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Beyond the Bite

The Official Blog of the Florida Dental Association

Category: Real Estate

Market Appraisal: Transitions & Valuations

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By Greg Auerbach, , MBA, Henry Schein Dental Practice Transitions

Leading up to early March 2020, practice values and sale prices in Florida were among the highest they had been in years, if not decades. This was driven by solo practicing dentists, smaller multi-dentist groups and DSOs in the marketplace hungry for acquisition. Smaller, local lenders had access to money that was readily available from reputable national lenders. There simply were more purchasers in the market than there were sellers. Aided by practices continuing to strengthen after the economic challenges of prior years and increasing net income, the market could not have been better. Then the clock stopped as we saw practices close abruptly early 2020. We all know what happened, but what was the result? Where did things go and what can we learn? 

After reopening, we saw a very strong recovery with many practices increasing their average monthly collections over 2019, despite the shutdown. For many, this continued into 2021 where, after accounting for the time of forced inactivity, it was almost as if 2020 was just another data point in continued year-over-year growth. This created a “first” amongst evaluators and transitions specialists — specifically, how is 2020 accounted for and how is the continued viability and sustainability of the practice made evident?  What has that meant going forward? Value has remained high and practice sale prices have similarly remained high. We note that investments made in the practices, whether by way of equipment/technology, team training, patient communications or personal education, proved a strong positive return on investment.    

In all, the timeless question continues to be top of mind: Where does value come from? How is the real value, the intangible of a practice quantified and how does value get protected and transferred in a transition? Even now, it is not uncommon to hear a doctor firmly state that practice value is 60-70% (of something). That “something” may be collections, production, an average of three years’ of collections or some other “methodology.“ While we, and many others, have published articles locally, regionally and nationally, and presented casework to demonstrate how this is incorrect, the myth persists. If you are looking to purchase an existing practice, it could mean that you miss out on stellar opportunities because your mental “evaluation“ of an asking price is not consistent with the current market. If you are considering a sale, it could mean that you agree to sell at a lesser price that could have been otherwise obtained. There is no magic formula that can be applied to all practices.

Once the hurdle of pricing is conquered, though, the pitfalls of the process abound. Transition is not about two people making an agreement, it’s two (or more) doctors — often, it’s two spouses, two accountants, two attorneys — at least one banker and their team (if not more), not to mention any other advisors, all whom are vital to crossing the goal line. Who are these other participants, though, and what should they do? 

We often come across “experts“ who stray from their experience or knowledge to try to do more, with real-life scenarios resulting in a deal that is not consummated or made very difficult from start to finish. We are seeing more out-of-state advisors who are evaluating and providing advice for practices in Florida with no local knowledge. In a lot of cases, their credentials are internet-based and there is no real personal relationship, let alone hometown or “on the ground” knowledge.

Having advisors is important; the goal is for everyone to work in concert while properly representing their client. How is this done? Further, what are the best practices for evaluating the practice and transition, working with the staff, retaining the patient base and setting the table for success? The stories of the “bad” are numerous and can be a point of education, but so can the successes. 

Experience and expertise matter in every aspect of dentistry, and this does not exclude practice transitions and evaluations. Learning how to best ready yourself, whether as owner looking to transition or non-owner looking to take the next step in your career, understanding the ins and outs of the methodologies and processes and the members of the team around you is vital. 

Mr. Auerbach is an FDC2022 speaker and will be presenting “Transitioning Transitions and Valuing Value: The Good, the Bad and the Ugly” on Thursday, June 23 at 9 a.m. Visit floridadentalconvention.com for more information.

Commercial Real Estate Fundamentals

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By Ken Jorgenson, CARR Healthcare Realty

For most health care practices, real estate is the second highest expense behind payroll. The difference between a properly or poorly negotiated transaction can benefit or cost a practice tens to hundreds of thousands of dollars over a 10-year period. Additionally, you typically get only one opportunity every five to 10 years to take advantage of a new negotiation. With this much at stake, every transaction is paramount to maximizing profitability. Being educated on commercial real estate fundamentals can increase the potential to make your practice a success. The following are key considerations to understand:

Square Footage Needs

There are many property considerations to evaluate when choosing an office space for your practice. One of the most important considerations and first question to be asked is: What size space are you looking for?

Choosing the proper square footage for your new office space is a balancing act between size and money. You need to choose between how much space you need right now and how much space you will need in the future, say in five years from now or as you grow your practice. You also need to understand the cost of what you can afford now compared to what you can afford in the future.

If you play it too safe, you can end up limiting your upside and ability to grow your practice. On the other hand, if you acquire too much space, you can dramatically hurt your profitability in your first few years.

