When Tanner Milne realized that there was no commercial real estate broker in the Phoenix valley who specialized in helping dentists, he created Menlo Group CRE. Since then he has brokered over 1000 real estate transactions for dentists and advises them on leases, renewals, purchases, and new builds. Listen in on this episode to avoid some of the biggest mistakes dentists make in commercial real estate.
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Biography of Tanner Milne:
Tanner Milne has been involved with commercial real estate development and brokerage since 2003 and has negotiated over 500 dental leases and completed over 1,000 commercial real estate transactions. In the wake of the recession, Tanner founded Menlo Group Commercial Real Estate in October of 2008. Although Menlo Group works with landlords, sellers, buyers, and tenants, they have developed a niche practice working with dentists in opening new offices, expansions, relocations, building purchases, and lease renewal negotiations. Tanner earned an undergraduate degree from Brigham Young University and a Master’s Degree in Business Administration from Arizona State University.
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It’s a huge, huge luxury today to be- I found a rare gem. Most dentist think that they need more training on how to do a root canal, filling or a crown but at least once in your career or maybe every 15 to 20 years you have to deal with your facility, your real estate. You’ve got to decide whether to buy a piece of land or buy a building and I’ve got the guy- Tanner Milne- who probably does 60% of all that in Phoenix, Arizona which is 4.7 million people in the metro and my friends that know you, Ryan Isaac and all those, everybody that I found that talks about you is you’re the make, you’re a genius in this, this is all you do.
This is like talking to an orthodontist who only does braces. This is all your do so first of all thanks for giving me a hour of your time and I feel dumb as an interviewer because I don’t really even know what questions I should be asking you so let’s start with first, introduce yourself. How did you get into dentistry, what are the low hanging fruit dental problems and needs when it comes to a facility and I’m sure everybody asks you, should they rent, should they own, so I’ve got an hour with you and I don’t know what to ask you so tell us how did you get into dentistry and what is it, Tanner, that you actually do?
Tanner Milne: You bet. Let me give you a bit of a background. So originally I got into the market on the development side so selling buildings. In the height of the market there were a lot of doctors and dentists buying these office condos.
Howard Farran: What year was that?
Tanner Milne: ’04, ’05. Ramping up, really ’03, ’04, ’05 were extremely robust and dynamic times in the market. The economy was great, everybody was buying buildings and nobody even questioned pricing. Money a plenty, right. You got money on pro forma and it was really at that time, I interacted with a lot of dentists and saw reoccurring relationships. I saw the same lenders, I saw the same distributors as far as equipment, I saw architects and contractors and I saw a consistent theme in this team and it was actually a lender- this was about ’06, ’07 who said you know, there’s really nobody in the valley that’s kind of specialized in this piece and I can introduce you to a whole new world. So I was already specializing in that space when in 2008 I started Milne Group Commercial Real Estate and from there it’s just gone gang busters because we’ve kind of figured out and really through the recession, recession hit in 2008 and ’09 and ’10 were crazy years so the value we added to dentists has evolved to the point where the doctor I just mentioned that I just got off the phone with, the strategy there, so from a perspective of helping these doctors determine where do they start up and do they start up and leasing versus buying and building versus buying or leasing and ’09, ’10, ’11 it was- I owe a million five on my building and it’s worth 500 thousand dollars.
What do I do?
Howard Farran: Did you give them a gun or a rope?
Tanner Milne: I tell people all the time, I felt like I was an oncologist and literally I had to look husband and wife in the eye or partners in the eye and say, basically you’re going to die and go home and enjoy your family kind of thing. We actually, at any point in the market, we’ve kind of created strategies where sometimes we provably did a couple of dozen where we sold the building off to an investor, they did a short sale and then this investor leased back the building to the dentists and he was able to stay there and reduce his debt and operate as normal.
Now his debt is serviced instead of the $15 000 a month mortgage payments etc., it’s now a $5000 a month lease payment. So that was a strategy then and it’s really trying to identify, what’s the need? What’s the situation? We do a tremendous amount of lease renewals and a think a lot of the times, a dentist that’s been in a building for 10 years, they look at it and say I’m tired of paying rent. I keep throwing money away and I look at it and say is that the best thing for your business, because you’ve got to be business owner over here and real estate investor over here and they may not be the same role.
So investing in your real estate may not be the best strategy. I surround myself with a great team so as far as tax advice and financial advice and lending, I don’t make those assessments, I take all the best resources information I have and say you need to make the best decision for your practice. How do you make the most money in a practice and if it means buying the building, buy the building. So there it goes.
Howard Farran: I think it’s the same thing with the mindset of a dentist if he wants to be an associate or own their own practice. I’ve had so many associates and known so many that were making like $250 000 a year but they were tired of being an associate. So they had to start their own practice and for the rest of their life they made $150 000. So they lost $100 000 a year in income and quadrupled their headaches so they could make $100 000 less money.
I’ll never forget, I was friends with Dan Carney, the founder of Pizza Hut because I was born in Wichita and lived in the same part of town and same church and all that stuff, I said so do you want to own all your Pizza Hut land and buildings? He said I would take 10 000 of them and throw them in the bottom of the ocean. I don’t want to own land and a building, especially in some small town in Kearney, Nebraska, he says why do I want to own land and a building in Kearney, Nebraska, I’m in pizza business, that’s where the money is.
I also noticed it was interesting in MBA school they talk about some of the biggest resorts in the world like Marriott and Hilton and whatever, they’ll find an investor to build a 50 million dollar resort and then they lease it from him. These guys are publically traded and awash in cash and they don’t want to own the land and building so a lot of times dentists want to own their own business and own their own building purely for hormonal territorial, like you let your dog out in the backyard and he has to go pee on all four corners and a lot of the times that about the same brain set of wanting to own your own business and own your own land and building.
So put on the hat, first of all do the majority of dentists lease or own their building? Do you have any rough estimates on?
