Episode 117: Buying a Dental Practice - The Real Estate
In this episode of The Dental Amigos’ fourth season on buying a dental practice, Rob and Paul discuss common mistakes that buyers make with practice acquisitions regarding purchasing the real estate.
While buyers often view the option to purchase real estate as an opportunity, the Amigos caution that it could be a liability. Tune in and learn why Rob and Paul suggest that buyers think twice before purchasing real estate and what buyers can do instead.
Listeners who want to reach Paul can do so at Paul@DentalNachos.com and those who want to reach Rob can do so at Rob@RMontgomery-Law.com.
See the full transcription below:
Welcome to the dental amigos podcast with Dr. Paul Goodman and attorney Rob Montgomery taking you behind the scenes of the dental business world. All the things you didn't learn in dental school, but wish you had. Rob is not a dentist and Paul is not a lawyer. But since Rob is a lawyer, we need to tell you that this podcast is for informational purposes only and shouldn't be considered legal advice. listening to this podcast does not and will not create an attorney client relationship. As is always the case, you should formally consult with legal counsel before proceeding with any legal matter. Learn more about the dental amigos at WWW dot the dental amigos.com. And now here are the dental amigos
Rob Montgomery 0:39
Hello everyone. I'm Rob Montgomery and welcome to another episode of the dental amigos Podcast. I'm joined as always by the head Nacho himself, Dr. Paul Goodman, great
Paul Goodman 0:47
to be talking Rob Paul, it's
Rob Montgomery 0:48
always good to talk to you and welcome everyone to another episode of the dental amigos. Today we are continuing our season on buying a dental practice things to do things not to do things to think about. And today's episode, we are going to talk about the real estate. So you're buying the assets perhaps of the practice. And as you have attributed to me and quoted me, I appreciate it without an office, you can't have a dental office. So we have to nail down what is the deal with the actual physical location, which may not be the sexiest topic. But I'm not kidding. Without that unless you plan on practicing out of a van. You need to deal with real estate,
Paul Goodman 1:37
it's important. Maybe I can just ask you to kick it off a little bit in your deal experience. I'll say as a broker most of the time I'm talking to sellers who do own the real estate. But I am like a New Jersey pa person and a lot of these dentists did purchase these things. And then 70s and 80s at this condo complex or things like that. I know that there's buildings that are much bigger and more exciting, but are you dealing most of the time with sellers that? Own it lease it both? 5050?
Rob Montgomery 2:05
Yeah, I think it depends. You know, as you said, it's a regional thing. And it's also like an age thing. There was a time back in the olden days, a long, long time ago, when I first started practicing law, my first dental client who got me in this business was really one of the first, you know, the pioneers to go into a retail setting. Yeah, no, he was in shopping centers and malls. And he had caught some grief about it. So you know, he was very much ahead of his
Paul Goodman 2:33
back then all you do is hang out a shingle you went to the shingle store. That was the whole business thing. Well, that was my shingle, but then he was saying, you didn't even have to own the building that you put the shingle, right? Well,
Rob Montgomery 2:41
you're there. He's like, Coiler he's a mall dentist. Yes, he is in the mall, across from a movie theater where 10s of 1000s of people his door on a daily basis. Like, why did that take so long to become a thing, right? And so you know, but that has changed over time. So we probably see, especially in the startup world, more people are going into retail spaces, then. Then medical office buildings or standalone buildings. We'll talk about houses too. That's a whole nother thing. But in those situations, typically the practice owner doesn't own the strip mall or a shopping center or the mall. So in that, in those deals, we're definitely looking at a third party landlord. It also depends on on where the practice is, you know, if you're in Staten Island, yeah, you're probably looking at practice in a house. Yeah. If you are looking in Oklahoma City, you're probably looking at a strip mall. Yeah. And so they're just to sort of easy to sort of
Paul Goodman 3:48
practice and I haven't, I'm a resident expert. I got a practice in the house that we own a building and we got to practice on the strip mall. We don't on the strip mall.
Rob Montgomery 3:55
Yeah, I would say, you know, and let's let's just talk about practices and houses. I think you guys you have a different situation because your house is, is the office has been completely turned into a down. Yeah, right.
Paul Goodman 4:07
We had to get rezone. We did have a tenant there for me. I had to have a tenant. Yeah. So I totally know what you say right now. Ours is totally a commercial building for the dental office.
