A national medical association contacted Ground Floor Partners seeking help with developing a business plan to set up their own in-house testing facility for members. Each year the association brought in several hundred physicians for several days of oral examinations. The association had been leasing space from a hotel for several years, and while the arrangement seemed to be working reasonably well, the board believed they could set up their own in-house testing facility and then rent the space out to other groups to make a profit.
The board asked Ground Floor Partners to help them develop a business plan for the proposed facility.
Initially, this looked like a fairly straightforward project. We would research other groups that needed testing centers (demand), identify and research other testing facilities (supply), and compare the two sides. We assumed there was modest supply but plenty of demand.
However, our research quickly revealed the opposite: demand was shrinking and supply was increasing. The Airbnb, flex space, and shared office space movements were all growing, while the demand for specialized testing facilities was shrinking.
Another issue was that we were ten years into the economic expansion since the Great Recession, so construction and real estate prices were near historical highs. This was especially so in the neighborhoods of greatest interest to the association.
On top of all this, because our client needed a rather large and unique space, the landlords all insisted on long term leases, in the range of 5-10 years.
We concluded that if they went ahead with the new testing facility, they would lock in high costs now, and be vulnerable to potentially lower leasing rates from their tenants in the future.
We developed a simple financial model for the business and ran several different scenarios. The model indicated the association could easily lock in a $500,000 annual loss each year for the next 5-10 years.
We also contacted several commercial real estate brokers and tenant representation agents to get their opinions. They agreed that the concept was flawed and suggested exploring alternatives.
We presented our findings to the board. They reviewed our findings and decided to follow a much safer course. The association abandoned the project and instead decided to rent space from another group that had already invested in a new facility. Our research and advice helped the association enter into an attractive, flexible solution, and potentially saved them a minimum of $2.5 million dollars over the next five years.
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