Tanner Milne: I would say, not just locally but nationally, you probably have more than 50% lease than owned and I think we went through a period of time where everyone felt like they had to own and certainly in the Valley, the developers did a great job marketing, basically saying- they would show a stack of rent checks over 10 years and say you want to throw all that money away? Why are you doing that? You should own your building.
But the fact of the matter is if you’re a dentist on a high traffic, high visible or in a high traffic shopping center and you’re doing a million plus, a million five in collections, why on earth would you move? And that’s where I think I’m grateful professionally where I’m at a point in my career where I don’t look at where do I make the most money, because frankly I make the most money when they move but every single day, I’ve had three conversations already today where I’m saying why are you even talking about moving? Because the economics are so favorable and the risk of moving, I think the variables are so great that why don’t you make the best decision for the business. The discretionary income that you have by making money in your practice, you want to be a real estate investor? Go buy a shopping center. Go buy an apartment complex. Invest in Reits.
There are ways to invest in real estate. Buy single family homes. It doesn’t have to be your own building and sometimes it makes sense because you can be either leasing- there’s a lot of times where you either lease the building you’re in or you own it and it’s- you can underwrite the numbers and say it’s just rent replacement right? To be in the same facility, to pay $5000 a month in rent or $5000 a month in a mortgage payment, that’s an easier decision. Now if it’s a $25 000 mortgage payment and a $5000 in rent, those are easier mathematical numbers so I just want to present the data and say let’s make a calculated decision.
Howard Farran: You know another thing you said was they were renting in a retail center and they might have been by a Big Box, Kroger or grocery store. Lots of traffic, lots of walk-ins, high visibility and then they go save money buying some little medical dental building condo or whatever and they save this rent but I look at a lot of that rent in the high visible areas, maybe that isn’t a rent payment. Maybe that’s marketing. Maybe you should allot half your rent under marketing. When they say a dental business should spend 3% on marketing and advertising, well maybe if you could be renting for $2500 and you’re renting for $5000 in a highly visible parking lot that gets 40 000 cars a month, well maybe in your own mind you should just allot half that rent to marketing and advertising because what’s going to make the most sense, especially for me and I’m a dentist, is if someone comes in and they broke their tooth or they have a toothache and I do a $2500 root canal, build up and crown. That’s how I make my money. Not on the appreciation of the land and building over 30 years.
Tanner Milne: Right.
Howard Farran: We talked about 50% lease and 50% own a building, is that a different mix of talking to the half the dentists in urban areas versus half the dentists in the rural? Is it a lot different here in say Phoenix and Scottsdale and Mesa and Gilbert as opposed to Carefree or Maricopa or Arizona City or Eloy?
Tanner Milne: Absolutely and I would say probably in the majority of markets, in a highly dense metro area, whether it’s multi-tenant medical office buildings or retail shopping centers etc. you’re buying larger leasing. It’s tertiary markets, it’s less in rural areas and it makes sense to buy. I mean you’re the hometown dentist or there’s three of four hometown dentists and you’re in the same place for 25 years. Okay now we can make justification to why not but you know what? In a constantly ever changing market sometimes you’ve got to move to revitalize the entire operation and I can show you statistics where someone moves and their collections jump 20-30% because the entire staff, the ambience has changed, the energy has changed, the excitement is there so do you really want to lock yourself into a 25 or 30 year decision?
I think that’s where the old way of running a dental practice-
Howard Farran: So you’re saying don’t lock your building in for 30 years when your marriage will only last 15? Did I just hear that right? I’m just kidding.
Okay so let’s start with the lease part. I’m not even smart enough to ask you, I don’t even know what question to ask. So tell the viewers what they should be thinking about when they’re approaching a lease?
Tanner Milne: Okay. Well let’s talk about the first lease and then let’s talk about the lease renewal process because we get involved in a lot of deals where the lease was signed 5, 7, 10 years ago and then we’re involved in the new process because a lot of times- and dentistry is very unique. There’s a lot more transition in dental practices than you see in medical specialty or even medical family practice offices where there’s not the same transition of people buying and selling. As you know there’s a lot of velocity where a guy will work a practice for three to five years and then decide to sell it.
Not necessarily because he just created a lot of value and there’s upside and he wants to pull equity out, it’s just maybe their getting bored. It’s just I tend to see a lot of velocity.
Howard Farran: And you think more so in dentistry than in medicine?
Tanner Milne: Correct.
Howard Farran: And what is that based on, just what you see or numbers?
Tanner Milne: Well oddly enough you don’t see the same valuations in medical practices. I know in every market people have different valuations, whether it’s percentage collections or whether it’s multiple on EBITDA or whatever the valuations methodology is, dentists are willing to buy goodwill and a stream of revenue whereas you don’t see that in medical.
Howard Farran: And they don’t advertise either.
Tanner Milne: No, correct.
Howard Farran: Because with Medicaid, Medicare and all that the margin is so low and the supply per patient is so high it’s not really a business.
Tanner Milne: Right.
Howard Farran: They got in bed with the government in 1962 and if you get in bed with anybody you’re going to get screwed and the Medicaid and the Medicare, you’re right. You don’t ever see them advertise. Only a healthy business advertises. So you see a lot of dentists, veterinarians, chiropractors because they can grow and build a healthy business but medicine, ever since they got in bed with Medicare it’s not really a business.
Too many patients, you don’t have enough time, the reimbursements are so low, it’s just- you just go in there and get exhausted all day.
Tanner Milne: True. So going into initial lease, you kind of want to being with what’s your exit strategy and I think every dentist will go into a deal saying well I’m going to be here for 20 years. We want to structure the lease such that they do have escapes and just the basic things that we look at, and I’ll give you an example of a deal that I reviewed last Thursday or Wednesday. So we look at for example on a shopping center, a lot of these are very shopping center or multi tenant building specific, but a relocation clause. Can the landlord relocate you because they have a better tenant, bigger tenant and so the question really becomes did you go to that location for the view, the signage the whatever, but what I would say 80% of the leases I review have a relocation clause in it that the landlord can relocate you so a substantially similar location and that’s detrimental to the dentist.