In an ideal scenario, you can find a space that gives you a healthy amount of room to grow, but also allows you to successfully manage your budget and profitability both at the beginning of the lease and through the completion of the term. Your goal is to be profitable as soon as possible, but not to the detriment of future profitability, which comes through growth.

Each real estate location and market also impacts the size you can afford. The real estate market in San Francisco, Calif. is completely different than the real estate market in Omaha, Neb. or even Denver, Colo. The more competitive the market and current economy is, the more limited your choices will most likely be.

If you are borrowing money from a lender, they may require your total monthly rent to be below a specific amount during the first few years of the lease or set a cap on the average monthly mortgage payment if you are purchasing. The specific amount of money these numbers are typically based upon is derived from the lender’s underwriting guidelines and are aimed at keeping the monthly payments to a manageable amount, especially in the first few years.

The best way to understand how to choose between the ideal amount of space and budget, is to work with several partners who can each help you balance the two decisions. A lender will tell you what your maximum budget is. An architect or general contractor can help you determine how much you can build inside the space and at what cost. An experienced health care real estate agent can make sure you evaluate your top options that best fit your requirements, and then how each option compares to the others — both financially and through other important business considerations.

Selecting the proper square footage for your new office is an extremely important decision that you should make based upon market knowledge, current and future needs, and most importantly — budget.

Parking

Another vital property consideration for your office space is parking, for both your staff and your patients. When evaluating the parking needs for your patients, you have three groups to consider: patients who are coming to your office, patients who are already inside your office and patients who are leaving your office.

Depending on your schedule, there can be a high demand on the parking allotted to your space due to other tenants sharing your parking lot. While most medical office buildings and retail centers have a higher parking ratio for this reason, its important to make sure the property you are considering has ample parking both for your needs and the needs of other tenants that ebb and flow throughout the day.

While some landlords allow specific tenants to have a few reserved parking spaces, the majority of landlords do not grant exclusive parking spaces for patients. This means it’s important to ensure the locations you are considering can accommodate your current practice and future growth.

Visibility and Signage

Two of the most requested property considerations for new offices are strong visibility and exterior signage, either on the building itself or on a prominent monument sign in front of the building. These requests also are two of the most important items for nearly every national retail tenant. Large, national retailers count on the visibility and signage of their locations for marketing, brand awareness and most importantly, driving business to their stores.

Since the early 2000s, more and more health care providers have been seeking the same benefits that come from the positive exposure of both visibility and signage. It helps patients find your location and provides built-in marketing and brand awareness.

That being said, visibility and signage usually come with a higher price tag. In the majority of commercial real estate markets, landlords charge a premium for high visibility properties, spaces and signage. Landlords understand the value that visibility and signage offer, and properties that benefit from them typically are priced higher than similar properties that don’t have the same exposure.

Even government agencies, such as real estate assessors, recognize this when valuing properties. You can expect the majority of properties that offer high visibility and signage to be assessed with higher property taxes and as a result, will have higher operating expenses. It’s important to weigh the increase in your real estate evaluation and, if applicable, evaluate if the increase in monthly rent or mortgage will benefit your practice proportionately. There are many times that the exposure and signage is worth the added expense. An alternative and potentially stronger position could be to select a property that would save you more money on a monthly basis and use the savings to invest in a targeted marketing strategy.

Last, there are some specific types of practices that are 100% driven by referrals of other practitioners, where little benefit is obtained or needed from either visibility or signage. If the vast majority of your new patients are coming at the recommendation of a referring doctor, paying the premium for signage and visibility may not be worth it.

As with most financial decisions, a detailed evaluation provided by your agent should help you weigh the difference between cost and benefit.

Access

Another main consideration alongside visibility and signage is access to your office. In other words, if a patient is driving to your office, what is the closest major intersection to your property? Where do you turn to get into your property’s parking lot? Does the property have great visibility but challenging or poor access? That problem can occur when the primary access point to a property is a location you need to turn into before you can actually see the building. When that happens, a new patient drives by the building and sees your office, but then has to pull a U-turn or make multiple turns to get back to the main access point of your location. Thankfully, the majority of new patients will rely upon GPS and mapping software on their phone to find your office the first time. However, the easier the access is for the patient to get to your building and the more recognizable the major intersections or known landmarks are to your property, the more ideal the patient’s experience is in finding your office. Thus, the more likely patients or referral practices will recommend you.

Anchor Tenants and Complimentary Practices

The next property consideration we are going to discuss is the impact of what are commonly referred to as anchor tenants as well as complimentary health care providers. This often is an overlooked but important consideration when it comes to commercial real estate fundamentals.

