Make more money with a sale-leaseback on your dental practice
By David Seay, BIC, CCIM
December 4, 2012
Practice transitions often involve a real estate transaction. While it may seem like an incoming practice buyer is your ideal real estate buyer, the selling dentist may be leaving money on the table by not considering a sale-leaseback in the years leading up to a practice’s sale.
In a sale-leaseback transaction, an investor purchases a property currently owned and occupied by a user (a dentist in this case). Simultaneous with the sale, the parties execute a lease whereby the user leases the property back from the investor. These sale-leaseback transactions can provide excellent benefits to the investor and the dentist if structured properly.
RELATED: Planning a successful dental practice transition
In theory, the doctor’s lease creates a higher sales price (supported by the stable rental income of the tenant/doctor) and the new owner gets the future rental income as a benefit, most likely still guaranteed by the creditworthiness of the dentist. It can be a win-win situation.
If the doctor selling the practice has not thought about who might buy their practice real estate in advance and the only choice available is the buying doctor, then the seller may be tempted to drop the real estate sales price prematurely, simply to make the entire transition deal work. Some new dentists are even struggling to get approved for real estate loans (practice purchase loans can even be challenging) given the high amount of dental school debt common today.
RELATED: Negotiating a practice sale
If the real estate deal is not a good deal independent of the practice sale, then the selling doctor may want to consider holding the property and becoming a landlord and accepting rental income as a retirement benefit. This can give the selling doctor more opportunities to sell at a future date, even if they ultimately sell to the dentist that purchased their practice. They can also market the real estate for sale to an investor that would love to have a dentist as a creditworthy tenant. Investors are always looking for good deals and predictable rates of return. Medical and dental tenants are typically a safe investment for real estate investors, especially if the doctor will sign or “leaseback” a five-year lease (or longer). The leases are often triple net (aka NNN or Net, Net, Net) leases, in which the tenant will pay for all of the expenses to operate the property, including property taxes, building insurance and any common area maintenance fees.
Unfortunately, some doctors wait until retirement to start thinking about the real estate component of their practice, which greatly limits their potential buyers and could even limit their property value.
RELATED: The sale of the dental practice: an office manager's perspective
Sale-leasebacks allow the dentist to attract quality buyers who will pay top dollar well before a practice transition starts to occur. Some believe that the real estate component of a practice sale is important to the overall transition. However, most dental consumers expect offices to be new and updated, and if a selling doctor is selling an older space, there is no guarantee that the buying doctor will care as much about the real estate experience as much as they will about the active patients and associated production for sale. The selling dentist should take care to structure a good lease that will allow them to assign their lease to another dentist who might acquire the practice so they can exit the lease agreement earlier than anticipated if an unexpected buyer falls in their lap.
To properly explore sale-leasebacks, dental professionals need to engage quality advisors including CPAs, attorneys and real estate brokers, as there are many risks to consider, including tax impact, forfeiture of future real estate appreciation and the loss of real estate ownership control, but the benefits include freeing up capital to invest elsewhere (potentially tax free with IRS Section 1031) and tax-deductible lease payments. Advanced planning and self-education of the options are critical to any dental professional and each dentist has a different tax situation.
Owners/users have used sale-leaseback transactions for decades to free up capital invested in real estate and convert it to alternative uses, especially in challenging economic times – but don’t wait until transition time to explore them, or you could be forced into a weaker negotiating position.