Howard Farran: So you’re saying, okay say I rent next to a big Fries or Safeway or Walgreens and the Walgreens wants to expand it’s sixe and for that to happen you mean they have to get rid of that little dentist, take in 2000 square feet. Is that what you’re talking about?
Tanner Milne: Correct. So let’s say you went to that space because it’s the corner. Great visibility to the corner of Main and Main, and they say oh we have another location on the other side of the shopping center, same size, same deal, we’ll even rebuild it for you. It’s not the same appeal, not the same space, in fact you may not have even gone to the shopping center if that wasn’t the space you were going to get, right?
But they can do that and they do it.
Howard Farran: For clarity purposes, I want to say that in Phoenix, there is no Main and Main. I think that would be, I think- I’ve never heard Main and Main. So you’re saying to avoid the relocation clause or for your clients you take that out.
Tanner Milne: Yeah, get that out, get the relocation clause out.
Howard Farran: Okay get the relocation clause out.
Tanner Milne: With dentists, I encounter this all the time- personal guarantees. So again, shopping center, landlord gives $60 000 to the tenant for improvements to their space so they’re getting $60 000 out of the total billed out cost of $200 000, but the landlord requires a full personal guarantee and in fact those personal guarantees typically endure in perpetuity so throughout any renewal period and at least a dozen times I’ve gotten a call from a dentist that has since sold his practice and says hey I got a call from the landlord and they say I’m a guarantor and the tenant is in default and they’re coming after me, and so the real question just becomes what does your guarantee obligate you to?
How long should it endure? Does it just endure for the overall cost for the landlord? So what I look at, I say I get it: a landlord should get some guarantee because they just gave you $60 000, they gave your free rent and they’ve born costs to do that deal, but that doesn’t mean you have to guarantee the lease for the next 20 years and you’re personally viable for the term of that deal?
Howard Farran: And it reminds me always of the old famous saying, you know what you know but you don’t know what you don’t know and some of us don’t even know what we don’t know and dentists, physicians and lawyers have a high tendency to think they basically know almost everything and they’re not humble people and when I look at the entrepreneur millionaires, Harvard Business Review just did an article last month saying when they study the most successful CEO’s and big, medium and small companies, humility seemed to be the most highest in common trait of the most successful CEO’s because a humble person will listen, as humble person will ask advice, a humble person will listen to the customers and the employees. Humble people listen and learn. It’s arrogant, know it all physicians, dentists, lawyers- why would I have to have Tanner read my lease? I’m a doctor and you’re not and they’re calling back 20 years later and they’re a personal guarantee on a defaulting tenant.
By the way Tanner, do you represent the dentist or the real estate person in your business? Or do you do both?
Tanner Milne: Our firm does both, correct.
Howard Farran: And then you disclose that to the dentist if you’re representing the dentist?
Tanner Milne: it’s very infrequent that we would represent both parties.
Howard Farran: And can you represent somebody outside of Arizona or is that a license thing and you can only do Arizona?
Tanner Milne: I have done- because there’s kind of different roles to what we do. A lot of people look at us as realtors, space finders, that’s all we do is find space for dentists but we say that’s a really small part of the job. In fact anyone who has access to the data can find space. It’s really taking people through a process and really the intelligence of the negotiation and the negotiation process, framework, training and experience really. I’ve completed over 1000 transactions so really to say, every time- haven’t seen it all because I’ll tell you a situation.
Doctor ready to sign a lease last week, it comes back, attorneys already reviewed it. The dentist’s attorney has already reviewed the lease and he says I’m ready to go I want to sign by Friday. So this was Wednesday of last week and I said you know what, let me just go through it one more time to make sure everything’s there, again my job is just to find the space right?
I go through it and there’s this section 8.2 called alteration, and it essentially says that 30 days prior to the lease expiration, should the landlord so choose they can require the tenant to- it was basically put the space back to whatever form they so desire.
It literally the word desire- what is that? Back to gray shell, vanilla shell, I mean and that could have 20 or 40 thousand dollars at the end of the lease, the landlord could say oh by the way, we just leased this space to a pizza guy and we’d like it back in XYZ condition. That’s what the lease said so I saw that and I’m like you’ve got to be kidding me!
I think a lot of times a dentist push back because I see this clause and I’m like you agreed to this seven years ago where now I’m trying to prevent it on the front side and they’re like well what landlord wouldn’t want my TI’s? I just improved the landlord’s space. Well not if you’re a shopping center owner and you’re going to put Domino’s Pizza into your space. They don’t care about your dental buildup.
Howard Farran: Tell me a couple of things logistically. The whole goal of Dentaltown, with Dentaltown.com no dentist would ever have to practice solo again. How much space does an average dentist rent?
Tanner Milne: Solo practitioner? Typically between 1 800 and 2 400 square feet.
Howard Farran: 1 800 to 2 400? And what would be the largest and the smallest? What would be the standard deviation plus three minus three in your 1000+ transactions?
Tanner Milne: Single dentists? I would say you’re probably 1 800 to even 1 900 to 2 100, that’s probably the tightened range. I’ve seen deals as low as 1 200 to 1 400 square feet and you know really- I think people are have started to tighten their belt. Seven or eight years ago the solo dentist was always looking 2 500+ because they needed the extra office and they needed the big, oversized bathroom and shower and the huge break room, I mean you make a lot of money in your break room right?
So it’s those things to say, you’ve got to run a comfortable office but at the end of the day I’m trying to help these guys see that they’ve got to make money.