Anchor tenants are most commonly found in large shopping centers and areas that are located nearby your office space or in the same building or complex. Anchors often are identified as grocery stores, warehouse clubs, depots, large retailers and other prominent tenants that drive a significant amount of foot traffic into stores and shopping areas. Anchor tenants attract other businesses and retailers who desire to be located nearby for the same reasons. Overall, anchor tenants increase the number of customers or clients in a specific area.

Anchor tenants also can be smaller in size, as long as they drive significant traffic to a property. For instance, a prominent coffee shop might bring several hundred visitors to a property in a single day. Other restaurants or retailers with a smaller size also may be able to attract a noteworthy amount of potential new patients.

A health care practice within an office building, medical office building or on a hospital campus that has complimentary practices located in the same building or campus can have a huge impact on the success of your practice. For instance, if you are pediatric dentist, being in a building with a pediatric physician could have a huge impact on the number of new patients you see. Many health care providers will seek out buildings or campuses that allow themselves to be surrounded by other providers who are both complimentary and can provide tangible opportunities for referrals.

In summary, there are pros and cons to nearly every property, and each consideration needs to be weighed. The space you are the most excited about might be the most expensive or above your budget. The center that has the most traffic and visitors per day might have the most challenging parking if you are competing for parking against other busy tenants. A property that is priced the most competitively might not offer the visibility and signage you would ideally like.

It’s incredibly important to truly understand all the property options that meet your requirements. To do this, you should hire professional representation and make sure you are evaluating and negotiating with multiple owners whenever possible. This allows you to compare multiple spaces, buildings, landlords and offers against the other options, so you are able to make the best decision possible. Real estate will make a major impact on your practice’s profitability. Make the most of every opportunity.

CARR Healthcare is the nation’s leading provider of commercial real estate services for health care tenants and buyers. Every year, thousands of health care practices trust CARR to achieve the most favorable terms on their lease and purchase negotiations. CARR’s team of experts assist with startups, lease renewals, expansions, relocations, additional offices, purchases and practice transitions. Health care practices choose CARR to save them a substantial amount of time and money, while ensuring their interests are always first. Visit CARR.US to find an expert agent representing health care practices in your area.

 

6 Reasons to Call in the Dental Office Lease Negotiation Pros

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By Cirrus Consulting Group

There’s an old saying that goes, “Leave it to the professionals.” When you need a haircut, go to a barber. When you need your car fixed, see a mechanic. Seems obvious when you put it in these terms, but in today’s do-it-yourself (DIY) culture, business owners are increasingly circumventing professional services to go it alone. In the world of dentistry, negotiating a risk-free dental office lease with fair and reasonable economic terms is an essential component to mitigating risk and running a successful practice — and yet — it’s not always obvious to practitioners why they should consult a professional dental office lease negotiator.

Signing your lease is one of the most important, expensive and significant commitments you’ll ever make as a dentist, and going in blind or ill-prepared can have lasting implications. Here are a few reasons why you should leave your lease negotiations to the pros.

1. The Doomed DIYer
The obvious upside in not hiring a professional dental office leasing negotiator is that you won’t have to pay their fees. Often, this is the single biggest motivator for dentists who view the task as one they can easily tackle themselves. Of course, as with many such tasks, you get what you pay for.

Consider the amateur handyman who decides to build his own furniture; he can save money by building his own bookcase, but what happens one month later when the shelves give out because it was poorly constructed? The bookcase collapses, the objects on the shelves end up broken, it creates a mess and leaves the “handyman” right back where he started — no bookcase, plus one mess and minus several treasured objects. Because poor planning and mismanagement of a dental office lease permeates every aspect of a practice, this is one area where an investment today can save big bucks tomorrow.

If you sidestep the experts, you won’t be getting their professional guidance and advice that exposes you to significant financial repercussions and the unnecessary risks that come with a poorly negotiated lease agreement. Every time you renegotiate or renew your lease, you are committing to another $500,000 to $1 million contract. Spending a fraction of this contract value to ensure that your future is protected just makes good business sense. The value that a professional dental office lease negotiator brings — both economically and in terms of risk reduction — is worth far more than the initial investment of their fee, not to mention the substantial, long-term savings that can be achieved with proper representation.

2. More Time to Dedicate to Your Practice
The most immediate benefit to working with a professional lease negotiator is the amount of time saved. Spending more time chairside is critical to the practice’s success. When you decided to open a dental clinic, you probably didn’t realize you were signing up for all of the administrative burdens required to run a successful practice. Whether you’re just starting out or are growing an established practice, taking chairside time away to review the lease, research market rental rates, negotiate with your landlord and understand tenant rights is a time-consuming nuisance.

