Deciding to sell your dental practice is a huge transition. Transferring the practice itself can be daunting, but it can become even more complicated if you own the commercial real estate because you have to decide whether to sell the commercial space too.
For many transactions, that pairing will make sense because it can increase the sale price of both properties, but that will not be true of every situation as you may be relying on it for your retirement. In other words, your personal finances, how you want to sell your practice, and even your geographic location will dictate whether selling the commercial property at the same time will be a good idea for you.
For example, if you are planning to move away from the area, you may not want to continue to hold real estate in that part of the country and manage it from a distance. On the other hand, retaining the property and using it as another income source through a lease agreement may be a great way to help fund a transition into retirement.
Other factors that might affect your decision include:
Generally, there are four options for your building if you are also selling your dental practice.
If you are not ready to part with the building just yet, you can rent or lease it to the new practice owners. In this way, they can maintain your current location without making an additional investment in purchasing the real property. The location of a practice is a big part of the goodwill that someone is paying for when they purchase your practice, so they will want to stay at that location.
You also get the benefit of cash flow from the rental agreement. Over time, you can also add equity to the commercial property, and the building may appreciate, making a sale more attractive in the future.
By negotiating a triple-net lease, you can essentially hold the rental building with minimal additional cost to you. A triple-net lease means that the tenant will take care of not only the lease payment, but also the utilities, maintenance, and any other operating expenses. This type of lease is not only monetarily beneficial, but it also allows you to have very little involvement with the ongoing needs of the property.
You could also hire a third-party management company to take care of any issues that arise, making your geographic location much more flexible. Many property management companies are very affordable, only charging a relatively small percentage of the rental income.
Of course, by renting the building to the new owners, you run the risk that they will vacate when the lease is over. In that type of situation, you need to evaluate how likely it is that you can find a new leasee when that time comes. Your “guaranteed” income stream is unstable if you have trouble renting the building past the initial lease.
Cutting ties with your practice by selling your commercial building along with the practice can be a very appealing way to make a complete transition away from your practice. As you head toward retirement, you may not need the cash flow or want to deal with the headaches of being a landlord. The extra time that it takes to sell the building to a third party may also make that option undesirable or even impossible in some circumstances as well.
However, there can be some drawbacks to this type of arrangement, including:
Despite these drawbacks, careful planning can allow you to sell both the practice and the real property at the same time to the same person or entity.
Depending on where your office is located, any potential new owner may want you to sell the property to them. If it is in a vibrant part of town where other similar businesses are located, having that type of property for a new owner could be a great investment. It could also significantly increase the overall purchase price of your practice.
If, for example, the building you own has other tenants, that type of investment might be very attractive to a practice owner who not only wants to operate out of the building but likes the idea of having another revenue source. Of course, if there are several tenants, the asking price will (and should!) increase, which can be somewhat intimidating to someone who is just getting their feet on the ground in the dental field.
However, a mortgage payment can be less than a lease payment in some cases, and that may be important to point out to a potential buyer.
If you are not convinced you want to be a landlord for anyone taking over your practice, you may want to consider selling the property to a third-party. This option solves any issues with the price increase with the practice that may make the purchase cost-prohibitive to some potential buyers. It also allows you to completely step away from the practice and the building, cutting ties completely.
In this type of transaction, you would first set up the triple-net lease with the individual or entity buying your practice. This would preferably be a long-term lease, as that is more marketable to new commercial real property buyers. Then, you sell not only the building itself but also the ongoing income stream to a third-party. The building and lease combination allows you to maximize the potential sale price to a third party.
Of course, this type of transaction is contingent on getting the long-term lease. It also requires you to find two buyers—one for your practice and another for your real estate. That the process can be time-consuming, and, in some markets, it can be challenging to find an investor who wants to take on the role of the landlord.
Keep in mind that if you are selling the building to a third-party, the individual or entity buying your practice may want a right-of-first refusal to combat the potential of having a non-dentist landlord. You can negotiate that type of term (sometimes for an added purchase price) into your purchase agreement.
The fourth option really only comes into play if the value of your practice is below the value of the real estate in which it operates. This type of scenario is challenging, but you may have the option of selling your real estate separately while also selling your patient records to dentists who may be in your area. Those dentists may want to take on the new patients without having to open another physical location.
The real estate may bring a much higher value if it is marketed to more than just those who want to open a dental practice, so a completely separate transaction in that type of situation may be a viable option.
It is a good idea to run through your options with a professional who understands the nuances of these sales. Dental and Medical Counsel helps dentists transition out of their practice regularly, and we can help you evaluate your options given your unique situation. Call Dental & Medical Counsel today for more information or use the button below to request a free consultation with dental attorney Ali Oromchian.
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