Howard Farran: I always remind the dentists, you always hear people making fun of poor people who live in a very squalor condition but they’re driving a $30 000 car, and you say when you’re car is worth more than your home that doesn’t seem right and I’ve told many kids in my practice over 28 years, I’ve walked some of them out to their car because they wanted to show me their car, and they walk me out and show me this $30 000 monster truck or it’s a purple low rider from Guadalupe and it’s just al decked out, and I always put my arm around them and say you know, if you would have sent this money to DeVry and went to school for 18 months, you’d have a job with healthcare and dental and that’s going to make all those single girls more attracted to you than a $30 000 monster truck or a $30 000 purple low rider that’s doing this in my parking lot, you know what I mean?
A lot of the dentists when I see their 5000 square foot home and then their small little 1500 square foot office in a horrible location, I’m like dude that’s backwards. If you could have had a better location or a better business, I mean shouldn’t your business earning you all your money be more of your finances than your consumption? Why do you have a boat and a RV and you don’t have a digital x-ray system? It’s kind of backwards.
So individuals out there, 1 800 to 2 400, a little tighter 1 900, 2000, tell me this, you talked about covenant- you hear a lot of dentists ask they can get a covenant that no other dentists can come in here and compete? Is that legal? Is that common?
Tanner Milne: Very common. Yeah that’s another one, exclusive use. So to get an exclusive, especially in a shopping center, or these office condos or multi tenant office buildings it’s very uncommon to get, but if you’re a specialist no question you should get an exclusive use or a covenant. It’s not a non-compete but it’s an exclusive use provision.
Howard Farran: You’re saying it’s more important for a specialist than a general dentist?
Tanner Milne: No, I’m just saying that if a specialist goes into a property that has three general dentists, and they’re going in there because they see an in-place referral source, they better ensure they get an exclusive use. If you’re in a shopping center there’s no reason you shouldn’t get an exclusive use although I’ve seen situations where they don’t have an exclusive use or the provision is called preferential use or we won’t lease to another dentist unless they’re this type of company and I’ve seen where the small 1 800 square foot dentists that’s in-line shops thinks he’s secure and then the landlord put s Pacific Dental Services right out on the front of the building because they were bigger than that language restricted to. So you’ve really got to think about what are your risks because why are you going into to shopping center paying extremely high rent if then your competitor is going to be right out in front of you.
Howard Farran: So if I’m a general dentist would I want an exclusive to where even specialists couldn’t go in?
Tanner Milne: It depends. I’ve negotiated where almost to the point where it’s put me in a tough spot where I put a general dentist in a space and get him an exclusive on any type of dentistry and then a pediatric dentist says hey I’d love to be right next door, I think that would be a great thing but the general dentist would have to be the one to say to the landlord I’m okay with him coming in and relinquishing the exclusive on pediatric.
Howard Farran: So you’ve done that before?
Tanner Milne: Absolutely.
Howard Farran: Okay and since you brought up corporate dentistry, I don’t like the term corporate dentistry because almost any individual dentist I know who’s a solo is incorporated so- what do you call it? I call it big chain dentistry or what?
Tanner Milne: I guess DMO or DSO.
Howard Farran: DSO, dental services organization. So what are they doing? Do they buy their land and building? Are they leasing?
Tanner Milne: Well they all lease. In fact I don’t work with Pacific Dental Services but what I understand is they see so much value in the locations that they’ll pay more rent than anybody in town, because you made the comment about Domino’s Pizza. Retailers look at visibility just like Walgreens does, it’s a cost of doing business, it’s another line item and they can attribute some of it to marketing exposure and say we’ve got to be in the best locations and when I’m representing Dr. Johnson into a shopping center and I’m trying to get the lowest rent, the most amount of TI’s, the most amount of free rent, guess what? I’ll get blown out every day by Dunkin Donuts or Five Guys or Jimmy John’s, some of these retailers because they’ll pay 40% more than I’m trying to negotiate because they want the location that bad and they’ll pay more than list price because they look at it as I’m going to do 3-5 million in sales in that location and that’s just what it is. That’s what Pacific Dental Services, they pay so much higher rent than anyone else on a price per foot basis, but they pay for the best locations.
Howard Farran: Yeah and that Jimmy John’s, I have four boys so I probably gave them one million of that three million, I mean I can cook them a complete dinner and one hour later they drive down to Jimmy John’s. I mean what they can eat is amazing.
So Tanner when you’re talking to these tenants, I’ve heard some landlords say at the end of the day, you’re lucky, I’m dealing with the dentist because a dentist doesn’t really do anything for my shopping where if it had a Jimmy John’s or a Dunkin Donuts or a Starbucks next to my grocery store that would make the center more attractive but having a dentist or an endodontist or a pediatric dentist, that’s really not the optimum ideal mix.
Do you hear that when you’re dealing with rentals or is it just money?
Tanner Milne: No all the time. In fact part of the negotiation is being able to tell a compelling story and I think a lot of retailers, they almost need to be reminded that these businesses, these other businesses are very cyclical. They’re fad, it’s a fad, I mean frozen yoghurt. Let’s use frozen yoghurt and the key. So if I’m negotiating a dental deal I will say let’s keep in mind this is not a frozen yoghurt place and I’ll get pushed back because we know especially in the Phoenix market, you’ve got certain markets that got hit really hard by the recession. There were a lot of dentists that didn’t make it but still, statistically, the default rate is significantly lower than any other industry or business and so the stability of a dental office is exponentially greater than Five Guys Pizza Brothers, or whatever. The local pizza shop but even the nationals, I’ve just got to find the examples because I think about Quiznos. Quiznos was a great, national brand. I can tell you at least in the Valley here, they’ve blown out at least a dozen locations.
Howard Farran: What’s blown out mean?
Tanner Milne: They’ve defaulted.
Howard Farran: Okay defaulted, and that’s called blown out?
Tanner Milne: Yeah well that’s what I call it.