Don’t be fooled into thinking that the only step in lease negotiations is the initial review and signing of the contract, or that your landlord has prepared a fair lease that will see you through your career. Lease negotiations are a dynamic and potentially lengthy, ongoing process that require a dedicated time investment — if you’re doing it right. A reactive tenant acts only when prompted, or upon finding themselves up against a deadline. Often, this means it’s too late to get a favorable outcome, i.e., when your lease is about to expire and you’re at the mercy of your landlord. A smart dental tenant is pro-active, and by working with a professional negotiator, you will ensure that you have both the leverage and knowledge to be successful in securing a favorable lease agreement for the practice.

3. Reap the Benefits of Comprehensive Services and Support
Working with a professional dental office lease negotiation firm is an eye-opener for most practitioners because they don’t realize how much more they can be doing to optimize their practice. Professionals will not only identify landlord-set lease traps and negotiate the best deal for you, but also provide a wealth of business acumen and resources to improve your practice. Lease negotiation is a core function, but there is a wide spectrum of services that a lease negotiation firm provides, including insight from market research and data analysts, in-house brokers, attorneys and ex-landlords. Whether designing asset protection terms, or leveraging emerging market trends to help you map out practice goals, your lease negotiator is backed by a team of experts who put all the pieces together, and deliver a results-focused business solution for your peace of mind.

4. Your Future Self Will Thank You for Strategy-Planning Now
Most dentists are naturally eager to build out the practice and open their doors. However, in their haste, they often fail to consider their mid-range and long-term goals. The details in your office lease dictate key aspects of your business, such as the ability to bring in associates or specialists, the conditions under which you sell the practice, obligations and restrictions for remodeling or expanding, etc. — which is why the details within the lease should not be taken lightly. A skilled dental office lease negotiator will outline a comprehensive negotiation strategy that aligns with both your short- and long-term goals, and takes the big picture into account — so your lease doesn’t hinder you as you progress in your career.

5. Relax! Someone Else Will Fight Your Battles
Lease negotiations with a current or prospective landlord sometimes means playing hardball, and some individuals are simply not comfortable with, or capable of, getting tough and asking for what they want and deserve. But it’s not just about being assertive; you also have to know what the stakes are, and how to best achieve the desired results. A lease negotiator acts as your own personal advocate to represent your best interests, and ensures that your leasing needs are being met. For example, as a dental tenant, you may not immediately appreciate the importance of addressing “relocation language” that prevents your landlord from moving your clinic, or the amendment of the “assignment” clause, preventing your landlord from taking 50 percent or more of your practice sale proceeds at transition time. Your negotiator, however, knows that strategic tactics today will certainly pay off later, and that every word in your lease agreement can have major implications down the road.

Keep in mind that your landlord will draft a lease that benefits them, not you. In their hands, the lease is a tool towards achieving financial flexibility and power. Your lease negotiator can convert a bad lease into armor to protect your assets, family and estate, and optimize the lease in your favor. They will negotiate the best terms and rental rates possible so that you, not your landlord, are in control of your financial future.

6. Do you speak “Legalese?” We do!
Dental office lease agreements can be complex and lengthy, full of technical legal jargon and contain terms that aren’t tenant-friendly for the average business owner. Navigating the tricky and complex language is just one challenge. The bigger obstacle is identifying expensive traps and risks, and understanding what must be done to reduce or eliminate them. Most leases leave the tenant vulnerable to expensive penalties and inconvenient pitfalls that can have devastating effects on their career or practice. Before signing, it’s your responsibility to review the proposed terms. But how will you know what to look for? A seemingly innocuous statement may harm you down the road, and similarly, the absence of a key clause can leave you, your assets, your family and your practice exposed.

For example, did you know that you can be held financially responsible for the practice even after a sale or transfer of the lease? Or that you could be forced to bear the financial burden of a forced relocation? Dental office leasing professionals will review your lease and identify risky terms that have been intentionally buried or obscured by your landlord. The negotiator will use their skills to revise the lease to work in your favor — something that an untrained professional simply cannot do. This is one of the key differences between a professional dental office lease negotiator and a general commercial lawyer/attorney. While lawyers can be experts in contract management and negotiation, they often lack dental industry and real estate experience to produce a lease agreement that both protects and enhances the value of a dental practice. If you’ve retained an attorney, ask them how many dental office leases they’ve negotiated. Dental lease negotiators have specialized expertise in contract negotiation, dental tenant rights, practice optimization — and, they understand the industry inside and out.

