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Articles

The Professional Advisory

  1. Is it Time to Move?
  2. Staging A Dental Practice
  3. The High Cost of Dying
  4. Deal-Busters
  5. Patients - Attract and Retain
  6. Should I Stay or Should I Go?
  7. Is There a Buyer for Every Practice?
  8. Good, Better, Best - The Market has Spoken
  9. Smooth-Sale-ing
  10. Buying Time
  11. Patients, Patience, Patients
  12. A Real Patient
  13. Why Do a Practice Valuation? I'm not Selling
  14. Irrational Exuberance or The New Normal?
  15. Do dental equipment and dental technology affect a practice value?
  16. Finding and Being a Mentor
  17. Bigger is Better
  18. Daves Top Ten List for Buyers (Vendors should read this too!)
  19. How Well Do You Know Your Practice?
  20. Dave
  21. What will happen to dental practice Values in the next 10 years?
  22. Your Premises Lease is an Important Asset
  23. What are Associates Thinking?
  24. There is Life Outside the GTA
  25. When Is the Right Time to Sell My Dental Practice?
  26. Mergers are a Viable Option
  27. Is Your Associate an Asset or a Liability?
  28. Has your Practice Facility Kept Up With Your Billings?
  29. The 100 per cent of Gross Myth
  30. The Past, The Present and The Future
  31. Caveat Emptor
  32. Overpaid Long Term Staff
  33. Selling your Practice in Stages
  34. A Potential Pitfall of Selling Shares
  35. Value in Your Practice Through Balance
  36. Only Trusted Staff Can Defraud You
  37. To Own or Not to Own Practice Real Estate? That is the Question.
  38. Coping With A Large Patient Base
  39. Successful Dental Practice Transitions
  40. Taking Care of Business
  41. The Investing Dentist Phenomenon
  42. Two areas to focus upon that could negatively impact the value of your practice
  43. Organize your Debt in Order to Sell your Practice
  44. Having a Better Team
  45. How Do I Prepare My Practice For Sale
  46. How Do I Prepare My Practice For Sale? Part 3
  47. How Do I Prepare My Practice For Sale? Part 2
  48. How Do I Prepare My Practice For Sale? Part 1
  49. Advice to My Son or Daughter Graduating from Dental School
  50. Transition - What to Expect
  51. Discussion on Digital X-Rays
  52. Partnerships and Shotguns
  53. Strategic Planning - How to Get Started
  54. Calling All Vendors - Practices have Gone Up in Value
  55. Purchasers: Expect to Pay More for a Practice because of Lower Professional Corporation Tax Rates
  56. Matrimonial Practice Valuations
  57. Purchaser's Guide to Affording a Practice
  58. Location Improvements Throughout Your Career
  59. Small Practice Valuations
  60. Partnerships – The Best and The Worst
  61. Changing Location When the Opportunity Comes Along
  62. Visual Presentation of Your Practice
  63. Presentation of Charts
  64. Your Premises Lease Can Be Your Worst Enemy
  65. How to Select an Appraiser for Your Practice
  66. How Are Your Billing Ratios?
  67. It Pays to Invest in Your Tangible Assets
  68. The Importance of Separate Financial Statements
  69. Five Time Frame Levels to Sell a Practice
  70. 12 Suggestions to Safeguard Computer Data
  71. How to Buy a Visible Practice
  72. Why is there a shortage of good practices today?
  73. The Importance of Equipment in the Purchase of a Practice
  74. The Balanced Practice
  75. Will My Practice Be Saleable in The Future?
  76. Buyer Be Aware
  77. Excess Profit - The Second Key
  78. Patients and Profits are the Keys
  79. Plan Ahead

Volume 43: To Own or Not to Own Practice Real Estate? That is the Question.

Download the PDF version now!

Real Estate for many people is intoxicating. In this article we will look at what drives people to own real estate for their practice, how to analyze the factors that contribute to making the decision to own, and finally, the impact that decision will have on the sale of the practice.

Here are a few reasons why people like real estate;

  • Long term capital appreciation.
  • The pride of ownership.
  • You can build from scratch or renovate and get exactly what you want.
  • You never have to worry about what the landlord might do at the end of the lease.
  • By using leverage, you can acquire valuable property with relatively little capital. 

For these and several other reasons many dentists choose to own their own premises. But is it really financially viable? Further, how does someone contemplating buying a practice that includes real estate analyze the benefits of owning versus renting? Lastly, how does someone who is facing the decision of renewing a lease or buying or building their own premises make the decision?

The decision to own real estate should be based on sound financial reasoning, not emotion. It is perfectly acceptable to buy a house to live in based on emotion, but not a place to conduct business. The business will be paying for the real estate and the “occupancy cost” entry on your financial statement is indifferent as to whether the money goes to a landlord or a bank. What is important is how much it costs and can the practice afford it. You should try and keep the occupancy cost to 6.5 per cent of your gross billings or below.

Let’s look at a couple of examples where we have worked with dentists who own their real estate.

 

 

In the first instance it is really obvious that owning the real estate makes perfect financial sense. We were able to sell the practice very quickly and the purchaser paid a premium over the appraised value for the real estate since the value and occupancy costs were so low relative to the practice value.

For Dentist 2, the occupancy cost is far too high relative to the practice billings, and the value of the real estate exceeds the value of the practice. In this case the dentist would have been better off not owning the premises since the real estate has put his practice out of balance financially. Obviously I have chosen extreme examples to illustrate the range that we see. Most cases fall somewhere in the middle of these extremes.

If you are looking at real estate for your practice it is probably easiest to “back” into the decision. By that I mean determine how much you can afford for occupancy and then determine if that will allow you to own. For instance, if your gross billings are $1,000,000, your occupancy costs at 6.5 per cent would be $65,000 annually. Taxes, maintenance and insurance will take up roughly $21,000; utilities and maintenance reserve another $15,000 leaving approximately $29,000 to cover interest on the debt. This will cover the interest on a mortgage of approximately $525,000 at 5.5 per cent. Please note I have calculated this based on covering the interest portion of the payments, and not included the principal portion of the payment because the principal portion is essentially building up future equity. The principal portion will have a modest impact on current cash flow. In the scenario above you could purchase real estate worth $700,000 with a 25 per cent down payment.

While purchasing real estate for your practice will make sense for some people, it is certainly not for everyone. In general, you don’t see large corporations owning their own real estate. This is primarily due to the return on capital that they need to achieve in their business. For most corporations a better return can be achieved by deploying their capital in their core business then in real estate.

There are many other factors to consider when making the decision to own or rent. Your accountant, banker and financial advisor can all help you make an intelligent decision. Just remember to keep the practice in balance so the real estate makes it easier not harder for you to sell your practice.

David Lind is a Partner in Professional Practice Sales Ltd. (www.ppsales.com), which specializes in the valuation and sale of dental practices. He can be reached at (905) 472-6000 or 1-888-777-8825 or e-mail at: david.lind@ppsales.com

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 Dentist 1
Dentist 2
Gross Billings
$1,434,000
$257,000
Occupancy costs
$18,000
$47,000
Occupancy costs percentage
1.8%
18.2%
Practice Value
$1,600,000
$203,000
Real Estate Value
$135,000
$340,000
Location
Small Town
 Greater Toronto Area
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