Howard Farran: So they defaulted and is that because Firehouse Subs and Jimmy John’s has?
Tanner Milne: Well I think there’s always a new, latest and greatest concept that’s the hot concept and it’s hot for two years and then it fizzles out and so these franchise models, they become attractive to these landlords and I think the argument of publically traded, national is not the same story that it used to be because if you’ve read Jim Collins Good to Great.
Howard Farran: Yes, my all time favorite book. Jim Collins, Good to Great, How The Mighty Fall. Built to last and his last one was-
Tanner Milne: Great by Choice.
Howard Farran: Yeah those are my four all time favorite books of all time. I’m sorry to interrupt, keep going.
Tanner Milne: Even companies that were on that list are gone. Circuit City, gone. So I think to say these are companies that can endure the test of time, have you read the book Black Swan?
Howard Farran: No.
Tanner Milne: It’s a Black Swan. It’s the 9/11. Who could have predicted, no one predicted 9/11 or a turkey. A turkey doesn’t ever predict Thanksgiving Day. It just happens, life is good until it’s not. So it’s helping these landlords understand, look, Dr. Johnson, he could default but statistically the default rate is less than 1%.
Howard Farran: Remind the viewers that publically traded stocks on Wall Street in 1900, only one General Electric, was still trading in the year 2000. So all the greatest companies in the world were all gone except for GE which kind of freakishly had a couple of weird geniuses. One was the Thomas Edison founder then the other one was that Jack Welsh super manager. I loved his book too, From the Gut by Jack Welsh. Other than GE the whole Fortune 500 was gone which also makes me wonder, I’m 52, when I got out of school there was a publically traded Orthodontic Centers of America on the New York Stock Exchange and a dozen companies on NASDAQ and then I watched 10 years later they were all busted and gone.
Then it was 10 years of silence and now they’re all back again. Hartland Dental and Pacific and all this and an old guy like me, who’s 52, is thinking I’ve kind of seen this before, and everybody’s saying oh it’s all different, it’s all different. They say it’s different at the top of every real estate stock market bubble, real estate bubble, remember in 2000 the internet was going to change everything and these companies would be endlessly profitable for eternity and then NASDAQ went from 5 800 to 1 200 and so the reason I don’t trust any of the corporate chains first, when you’ve been doing dentistry 28 years, I’ve already seen this before. They all came up and they all exploded and I’m seeing the same red flags, and the red flags on the first time was they would buy your practice and you had to work there for five years on the five year and one second, all the founders ran.
I’m seeing that again this time so when Warren Buffett buys your company, the founders all stay till they die but with the big chains the founders all leave the second they legally, contractually can get the hell out of there. So to me, isn’t that a huge red flag? I mean the business is people, time and money and you’re people only stay with you when they’re contractually the lawyer says you have to for money and then the minute it goes to well I’m free to go and they all fly out the cage, God! So I’m predicting, I’m 52, I think by 62 I’m fully predicting it’s the same thing. What’s the difference in the story?
Tanner Milne: Can I make a comment about that though? The one thing that I, you commented at the very beginning about these associates, I think a lot of times these guys don’t confront the brutal facts, Jim Collins right, there are some guys, and I’m not advocating for corporate dentistry or DSO’s or DMO’s but there are dentists that are clinicians that are not meant to be business owners and they think that they’ve given in or they’ve waved their flag in the air and say I’m a failure if I don’t go into private practice and own my own practice but over and over I’ve seen guys where they’re just not cut out for business ownership and so, again I’m not advocating for the specific corporate models, however I think there are dentists, especially if they’re listening to this podcast they need to understand, it’s okay that you’re not a great business owner and unfortunately, I hate to see the guys that make a million dollar decision to realize I don’t have the grit, the gut, the staying power or whatever it is to be a business owner and that’s okay.
We’re not here to say everyone is a perfect fit for me because sometimes I’m working with an associate that thinks that that’s what he’s supposed to do and maybe he’s getting pushed by a vendor and I look at him and I say really? You’re making $300 000 as an associate? Do you really want to be a business owner? Do you really have what it takes? Do you really want to be processing books and dealing with staff and all that other stuff that comes with business ownership and their like, you’re right.
Howard Farran: It reminds me of a change of thinking from when I got out of college to now. When I was in college they used to formally teach you that there were geniuses, the smartest guy ever was Sir Isaac Newton who invented calculus in 1687 and then there was Albert Einstein and I’ll call bullshit, so Sir Isaac Newton invented calculus when no one else was doing math and he made a bunch of money with his book and he invested it in the first stock market bubble that popped of all time, do you know what they were trading in back then in 1687? Tulip bulbs. Remember that one? And tulip bulbs just kept doubling and doubling in price. Sir Isaac Newton put all of his money in tulip bulbs and lost it all and died a popper.
You can also tell that by you know when they say it cost you an arm and a leg? Because before camera’s everything was painting and the painting was paid by the piece so you can go back in time as see if someone was rich. If they were really rich it would be a full body painting and including their bird, dog and maybe their wife and kids, but Sir Isaac Newton is just a picture of his face. So he only had enough money to have his head painted and then Albert Einstein got like a million dollars for his Nobel Prize in physics and he had to give it to his ex in a divorce who was his first cousin and so what I say about the business owner is that, I think they feel bad because they think they should be smart in that, or their not smart in that and it’s a failure and what the neuroanatomists are telling us is that if they look at the brains of 100 ants or 100 monkeys or 100 humans or 100 dolphins, we all have the same brain, what makes you smart is if you’re interested in something and if business is really exciting, like you and I have both read all the Jim Collins books whereas this other guy, he might be deer hunting or elk hunting or maybe he’s involved with his kid’s boy scouts, he’s just not interested in it.
If you’re not genuinely like want to read business books, then you probably shouldn’t be a business man. It’s not like you’re dumb or should feel guilty or you’re saying well if I can do a root canal I should be able to figure out this business, your brain is the same as everyone else and you’re only going to figure out what you’re interested in.
