Should you rent or buy the real estate when purchasing a dental practice? Your dental transition experts, Matt and Joe, have the answer — or what to consider when making the decision!
Matt Scherer: Hello and welcome. This is Matt Scherer from PMA Practice Transitions, and I cover primarily the Ohio and western Pennsylvania area, and I assist dental professionals in purchasing or selling practices. My colleague here is…
Joe Gordon: I’m Joe Gordon. I do the same thing that Matt does, but I do it in Indiana and northern Kentucky.
Matt Scherer: What’s our subject today, Joe?
Joe Gordon: Our subject today is renting or buying real estate in a transaction for a practice.
Matt Scherer: Good topic.
Joe Gordon: Extremely important subject. A lot of people think that buying the practice will be the largest debt that they incur, but in a lot of practices, either the real estate, whether it was a buy or a lease, is actually the largest liability that you have over you. So, we’re going to spend a little time on both. So, Matt, let’s talk about buying real estate [crosstalk 00:01:01]
Matt Scherer: Well, it’s certainly sometimes an option when somebody looks to sell their practice, if they own the real estate, some sellers don’t want to be landlords, so they look to sell the real estate. How does that benefit you as a buyer? You know, certainly… Typically when you buy real estate, you set up a separate entity that leases back to the dental entity. So there’s some… you can talk about it probably better, but in a different segment, but there’s some tax benefits in that. Certainly with leasing, you know, you’ve got to look at what type of lease it’s going to be.
Joe Gordon: And with buying real estate versus a lease, you have ultimate control of that real estate. When you purchase it, you know, absent any zoning- [crosstalk 00:01:50]
Matt Scherer: And it’s another asset, right?
Joe Gordon: It’s another asset and you hope it appreciates. Now don’t think that you’re going to retire on the appreciation on a building. That’s probably not going to happen. Particularly if it’s a standalone building for a dental practice, it’s going to be part probably of your eventual sale, somewhere down the line. But it does give you the flexibility to do what you want. Your costs per square foot are going to be lower over time, actually buying the real estate. And in a lot of instances, you almost have to buy the real estate that goes along with a practice, particularly those in rural areas that, you know, again, don’t want to be landlords. So we look at that.
Joe Gordon: You don’t have to buy the building immediately when you buy the practice.
Matt Scherer: That’s a good point.
Joe Gordon: We stagger them sometimes, but we come up with a fixed price for the real estate up front, so we know what we’re going to buy it and when the schedule, and when we’re- [crosstalk 00:02:53]
Matt Scherer: And I would add to that, that sometimes banks don’t want to finance the whole transaction, so they’d like to see you lease for a year or two and then buy it. But getting into leases, what do you see as the most common type of lease?
Joe Gordon: Most common type you’ll hear about are called triple net leases and CPAs like myself and other professionals, we throw that around. And what does that really mean? What that really means, is that as the lessor, you are responsible for all the costs associated with that building, absent a few things that you know, we might put in the lease agreement itself, structural things, things like that. But realize that if the air conditioning unit blows up a week after you take over that lease, that’s your responsibility. And I’ve seen that happen and nobody had a spare $15,000 sitting around they didn’t have a good use for.
Matt Scherer: Right.
Joe Gordon: So that is something to take into account. A lot of times you’ll be assuming a lease. It’ll be a lease that the seller had already signed, and you will assume that. Just so many things within a lease you need to look at. Renewal periods, escalators, what common area maintenance costs are there, what’s your ability for signage? What’s your ability for parking? Hours, operations, things like that. So very important things that you engage a real estate attorney to look at that.
Matt Scherer: Yeah. Most of the time an attorney can certainly help you through some of those issues, and I think you brought up a couple good ones. Signage is a big one. You got to see what kind of signage is allowed in that city or wherever the practice is located. And sometimes you’re restricted on the size of the sign, how high the sign is, or whatnot. So you definitely want to look into those things.
Matt Scherer: You know, it’s a personal preference. Again, some sellers, when they sell their practice and real estate, it’s a combo deal. It’s not one or the other. And you know, if you’re not into real estate or buying real estate, then maybe that’s not the deal for you. But it’s definitely a personal choice.
Joe Gordon: We obviously work with a lot of practices and helping them decide, when they’re selling, if we’re going to sell the building at that time, and we work with buyers on them going into leases and purchasing buildings. The one thing I do say on a lease, the last thing I’ll say about it, is that I usually always insist that we get the property inspected, just as if we were buying it, if we’re doing a triple net lease. So we avoid the air conditioner going out the first week that we’re in the facility and I think it’s well worth the $300 or whatever it is to do that.
Matt Scherer: Yeah, one last thing I would add is, don’t go and waste extra money on appraisals. The banks are always going to require an appraisal, and they’re going to require the appraisal be done by the bank. So if you go get your own or the seller go gets their own appraisal, it’s okay, it’s just know that the banks typically won’t use those appraisals, cause they have to order them through the bank themselves. I think that concludes our lease slash buy for today. You can certainly talk a little bit longer about it and more in depth, but we’ll leave you with that, and we appreciate you joining us today. Give us a thumbs up if you like us, and definitely share this segment with one of your friends or colleagues. Thanks.