Would you go to a mechanic to get your haircut, or a barber to fix your car? If the answer is “no” to both, why would you, as a dentist, handle your own lease negotiation? Gambling with the fate of your entire practice hardly seems worthwhile when you have a team of specialists just a phone call away. Some things are just better left to the experts! For more information, go to www.cirrusconsultinggroup.com.

Renewing Your Lease: 5 Important Things to Know

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By Ken Jorgenson, Carr Healthcare Realty

Leases and lease renewals typically are not conducted on a level playing field. After all, the landlord is in the real estate business and most doctors are not. By planning ahead and having professional representation, it is possible to negotiate a lower lease rate and receive a substantial tenant improvement allowance and free rent.

1. How does the lease renewal process work?
An important clause found in a standard lease is the renewal option. This allows you to extend your lease for a predetermined amount of time (often three, five or 10 years) by giving your landlord advance written notice. Renewal options include terms for specific lease rates, concessions such as free rent and tenant improvement allowance, and whether a new base year for operating expenses will be granted. Whether or not a renewal clause exists in the original lease, all of these terms are negotiable and play a large role in the financial structure of a lease renewal.

Renewal negotiations are most effective when conducted in the proper timeframe, by having multiple viable relocation options, and creating a strong posture to maintain the upper hand.

2. When should the process begin?
As a rule of thumb, you should begin to consider the renewal process 12–18 months in advance of your lease’s expiration. This is recommended so that you can compare all relocation options in the market before your current lease options expire. Tenants who miss their lease options incur more risk. Landlords view this as an opportunity to push rents higher as the window of opportunity to relocate closes. If tenants holdover (stay in the space after the lease expires), they often see penalties of 150–200 percent of their last month’s rent and also can incur damages if they holdover without permission. The bottom line is if there is not ample time to relocate if necessary, the landlord has a strong upper hand.

3. What type of cost savings can be achieved through a successful renewal?
If properly negotiated, you can achieve significant rent savings, a build-out allowance, free rent and other concessions. It’s common to start a lease renewal term at a lower lease rate than what you are currently paying. In many markets, landlords are offering aggressive concessions and more attractive lease terms to good tenants to keep their buildings leased and avoid vacancies. The amount of overall savings will depend on the availability of competitive vacancies, the efficiencies of the buildings, and your market knowledge and ability to negotiate business points.

4. What are some common mistakes practices make during the process?
One of the most common mistakes practices make is negotiating without the help of a commercial real estate professional, specifically one who specializes in representing health care providers. Some believe they can save money by not using an agent; but to benefit in real estate, leverage is the key to posture. Landlords are in the real estate business and negotiate with professional guidance. Selecting an expert to represent you provides the leverage needed to receive the best possible lease terms. Further, landlords typically are responsible for paying commissions, so professional representation is available to you at no out-of-pocket cost.

Another mistake practices make when entering a lease renewal negotiation is not being familiar with their current lease terms and risk exposure. Prior to contacting the landlord about a lease renewal, you should be well aware of your current lease terms — including every option and deadline. Most leases contain options that must be exercised within a specific time period, typically six to 12 months prior to the lease’s expiration. If you allow this period to pass, you risk losing all rights outlined in the option, which can cause the negotiations to begin at a disadvantage.

5. How do I calculate what I am currently paying per square foot?
Knowing what you are already paying per square foot is especially important if you are thinking about renewing your lease. What you are paying now versus what buildings are leasing for in your immediate area can be vastly different, especially if your lease has had automatic escalations in the rate over the term of the lease. The way to calculate your price per square foot is to multiply your monthly rent by 12 months and divide it by your square footage. Keep in mind that NNN or CAM charges (operating expenses for the property) also are calculated in the same manner.

Summary
Successfully negotiating a lease renewal is more than bartering, bluffing or asking for a good deal. Landlords and their professional representatives are in the full-time business of maximizing their profits — even if it means taking advantage of uninformed tenants. You can level the playing field by engaging your own professional representation, gaining competitive market knowledge and by having multiple options for your office space. When done properly, a well-negotiated lease renewal can have a dramatic impact on your practice’s profitability.

 

Carr Healthcare Realty is the nation’s leading provider of commercial real estate services for health care tenants and buyers. Every year, hundreds of medical, dental, veterinary and other health care practices trust Carr Healthcare Realty to help them achieve the most favorable terms on their lease and purchase negotiations. By not representing landlords or sellers, Carr Healthcare Realty is able to strongly advocate for health care providers and avoid conflicts of interest while saving their clients hundreds of thousands of dollars. Carr Healthcare Realty’s team of experts can assist with all types of real estate transactions, including lease renewals, expansions, relocations, startup offices, purchases and practice transitions.