I just saw a violinist the other day and afterwards people walking to the car like oh my God, she’s such a musical genius- I’m like no she’s not. She played violin four hours a day for 25 years. Do you want to do it? I’m asking you do you want to play violin four hours a day for a quarter of a century? No, it doesn’t mean your brain is missing a part of its bulb, you’ve got a ping pong sized part of your brain missing where the music center goes, you’re just not interested and I think if dentists aren’t interested in marketing and advertising and HR and tracking and retaining staff and doing quarterly interviews and looking at marketing and websites, if that just doesn’t fuel them then they shouldn’t do it and I can give you the names of 100 people who used to make $250 000 a year as an associate, now making $100 000 a year and very miserable owning all these problems.
And you see that dentist. When there’s something going on with the staff they just go in their private office and shut the door. Have you ever been watching a NFL football game and they’re losing so the head coach just like runs and goes back into the tunnel and goes in his office and shuts the door? I mean obviously the person isn’t built for managing.
So we talked about leasing. Is there any more covenants that you should talk about in the lease? You said there’s a difference between the lease and the lease renewal?
Tanner Milne: So with the lease renewal it just means that, certainly we can improve and focus on the economics but I think one mistake that dentists make is that they focus only on the economics. They don’t even think about the fact that they still have this relocation clause and they still have a personal guarantee and they don’t have a death and disability clause and they don’t have the ability to assign and transfer their lease when they sell the practice.
That’s actually one that we didn’t even get to. When you do sell the practice, most leases don’t allow you to just assign those to the guy who buys the practice or group of whoever and so the time of negotiation is really the only time you have any leverage. Not the time that you have, your $800 000 offer to buy your practice and you go to your landlord and say hey I’ve got a buyer and he wants to close in three weeks, can I assign the lease to him and he says no, what are you going to give me for it?
If I’m a shopping center owner, why would I say oh yeah no problem, happy to do it for you?
Howard Farran: Yeah what’s in it for you?
Tanner Milne: Yeah and so it’s really just, in that lease renewal process, understanding what things need to be improved upon because it’s the only time you have any leverage. That’s where I guess constantly I talk to dentists and they’re like I don’t really need you, I’m not moving and I’m like that’s not what I do is move people. That’s a part of what I do but you need to, just like you do audits in your business or you do quarterly reviews or annual reviews on your financials, are you doing reviews and understanding what’s your real estate strategy?
Is the location still viable for your practice? Has the demographic shifted? Are all your patients driving from five miles away and so if you move five miles closer to where your patients are coming from, it’s really just understanding how the real estate plays a role in the business.
Howard Farran: How far can a dentist move without having a material impact on their existing patients?
Tanner Milne: That’s a great question and I’ve always said that anything more than five miles unless it’s to get into a new demographic or leave a demographic that you don’t want to be a part of anymore. Three miles is probably the outer edge from my recommendation.
Howard Farran: And is it true, back in the day I questioned, back in the day they used to say that neighborhoods were about 100 year cycle. You’d build out a brand new area like Ahwatukee or Gilbert and then it was the new hot thing and then 50 years it was kind of the top of its value and then it starts turning into renters and about 100 years later it’s all crack homes and bulldozers hit it and it’s all gone.
Is that 100 year cycle still there or did master plan communities change that? Do you ever talk to a dentist like, okay you’re going to this neighborhood and you’re 25, but it’s kind of at the top of the cycle and if you stay here until 65 it’s just going to be homeless shelters and buying drugs on the corner or is that nor relevant in your mind?
Tanner Milne: That’s where I guess my opinion is, I don’t think you should make a 25 year decision and really be looking at it between a 5 and 10 year decision because at the end of the day, as long as you’re looking at whatever investment you put into the space on a 10 year horizon. If the markets change, that’s why you move and that’s where I think you buy the building and you become attached to that location and that demographic but if the space is no longer viable, then move it.
Howard Farran: So what I’m hearing from you, a major takeaway, is if you’re in Eloy or Arizona City or a small town and you’re born and raised in this town and you’re going to have your family in this town, you’re going to die in this town, yeah it would probably make sense just to buy your own land and building and put it on the corner of Main street and Main street but if you’re in a suburban area where things change, developments come and go and neighborhoods are going up and down, you’re right, nobody in Wall Street makes 10, 20, 30 years projections.
Tanner Milne: True, yes.
Howard Farran: So do you want to switch to owning land and building?
Tanner Milne: I think the methodology and the process is the same in the sense that we want to take them through a process so that the criteria, essentially the weighted matrix answers their questions and their decision so I mean because it really is always a lease versus buy comparison and if a dentist has been leasing for 10 years and knows they want to buy a building, the process is just taking them through the typical real estate transaction. Identifying the best location, whether it’s an existing building or a new building but- I mean I’m working with a dentist right now who actually has already bought a piece of land to build a building, he’s in an existing space, makes money there, has a great practice, over a million in collections and the cost to build is now over budget and he’s like what do I do, and I’m saying hold up. You haven’t started construction yet. Let’s go back to what we originally started with.
Three strategies, renew and stay, relocate and lease or move forward and build. He’s already bought the land again so just in the last week we’ve kind of gone through this process and we’ve now submitted a renewal to his existing landlord and we’ve submitted a new lease on a space down the street that’s a vibrant shopping center, great visibility and access and so then once those numbers come back, I can put all three in a spreadsheet and he can see what the numbers look like and it’s the decision will essentially be made through the economics.
