The Practice Buyer's Corner - Random Musings from the Buy-Side
The Practice Buyer's Corner - Random Musings from the Buy-Side
The purpose of this blog is to share current, real world, experiences on the topics of practice valuation, practice transition, retirement planning, and building equity value - over time - in your dental practice.
Blog By:
seanepp
seanepp

Owner Occupied Real Estate

4/24/2013 6:22:12 PM   |   Comments: 0   |   Views: 569
For many doctors, owning your own real estate can be an effective tax strategy over the arc of a career.  That being said, we encounter an endless number of practices involving owner-occupied real estate that becomes a stumbling block upon transition or retirement. 

Items to consider:

- Co-location or space sharing arrangements may seem compelling on the front end, but they tend to be incredibly messy on the back end.  Think long and hard about entering into facility arrangements where you don't have 100% control over the end game.  These scenarios can significantly impair the value of your practice and the ease at which you can transition it. 

- If you've owned and leased your real estate to yourself over the years you've probably paid yourself a premium to "market" rates - a perfectly normal tax strategy.  Be prepared to mark your rent to market when selling either the business or the real estate to a third party as what you pay yourself is rarely indicative of market and impairs the valuation of your practice.

- Be mindful of how/where you finance your dental-specific build-outs and improvements.  The cost of making any space a dental practice is an investment of the business, not the real estate.  In owner-occupied situations these waters are prone to get muddied - e.g. build-outs and even sometimes equipment related to the dental practice/business being financed and secured by the building's debt.  In these scenarios, when you go to sell your practice the investment/debt related to the "business" must be stripped out and paid off at closing to ensure clean transfer of title to the new owner.  Even if the buyer is purchasing both the business and the real estate a reallocation of value and borrowing is usually merited.  Further, if you're solely a tenant and have no ownership in the real estate but you've financed build-outs and equipment via the lease vs. cash or bank debt you should be prepared to "buy-out/down" your landlord for the business' debt buried in the lease economics.

- Be wary of investing in multi-tenant space.  If possible, focus on stand-alone facilities or professional condo and strip mall settings with covenants which prevent other general dentistry tenants.  It is surprisingly common to find professional condo settings housing multiple GPs - this is not a positive when it comes to selling your practice.

Look forward to questions and feedback!

Sean
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