, and the tax treatment via cost segregation and OBBBA-restored 100% bonus depreciation can generate six-figure deductions in year one.

This is not the same decision as general real estate investing. The analysis is specific: you're a physician, your practice is likely your only tenant, Stark Law governs the lease, and your exit timing connects to your practice sale. Here's how it works.

The ownership structure

Orthopedic surgeons who own their practice building almost never hold the real estate inside the practice entity. The correct structure is a separate real estate LLC (or similar entity) that owns the building and leases it back to the operating practice. Why separate?

• Liability insulation. Malpractice liability stays inside the practice entity. The building is protected from clinical judgments.
• Financing separation. Real estate lenders and practice lenders want different collateral packages. Mixing them creates complexity on both sides.
• Exit flexibility. When you sell the practice, you can keep the building and collect rent from the acquiring party — or sell both simultaneously. Separation preserves the option.
• Tax structure. The real estate entity generates depreciation and other deductions that flow through to you on a K-1, which you'd rather not mix into the practice's income tax picture.

Stark Law and the FMV lease requirement

This is where physician-owned real estate diverges from standard commercial landlord/tenant deals. Because your practice bills Medicare and Medicaid for "designated health services," the lease between your building LLC and your practice must comply with Stark Law's rental exception at 42 C.F.R. § 411.357(a).

The requirements are straightforward but non-negotiable:

• The lease must be in writing.
• The term must be at least one year.
• The rent must reflect fair market value — what an independent third party would pay for the same space.
• Rent cannot vary with the volume or value of referrals from the practice to any entity the physician has a financial relationship with.

The FMV rent requirement means you need a qualified appraisal. If you charge above-market rent, the excess looks like a self-referral kickback. If you charge below-market rent, you've undervalued your real estate. Either way, the IRS and OIG can revisit. Get the appraisal done by a credentialed commercial appraiser who understands healthcare real estate before you execute the lease. Update it whenever you renegotiate.

With the right structure and a proper FMV appraisal, physician MOB ownership is completely standard and widely used across orthopedic and other surgical practices.

Financing: SBA 504 is the preferred vehicle

Conventional commercial real estate loans require 20-25% down, which for a $3M ortho clinic building means $600K-$750K of your capital tied up. SBA 504 financing cuts the down payment requirement to 10% for established practices.¹

The SBA 504 loan has a specific three-part structure:

On a $3M building, the 504 structure looks like: $300K down, $1.5M bank loan, $1.2M CDC debenture at a fixed rate around 5.5%. The fixed CDC portion protects you from rate risk over the full amortization period. Total project costs can include purchase price, renovation, and qualifying equipment.

SBA 7(a) loans are also an option — faster to close, more flexible on eligible uses — but the rates are typically variable and higher, and the maximum loan amount is $5M vs. $5.5M for SBA 504. For pure real estate acquisition, 504 is generally the better fit.

Conventional commercial loans (from a private bank or credit union without SBA backing) may close faster and involve less documentation, but expect 20-25% down and a loan-to-value covenant at 75-80%. For surgeons with substantial liquidity, conventional may be simpler. For surgeons who want to preserve capital for other purposes — ASC buy-in, cash balance plan funding — the 504's 10% down is valuable.

How to think about the economics

MOB cap rates in early 2026 range from 6.0% to 7.8% depending on property quality, location, and tenant profile.² For single-tenant physician-group buildings in suburban markets, expect cap rates of 6.5-7.2%.

Cap rate is the building's net operating income divided by purchase price. If you're paying $3M for a building and the FMV rent is $195,000/year net (after property taxes, insurance, maintenance paid by tenant under a NNN lease), the cap rate is 6.5%. That's the initial yield on your investment before financing costs, depreciation, and principal paydown.