Howard Farran: You and I both have a MBA from Arizona State University and I know where you’re getting that from, the decision making course when they taught decision making and the biggest error in decision making, it’s not the square decision at hand or the triangle of what you decided, it’s you didn’t fill out all your circles, you didn’t know all your options and to make better decisions you need to fill in your options and I see no deal is much better than a bad deal but when humans buy the land now, that goes from their brain to their heart, they’ve emotionally committed, they own the land they’ve just got to keep going forward when a brain like yours is saying let’s stop! You bought the land, that’s sunken costs, maybe we shouldn’t go further and maybe we should try and sell that land. Just because you bought the land doesn’t mean you’re committed to this thing.
So you’re having exit strategies all the way down the line and I’ll also like to remind our viewers, the one thing they taught us both in MBA school is never let your money get too far from cash and when you’re making cash and you’ve got money is stocks, bonds and the bank, you have access to that liquid pretty much now but when you own a dental office, I’ve seen dentists try to sell their dental office and four years later they don’t have any buyers, especially in the rural areas so owning your land and building is nice but when everybody is telling you it’s worth a million dollars, I’m telling you well how long would it take to convert that to cash? Because I can convert a million dollars of stocks or bonds to cash in an hour on the New York Stock Exchange but you cannot do that with a dental office.
I’m seeing that with houses too. The only houses really liquid in Arizona are maybe 2000 square foot, three bedroom and two bath but once you start getting into 5000 square foot homes, most of them don’t even get an offer in a year.
That big million dollar home is basically just a big, illiquid asset, right?
Tanner Milne: Well let insert one more thing with that and that’s where, again, watching markets shift and change so now we’re actually, a strategy we’re presenting to dentists that own their buildings is to say why don’t we sell your building before you sell the practice, sign a lease back with yourself, and so now we can sell your building to an out of state investor or a foreign investor because they’re buying the annuity and then you can sell your practice and you don’t have to worry about the real estate because what’s happening is when you’re trying to sell your building and your practice together, the dentist that wants to buy it, they’re not able to quality and then the DMO’s, the DSO’s, the regional corporates or the dentists with multiple locations, they’re not buying the real estate anyways so you have the highest and best exit strategy to sell your real estate is to sell it to an investor on a cap rate, and that’s again taking them all the way through this evaluations where I can show them if you sell it as an improved dental office versus if you sell it as an annuity to an investor, look at the difference in sales price.
So we’re always unlocking opportunities to say what’s the best strategy for what the market is? We went through a recession, now we’re coming out and so sometimes it’s renew, sometimes it’s for a dentist it’s sell your building early, sell it now, keep it, hold it- it all depends, it’s not one size fits all for everybody.
Howard Farran: Tanner, a lot of people are afraid to talk to you or go and start a lease or whatever because they think I’m carrying $300 000 in student loans, I probably don’t even have access to capital. I probably couldn’t even get a lease signed, I mean once they find out I’ve got a third of a million dollars in student loans they’re probably just going to laugh.
What is access to capital like today for kids with $300 000 in student loans?
Tanner Milne: Unless there’s a derogatory credit history, meaning short sale, foreclosure, bankruptcy, the access to capital is the same as it’s always been.
Howard Farran: Really? Even carrying $300 000 in student loans, the landlord is not going to say run? You’re seeing access to capital?
Tanner Milne: Correct.
Howard Farran: Now are you involved in practice transitions at all? Do you work with people?
Tanner Milne: Yes in fact just in October of 2014 we launched a separate division of our company that does practice transitions.
Howard Farran: And who’s doing that for you? Is that you or someone else?
Tanner Milne: No someone else, yes.
Howard Farran: Okay and you work with that person?
Tanner Milne: I do, yeah, we’re business partners but he’s the day to day.
Howard Farran: Have you asked him what it’s like access to capital for a person with student loans?
Tanner Milne: So on the acquisition side criteria has changed slightly but in some markets, the lending criteria was they would fund 100% of last year’s collections where now those percentages are declining and I’m probably not the best to answer those questions because I’m not in it day to day, but my understanding is the criteria for practice acquisitions has certainly changed.
Howard Farran: Ryan, you have a MBA from ASU, you could answer any question.
Tanner Milne: Tanner.
Howard Farran: Tanner, what did I call you?
Tanner Milne: Ryan.
Howard Farran: I’m sorry, your friend is Ryan. I’m sorry. But I say- we talked about personal guarantee, relocation clauses, exclusive use, death and disability, options to renew, alterations, okay we didn’t talk about hours of operation and death and disability you didn’t say exactly what that meant? So can you cover those two?
Tanner Milne: So to have a clause in a lease that says in the event of a disability or death, that the tenant, the dentist has options. Because the problem is if you don’t create options, whether that’s sell your practice or sell the charts alone, or I mean certainly if I became disabled, if I was a dentist and I became disabled as a dentist and no longer able to practice, I would love the ability to get out of that lease due to that event and the same I would want my beneficiaries of my estate to be able to get out of that lease because if you sign a personal guarantee, that obligates essentially your wife as well, or your spouse and so it allows you to sell the charts to the guy across the street if that’s the best exit strategy rather than be bound to that lease that causes problems.
Howard Farran: So what I’m hearing is if you hate your spouse, do not put in a death a disability clause. Is that what I’m hearing Tanner? If you’re mad at your spouse when you sign this lease, take out that death and disability.
So when you put in that death and disability, what percent of the time does the landlord go with that says if I die, I’m out of this lease?
Tanner Milne: They’re almost always willing to do it. It becomes less negotiable when you have two or three partners in a practice because it’s less important.
Howard Farran: Okay and what are hours of operation?
Tanner Milne: So what is means is a lot of these leases have specific hours that you have to have continuous operation. So for example you are in default if you’ve been continuously closed for more than five days. Dental offices close for the holidays for a week at a time, you go on vacation or what have you and to think that you’re in default on your lease and you could be evicted because of being outside those hours, or some say you must be open from up until 10 pm at night, or they give you specific hours that you can or cannot be open and those are things to just really pay attention to because I’ve seen a lot of defaults as a result of something menial, hours of operation.
