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Articles

Volume 58: Your Premises Lease is an Important Asset

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As we go about valuing and brokering dental practices we come across all kinds of situations relating to the premises that dentists choose to occupy to practice their profession. There is everything from one lonely room in the back of a medical clinic to the dentist that owns the biggest building in town. Most dentists however have a lease for their space and this lease is a very important, and often an overlooked, asset of the practice.  This article is not about how to enter into a lease or how to renew a lease. There are experts in that field (one of the best writes in this publication) and I would strongly encourage you to use the services of an expert at that stage. What I want to cover is why a premises lease is so important from a practice value perspective.

Regular readers of The Professional Advisory will remember that “Patients and Profit” are the two biggest contributors to dental practice value. This is because the purchaser of the practice wants to be able to seamlessly pick up where the vendor left off and needs patients and profit to do that. The purchaser also requires a place to see those patients, and the best chance for a smooth transition is at the same place that the patients are used to. This means the premises lease needs to either be assigned to the purchaser or the purchaser will need to negotiate a new premises lease. Therefore, your landlord now plays a critical role in enabling you to sell you practice. Do you know your landlord? Do you have a good relationship with your landlord? If not, you should as you will need it one day.

In the current market, buyers usually extend the financing for the purchase of a dental practice to ten years. The banks are generally comfortable with this term on the condition that the premises lease (including options) is of an equal or greater term. This is where the fun begins. Most dentists enter five plus five year leases. Therefore after one year of your current lease you only have nine years left meaning anyone who wants to buy your practice not only has to get your present lease assigned, they also have to extend the term. A simple assignment is not usually a problem, as most leases contain a clause that states “the tenant has the right to assign the lease with the landlords’ consent, such consent not to be unreasonably withheld”. Nowhere does it say however that they have to be reasonable with an extension.

Landlords are in the business of making money and speculating on real estate. While they structure their businesses to produce profit as they collect each monthly rent cheque from their tenants, they also look at the longer term capital appreciation of their underlying asset (your space) and they want to make sure it is being utilized to its highest and best use. The longer they agree to let you have access to the space, the less flexibility they have on what they can do with their asset. When a commercial property is newer, this is not usually a concern, but any property over 20 years old may be able to produce more income if it was demolished and rebuilt as something else.  An example of this occurred recently with a dentist who renewed his lease for the third or fourth time. This time the landlord changed one word in the lease that nobody noticed until it was almost too late. We had listed the practice for sale and that one word almost caused the whole practice sale to fall apart. The word “the” was changed to the word “this” in a clause relating to the option of the landlord to demolish the building by giving the tenant one year’s written notice. In the previous lease the demolition clause was referring to “the” option period in the future. In the renewal the demolition clause referred to “this” option period. Therefore, much to the vendor’s dismay there was a current demolition clause in the active term of their lease. Fortunately, both purchaser and vendor had retained talented dental lawyers who were able to favourable renegotiate the lease with the landlord on terms that were acceptable to the purchaser and the deal closed. That was a good outcome that was very stressful and could have been avoided completely with a good understanding of the language in the lease.

Whether you are thinking of selling your practice or not, I would highly recommend that you become familiar with your lease. I understand it is a big unruly document. If you prefer, you can have a lease broker or lawyer review it for you and advise you if there are any shortcomings that you should try to correct in the next renewal. It is a very important contributor to the value of your practice. An unfavourable lease or an un-cooperative or greedy landlord can cause the sale of your practice to be stalled or in the worst case fall apart all together.

David Lind is a Principal 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 

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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