Volume 16: Your Premises Lease Can Be Your Worst Enemy

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The lease of your premises can be a positive or negative factor in the sale of your practice. The banks will want to assure themselves that you will have possession of the premises well into the future if you intend to stay at that location. If so, it is appropriate to have your lease contain multiple options to renew to ensure possession into the future. If you want to ensure your occupation for 20 years, you could obtain a ten year lease with a ten year option to renew. However, this scenario will restrict how quickly you can write off the leasehold improvements for income tax purposes. The Income Tax Act permits you to write off your leaseholds improvements over the term of your lease plus the first renewal period, with a minimum of 5 years. Therefore, the 10 + 10 lease would permit the write-offs over 20 years or 5% per year on a straight line basis. This is a slow rate. A better alternative would be a three year lease with a two year option followed by three additional 5 year options. This also provides you with up to 20 years of occupation but you can write off the leaseholds in 5 years at the rate of 20% per year. Save your taxes now not in 20 years.

If the intention of the purchaser is to move the practice then you will want to have a short commitment to the lease. A three to four month commitment is ideal as it would give you time to organize the transfer of the patients to another location.

The worst possible combination is a low billing practice with poor visibility, high rent and a long term lease. This is typical of many new practices that have started from scratch. I recently reviewed a mature practice billing $150,000 annually, with three years remaining on the lease. The patient base was 250 active recall patients with virtually no new patients in the past year, and gross rent was $35,000 per year. In my mind this practice is unsalable because the rent is continuing for three years and as such the practice cannot be moved to an existing practice.

If your rent is over 10%, this is a negative factor in the value of the practice and the desirability of your practice. If the rent (occupancy cost) is under 5% in a larger urban community in Southern Ontario, this is a positive for the value of the practice.

My recommendation is that if you are near the end of your lease and you are anticipating selling within the next few years, and your landlord likes having a dentist in that location, I generally would recommend shorter leases with multiple shorter options to renew. If you are having some concerns about the renewal of your lease there are professionals who can step in and handle your negotiations with your landlord.

The Professional Advisory

  1. One Year Later

  2. Dealing with Unsolicited Offers

  3. Covid-19 Practice Sales Update

  4. When is the Right Time to Sell Your Practice and Why?

  5. Partnership Pitfalls

  6. The Real Cost of a Dental Practice Set-up

  7. Smaller Practice Realities

  8. Dental Market Update - 2019

  9. Creating Your Own Most Valuable Practice (MVP)

  10. Small Practice Economics

  11. The Market is Very Efficient

  12. How Can Dental Practice Values be Rising and Declining?

  13. Hygiene as a Value Driver

  14. The Value of a Good Team

  15. Is it Time to Move?

  16. Staging A Dental Practice

  17. The High Cost of Dying

  18. Deal-Busters

  19. Patients - Attract and Retain

  20. Should I Stay or Should I Go?

  21. Is There a Buyer for Every Practice?

  22. Good, Better, Best - The Market has Spoken

  23. Smooth-Sale-ing

  24. Buying Time

  25. Patients, Patience, Patients

  26. A Real Patient

  27. Why Do a Practice Valuation? I'm not Selling

  28. Irrational Exuberance or The New Normal?

  29. Do dental equipment and dental technology affect a practice value?

  30. Finding and Being a Mentor

  31. Bigger is Better

  32. Dave's Top Ten List for Buyers (Vendors should read this too!)

  33. How Well Do You Know Your Practice?

  34. Dave's Top Ten List for Vendors

  35. What will happen to dental practice Values in the next 10 years?

  36. Your Premises Lease is an Important Asset

  37. What are Associates Thinking?

  38. There is Life Outside the GTA

  39. When Is the Right Time to Sell My Dental Practice?

  40. Mergers are a Viable Option

  41. Is Your Associate an Asset or a Liability?

  42. Has your Practice Facility Kept Up With Your Billings?

  43. The 100 per cent of Gross Myth

  44. The Past, The Present and The Future

  45. Caveat Emptor

  46. Overpaid Long Term Staff

  47. Selling your Practice in Stages

  48. A Potential Pitfall of Selling Shares

  49. Value in Your Practice Through Balance

  50. Only Trusted Staff Can Defraud You

  51. To Own or Not to Own Practice Real Estate? That is the Question.

  52. Coping With A Large Patient Base

  53. Successful Dental Practice Transitions

  54. Taking Care of Business

  55. The Investing Dentist Phenomenon

  56. Two areas to focus upon that could negatively impact the value of your practice

  57. Organize your Debt in Order to Sell your Practice

  58. Having a Better Team

  59. How Do I Prepare My Practice For Sale

  60. How Do I Prepare My Practice For Sale? Part 3

  61. How Do I Prepare My Practice For Sale? Part 2

  62. How Do I Prepare My Practice For Sale? Part 1

  63. Advice to My Son or Daughter Graduating from Dental School

  64. Transition - What to Expect

  65. Discussion on Digital X-Rays

  66. Partnerships and Shotguns

  67. Strategic Planning - How to Get Started

  68. Calling All Vendors - Practices have Gone Up in Value

  69. Purchasers: Expect to Pay More for a Practice because of Lower Professional Corporation Tax Rates

  70. Matrimonial Practice Valuations

  71. Purchaser's Guide to Affording a Practice

  72. Location Improvements Throughout Your Career

  73. Small Practice Valuations

  74. Partnerships – The Best and The Worst

  75. Changing Location When the Opportunity Comes Along

  76. Visual Presentation of Your Practice

  77. Presentation of Charts

  78. Your Premises Lease Can Be Your Worst Enemy

  79. How to Select an Appraiser for Your Practice

  80. How Are Your Billing Ratios?

  81. It Pays to Invest in Your Tangible Assets

  82. The Importance of Separate Financial Statements

  83. Five Time Frame Levels to Sell a Practice

  84. 12 Suggestions to Safeguard Computer Data

  85. How to Buy a Visible Practice

  86. Why is there a shortage of good practices today?

  87. The Importance of Equipment in the Purchase of a Practice

  88. The Balanced Practice

  89. Will My Practice Be Saleable in The Future?

  90. Buyer Be Aware

  91. Excess Profit - The Second Key

  92. Patients and Profits are the Keys

  93. Plan Ahead