Howard Farran: So Tanner, you were saying that the big corporate chains like Pacific Dental Care, they really take location importantly. Can you tell us attributes of a great location that a big, smart- I mean what in their mind is like this is rocking hot, I want to be here.
Tanner Milne: Visibility from the street, so monument signage, building signage, access and when I say access meaning it’s easy to get in, right in, right out, you don’t have to do U turns, access is key. You want to be on a fairly major arterial.
Howard Farran: Four lane road?
Tanner Milne: Correct. Depending on what you are, if you’re a general practitioner being close to a major freeway is not imperative but for a specialty, I mean you want to look at freeway access, you want to look at amenities. Whether it’s major employers or retail amenities, those things are important to not only the practice but what other components are driving traffic to the area specifically?
Howard Farran: Also, Tanner, in the 28 years I’ve been doing this, it seems like a lot of dentists think going into a big, hustling, bustling mall, an indoor mall was the hot thing and I mean going back 25 years ago, there were dentists in every mall but it seems to me, maybe I’m a poor sample size but it seems to me that those have kind of faded away and I was wondering did those fade away because the mall said I’d rather have a GAP store or a Victoria’s Secret than a dentist? Did it go away because they wanted better clients for their mix or did it go away because it wasn’t working for the dentist?
Tanner Milne: That’s a great question that I don’t know if I have the absolute answer for, however my opinion is having worked with mall operators, they’re looking for the credit tenants, the public companies because what they do is they negotiate on packages, for example, they basically will go to a retailer, a GAP store and say if you want Santa Monica mall, you’ve got to take the mall on Gilbert and the mall on Arrowhead and the mall in Salt Lake City and the mall in whatever, so they basically say if you want this one, you’ve got to take the rest of them, and that’s how they negotiate and structure those deals.
Howard Farran: So you’re saying that they probably aren’t, the reason I don’t see them in malls anymore is that they’re probably not successful in getting in?
Tanner Milne: Well not only that, maybe I don’t know if the model has been proven viable or not.
Howard Farran: Because I always thought, I would think it would be horribly inconvenient to have to go to a mall and walk across a parking lot and all that to go and have my teeth cleaned.
Tanner Milne: Well you’d think if being in a grocery anchored center versus the mall, you’d think you’d have fairly comparable access to eyeballs and traffic as you would the mall, it’s just the access convenience and visibility is significantly greater.
Howard Farran: Okay so I’ve only got you for one minute and 50 seconds so Tanner, what is your big close. Give your big close about what they should be thinking about. What would be their food for thought and then also are they allowed to contact you?
Tanner Milne: Please contact me.
Howard Farran: How would they contact you? Are you brave enough to give email or a website?
Tanner Milne: Email, website menlocre.com
Howard Farran: What is Menlo, that’s the name of the company?
Tanner Milne: Name of the firm.
Howard Farran: Okay and what’s CRE stand for?
Tanner Milne: Commercial real estate.
Howard Farran: Okay. And then how could someone email you?
Tanner Milne: Tanner@menlocre.com.
Howard Farran: Can you set up a temporary email account for Ryan at this number since I only called you that three times?
Tanner Milne: Absolutely.
Howard Farran: That’s an inside joke guys because we were introduced by a good friend named Ryan. And what about phone calls? Are they allowed to call you?
Tanner Milne: Yeah please 480 659 1777.
Howard Farran: And I’m going to put that all in the notes so Ryan, I have one minute left, what’s their close for everything you know?
Tanner Milne: Any market anywhere, please don’t do a deal without expert advice. Whether that’s me and my firm or someone and you should be able to get free advice in processing your decision before you just go ahead and sign whatever that is that’s in front of you. Don’t make these catastrophic mistakes that we see day in and day out without someone saying it’s a good deal, that’s a fair deal and you’re okay to sign that.
Howard Farran: And if I was a dental school dean on graduation day as those kids were coming up to get their diploma, I would say to everyone congratulations young man or woman, you’re a doctor of dental surgery but remember you don’t know shit about anything else. Get professional help on all these transactions because just because you’re a dentist and you think you know it all, I love your confidence, I love your self esteem but come on dude, at the end of the day there’s gravity and someone like Tanner can show you the gravity.
Tanner I want to go out while I’ve got you on leverage now, do you think you’d ever build us an online course on Dentaltown? We put up 300 courses on Dentaltown, they’ve been viewed 600 000 times. Do you think someday maybe you or your transition team could create an online CE course?
Tanner Milne: Yes, we’ve got a great presentation specifically on commercial real estate and even just things to know, it’s all just value added content. Don’t make these mistakes because I see them every day.
Howard Farran: I know the guys like you in Gilbert won’t come down to Ahwatukee because we’re just kind of trailer trash over here but all you’ve got to do is come down to Ahwatukee and I’d love to show you the team, the graphics team, I’d love to get a course on that because this isn’t a decision that they do very often, they mostly do root canals, fillings and crowns but this is a huge decision: people, time and money, it’s a big money decision so when that dentist is dealing with a five year lease or a renewal or whatever I’d sure like them to have more access to guys like you.
Tanner Milne: I appreciate it. I’ll reach out, we’ll get together for sure.
Howard Farran: Alright and then also, should our viewers read Black Swan and if so, why?
Tanner Milne: No, don’t read it. It’s very intense and you can find all the same principles, I mean I’m reading Decisive by Chip and Dan Heath right now and it brings in a lot of the same components. I try to read one book a month and I’d be happy to start sharing my best reads with you because it sounds like we’ve got books in common.
Howard Farran: Well you know what, go on Dentaltown because there’s some threads on Dentaltown what should I be reading and I’ve listed my 30 top favorite books so get on Dentaltown and start doing that. Tanner so much for your time and I look forward to hearing from your transition team too.
Tanner Milne: Sounds good.
Howard Farran: Alright buddy, see you in Ahwatukee.
Tanner Milne: Take care. See you.