The wealth-building case for MOB ownership combines:

1. Equity buildup via mortgage paydown. Every month your practice pays rent, part of that flows to principal reduction. At 10% down on a $3M building, you start with $300K equity. After 20 years of amortization, you own $2.7M+ of a building that has (historically) appreciated.
2. Appreciation. Medical office vacancy is low and demand from aging demographics is structural. MOB is among the more durable commercial real estate asset classes.
3. Tax benefits from cost segregation and depreciation — see below.
4. Exit optionality — see below.

The tax benefit: cost segregation + OBBBA bonus depreciation

This is the single most underappreciated part of physician MOB ownership for orthopedic surgeons who are otherwise paying 37% federal marginal tax rates.

Commercial real estate depreciation is normally 39-year straight-line. A $3M building generates ~$77K/yr of depreciation under standard depreciation rules. Not nothing, but not dramatic.

A cost segregation study dissects the building into components with shorter depreciable lives. Medical office buildings are particularly favorable for cost segregation because they contain above-average quantities of specialty systems: medical gas plumbing, procedure room MEP (mechanical/electrical/plumbing), exam room millwork and cabinetry, sterile/clean/dirty flow corridors, and HIPAA-compliant IT infrastructure.

Typical reclassification for a medical office:³

• 20-40% of building cost reclassified from 39-year to 5-, 7-, or 15-year depreciable lives
• On a $3M building, that's $600K-$1.2M of basis eligible for accelerated treatment

Under pre-2025 law, this produced "accelerated" depreciation at 40-80% bonus rates. Under the OBBBA (One Big Beautiful Bill Act, July 2025), 100% bonus depreciation was restored permanently for property placed in service after January 19, 2025. That means all reclassified 5-, 7-, and 15-year property from a cost segregation study on a post-Jan 19 2025 acquisition is fully deductible in Year 1.⁴

Example: You buy a $3M orthopedic clinic building in 2026. A cost segregation study identifies 33% ($990K) eligible for reclassification. At 100% bonus depreciation, you deduct $990K in Year 1 in addition to normal 39-year depreciation on the remaining $2M. At a 37% federal marginal rate, that's roughly $366K in federal tax savings from the reclassified component in a single year. The cost segregation study itself runs $5,000-$15,000 depending on complexity — the ROI is obvious.

Buy vs. lease: the framework

Buying makes more financial sense when:

• You plan to stay in the same location for at least 7-10 years
• You've been in practice long enough to qualify for SBA 504 financing (2+ years)
• The building is purpose-built or can be adapted for your specific practice (imaging, procedure rooms, ASC adjacency)
• Local commercial real estate values are stable or growing (not speculative bubble territory)
• Your practice income is stable enough to service additional debt

Leasing makes more sense when:

• You're early in your career and expect to move locations within 5 years
• You're evaluating a practice model change (hospital employment, PE sale) in the near term
• You're in a major metro where building costs are $500+/sq ft and cap rates are compressed below 5.5% — the economics don't pencil as well
• Capital is better deployed in an ASC buy-in that generates $300K-$1M/yr in distributions vs. building equity at 6-7% cap rate yields

The ASC comparison is real: if your practice has the opportunity to invest $300K in an ASC that returns $150K-$300K/year in distributions, that may beat the building investment in IRR terms. It's not automatic — the building has tax benefits and exit value the ASC doesn't — but it's a real trade-off to model with an advisor.

Exit: three scenarios

Scenario 1: practice PE sale, keep the building

This is the best outcome for many surgeons. You sell the practice to a private equity-backed platform for 6-12x EBITDA. The PE buyer needs your building — so you negotiate a long-term NNN lease at FMV with the new entity. Your real estate LLC now has an institutional credit tenant, which significantly improves the building's value. You continue collecting rent, the building has likely appreciated, and you can sell it later (1031 exchange if desired) as a stabilized NNN asset with a strong tenant.

