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

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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

<table border-collapse:="" collapse;"="">

 
 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

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

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