What to think about when selling your dental practice’s real estate
You are ready to sell your dental practice, but have you thought about the process for selling the real estate? If you own or rent the property, this video is a must-watch. Dental transition experts Matt Scherer, Doug Sellan and Adam Goldsmith talk about all the considerations when selling your dental practice’s real estate.
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Hello, again. This is Matt Scherer with PMA Practice Transitions. As you can see, I have a couple of my colleagues on with me. I have Doug Sellan and Adam Goldsmith. We help dentists transition out of their practices in the state of Ohio, Western PA, Northern Kentucky, and Indiana.
Today’s topic, gentlemen, we’re going to talk about considerations when selling your real estate when you are selling your dental practice. One of the considerations to think about when selling your real estate or when you own your real estate is, do you have a lease in place? It’s very important that you have a lease back to your corporation. The reason for that is I had a scenario just recently where one of my dentists was selling his practice. He owned the real estate, there were several units in the real estate, and he was selling it on the market with a commercial real estate broker. He had no leaseback to his corporation. One of the problems that we discussed is if somebody were to buy that real estate for his practice sold, they could technically kick him out of his space if they wanted to use the space for their own purpose or if he sold the practice, they didn’t want to give a lease to the new buyer, then the buyer would have to go, find a new space. That would cause, obviously, some issues and lower the value of the practice.
Anything else there, Doug, that you can think of?
Yeah. Keep it in mind that when you are selling your real estate, most first time practice owners, when they are seeking financing, the bank will typically only lend up to 80% to 90% of the appraised value, which means that the purchaser is going to have to come up with 10% to 20% of that purchase amount. They may or may not have the resources to do that, and a very popular option for you as the owner is to carry that note for a period of time. Typically, you’d want your terms to be equal to the term of the bank. They kind of dictate some of that. Just be prepared for that. You may have to carry a small amount of paper for a period of time, just so that person can purchase the real estate along with the practice.
I agree with that, Doug. A lot of times, even if they have the means to take the finances out of their own account to put down on the practice, the bank may dictate that they don’t want them to do that because they don’t want them to drain their cash in case of an emergency and they had to use that. So a great point.
Adam, anything to add on the real estate side?
Absolutely. One thing that is something to be mindful of, if you are leasing it from one entity to the next, where are your lease rates versus the market rates? Are they high? Are they low? We really want to paint a clear picture to a prospective buyer that the lease is within market range or market square foot for square footages on average, and that you’re not charging an inflated rental rate from your dental business to your real estate business. We will have to normalize that rent per square foot so that we can give an accurate view of what the practice real estate is really worth in conjunction with the practice.
That’s a good point. It comes down to cash flow too. Right? If you’re overinflating your lease, it may affect the cashflow of the practice. Certainly, those things, we would need to know when we look at the appraisal because we’ve got to take those things into consideration. If we have to add back some of the lease because, typically, you do see dentists when they’re leasing back to their corporation from their entity who owns the real estate, they typically rent back for a lot more. Right? It’s a tax situation for them. That’s legal.
Or they have nothing.
Correct, and that’s in the negative, right, for the add back. That could certainly affect the appraisal as well.
All right, all good points, guys. If you want to learn more about what we just talked about, please visit our website, pmagroup.net. Don’t forget to hit the like button. Obviously, if you really like us, please share us with your colleagues as well or share the video with your colleagues, and we appreciate your time.