Scenario 2: sell building with practice

You sell both the practice and the building simultaneously. PE buyers often prefer to acquire real estate — it simplifies transition and removes landlord risk from their pro forma. Expect the building to sell at a market NNN cap rate (6-7% for physician-group tenants in 2026), which may represent a premium to what an untenanted building would sell for. The tax treatment of building proceeds depends on your basis: you'll owe recaptured depreciation at 25% (unrecaptured § 1250 gain) and LTCG at 20% + 3.8% NIIT on appreciation above basis.

Scenario 3: 1031 exchange into a different property

You sell the practice building and use a §1031 like-kind exchange to roll the proceeds into a new commercial property — perhaps a multi-tenant MOB, a NNN retail asset, or a DST (Delaware Statutory Trust) for passive ownership. This defers all capital gains tax indefinitely. Requires strict 45-day identification / 180-day closing timelines; a qualified intermediary must hold the funds.

Costs and risks to plan for

• Vacancy risk: If your practice moves or closes, you become a self-managing commercial landlord needing a new tenant. Your building is likely specialty medical and not easily re-tenanted by a general office user. Plan for 6-18 months of potential vacancy on a transition.
• Capital improvement calls: HVAC, roof replacement, ADA compliance retrofits, and specialty medical infrastructure are expensive. Budget a reserve.
• Rising rates: The bank first mortgage on your SBA 504 is the variable-rate portion. In a rising-rate environment, debt service increases on that component. Consider interest-rate hedging options when negotiating the bank loan.
• Concentrated exposure: You are both the tenant and the landlord. Your personal financial situation is tied to the performance of one asset in one location. Diversification argues against making the building too large a share of your total net worth.

What to do next

If you own a private practice and are considering MOB ownership:

1. Talk to a CPA who specializes in physician practice finance about how the building's depreciation losses would interact with your current passive income picture. See How to Choose a CPA for Orthopedic Surgeons.
2. Get a commercial appraisal on your current lease space or a target building — you need FMV rent to set the lease correctly, and purchase value to model the economics.
3. Run the ASC vs. building trade-off with a financial advisor. If you're pre-ASC-buy-in, that may come first. If you're already an ASC partner generating distributions, the building argument is stronger. See ASC Investment ROI Calculator.
4. Consider the exit timeline. If a PE sale is possible in the next 3-5 years, the "keep building, lease to acquirer" exit is worth structuring for explicitly. See Selling Your Orthopedic Practice.

A financial advisor with orthopedic practice experience can model the 20-year comparison between owning vs. leasing, including the financing costs, depreciation benefits, and realistic exit proceeds. The numbers are specific to your practice location, income level, and capital availability. Generic physician financial advisors often skip this analysis entirely — make sure yours doesn't.

1. SBA 504 loan structure and down payment requirements: 504Capital — SBA 504 Loans for Medical Offices; SBA.gov 504 program fact sheet. Down payment 10% for established practices; 15-20% for startups or special-use. CDC debenture rates ~5.25-5.75% (20/25-yr, Q2 2026).
2. MOB cap rates Q1 2026: CBRE Q1 2026 U.S. Medical Outpatient Buildings Figures; Cushman & Wakefield MOB Capital Markets Midyear 2026 Outlook. Cap rate range 5.5-8.5%; physician-group tenants 6.5-7.2%.
3. Cost segregation reclassification rates for medical offices: R.E. Cost Seg — Cost Segregation for Medical Office Buildings; KBKG medical office case study. Typical reclassification 20-40% of building cost into 5/7/15-year property.
4. OBBBA 100% bonus depreciation restored permanently for property placed in service after January 19, 2025: One Big Beautiful Bill Act, Pub. L. 119-XX (July 2025), amending IRC § 168(k). Verified against OBBBA text and IRS guidance.

Values verified as of June 2026. SBA rates and MOB cap rates fluctuate with credit markets; obtain current quotes from an SBA-approved lender for your specific transaction. Tax values reflect OBBBA and current IRS guidance — consult a qualified CPA before executing any transaction.