Should you sell real estate with your dental practice? 3 creative options to consider
Selling your dental practice is a huge decision. There are many factors at play, with one of the biggest factors being whether or not to sell any associated real estate with your dental practice. This decision should ultimately be based on your personal finances and the intrinsic factors associated with managing any real estate holding(s) after the sale of the practice.
If you want to relocate after exiting your practice, retaining ownership of any associated property can present some unexpected issues. If you retain ownership, you’ll have to take on the responsibility of maintaining the property, servicing leases, paying operating expenses, and collecting rent. In essence, you will become the landlord to the new practice owners.
Carefully think through whether you want to continue being involved in the practice (albeit property management) after the sale and transition of your office. If you don’t want any further involvement, then your best option is to sell the real estate. That said, finding a buyer that’s financially able to purchase both your practice and real estate might be difficult.
Alternatively, retaining your property and leasing it back to the new owners can produce a financial upside for you through additional cash flow and increased property value/equity over time. In most cases, keeping the sale of your practice separate from the disposition of any real estate holdings maximizes the value and return of each asset.
Option 1— Rent back to new practice owners
Renting or leasing your real estate to the new owners of your practice is one option. A carefully negotiated lease with the new owner can provide you with a steady cash flow, especially if you pass through all legitimate operating expenses. In addition to regular cash flow, holding onto the property can potentially yield increased appreciation and equity over time. Depending on the type of real estate, a true triple net lease is a good option. This means the tenant is responsible for all maintenance and operating expenses of the property. This option also reduces your involvement and management of the property. Also, you could hire a property management company to oversee all landlord responsibilities. Most property management firms charge a small percentage of the monthly rental income.
Option 2—Sell real estate with practice
It may seem practical and convenient to sell your real estate along with the practice. Selling both could definitely limit the number of potential buyers who have the financial ability or desire to purchase both assets. It could also delay the sale of your practice or possibly require a price discount during negotiations. You need to be aware of all potential tax consequences and liabilities associated with selling both the practice and real estate holdings. One way to avoid some tax liabilities is to lease your real estate, with the option to buy at a later date, to the new owners. Separating your real estate from the practice makes it easier for potential buyers to finance and transition practice assets.
Option 3—Sell real estate to third party investor There’s also the option of selling your real estate to a third party investor. This requires creating a long-term triple net lease with the buyer where the future lease cash flow is sold as an investment. In this scenario, you must have a solid practice with a good credit rating. You also need to secure a long-term lease agreement with the buyer. If all these items are in place, the value of your real estate is maximized because you’re not just selling the bricks and mortar of the real estate; you’re also selling a guaranteed, stable income stream. Triple net lease investments are highly sought after by investors. But remember, this option is contingent upon your practice having a high credit rating and the new buyer’s commitment to a long-term lease.
Ultimately the decision to sell or hold any real estate associated with your practice depends on many personal factors, including your retirement plans, personal finances and physical abilities. Really weigh your willingness and ability to be involved with the management of the property. Also take into consideration the current real estate market in your area. Last, but not least, evaluate your personal finances and long-term objectives for retirement.