Rob Montgomery 4:17
Yeah. And so where we see problems a lot of times is where people are buying a practice in a house that still has a residential piece still, that is potentially problematic because of zoning. As you said, you got to rezone, and a lot of times people don't get these rezone. And then it's like there are requirements that the dentist needs to live in the house. How
Paul Goodman 4:42
did this happen? You know, my it was my dad's practice I used to I used to come home from school and we were moving and go upstairs with the owner Dennis widow and play cards and eat saltine crackers because it was in the house. I mean that right? What did Dennis do? We're like, you know, we should do we should take our incredibly stressful job. We should put it right inside of our Yeah, we have no arms like the way right stress. Right?
Rob Montgomery 5:05
Well, that's what lawyers didn't COVID. That's right. Yeah. But
Paul Goodman 5:08
your clients didn't come there. So true. So basically, you're just kind of putting this on its own island of the, if you're buying a if you're a buyer, like this season talks about and you're purchasing a, a practice that's inside of a house with rules to live inside of the house, be extra cautious.
Rob Montgomery 5:22
Yeah. And there are other issues that come with that, because then the day is going to come when you have to transition the practice. And now you've got this real estate that's a little quirky. And he said, you want to buy my practice? Yeah. Do you want to live upstairs? No, you know, and somewhat, and again, it depends where you are. Right? So in Pennington is the commercial area. And Pennington, as I understand it, it didn't let in other places like it, our houses, residential places that have been converted to businesses and professional offices. That's the nature of the beast. But no, that's not always the case. So if you're buying a practice in a house, that may already be an antiquated piece of real estate. And what happens 20 years from now, when you want to go transition the practice, it's going to be even that much more antiquated, and know that with all these zoning issues, they pose problems for the practice transition, you know, and it's a whole myriad of things. But you know, talking to my my team the other day, we have a couple of deals where we're dealing with sort of the collateral impact of having houses or buying practices in houses. And like more often than not, there are problems. And even if you're able to kind of get through them at the time of the purchase, realize that this is going to be your hot potato to deal with down the road. And so, you know, I would caution people who are looking to buy practices, and
Paul Goodman 6:50
it might using me as example, might we have a practice in Newark, New Jersey, in a strip mall, we lease it, we don't own the strip mall. So if we wanted to sell this practice, the buyer would be looking at taking over our lease, making sure it's, it's, you know, they can't get kicked out things that you've talked about leases in the past, which is gonna be way more exciting than they sound
Rob Montgomery 7:10
Yeah, well, that's important too. And so that's, you know, the other type of sort of real estate species and in a practice transition, where you have a third party landlord, where you have to get consent to sign that lease to your buyer. Typically, you know, and and this depends on the strength of the lease toe. And this is where you want to have good language in that lease, that allows you to assign it to a buyer of your practice, with minimal or no landlord involvement, you don't want the landlord to have too much of a seat at the table to evaluate your, your buyer. And this is something that we deal with when we're negotiating leases. And the landlord will say, Well, I want the ability to approve my tenant, okay, we're gonna give you a dentist, who is credit worthy enough to get a loan for $800,000? What's the other criteria that you need to evaluate? I want to know who's in my center, like, that starts to drift into places that it's like, no good could come out of that. Right? Right. Like, what what do they need to assess, and you don't want to give them that authority, because that can stymie your your deal. So a lot of that really be begins at the time that you that you enter the lease. And, but from a buyer, in a practice transition, unfortunately, you don't have a whole lot of leverage to negotiate with that landlord, you know, and so a lot of times you get stuck with what your seller agreed to. Now, that being said, lenders are going to require most of the time a lease that is coterminous with the lease term. So if you're signing a 10 year loan, then you're going to need to have control of the lease either term or renewal term of 10 years. So if there's only three years left on the lease, then you as the buyer have a little more leverage to go to the landlord and say, I want to extend this by seven or 10 years and add a five year renewal term. And then in connection with that, I want to fix some of the stuff that the seller didn't handle.
Paul Goodman 9:19
I don't remember because you know, pre pre COVID Seems like yesterday and 100 years ago but you were helping Jeff and I we actually ended the deal based on some very very just crazy things with the lease involving people are involved in it, it wasn't worth it to move forward. Right so it can truly be the deal breaker.
Rob Montgomery 9:35
It's the number one deal killer for us, I think you know, is is a bad lease or real estate situation. Yeah. uncooperative landlords, unreasonable expectations, where things just flat out don't work from a business standpoint. And
Paul Goodman 9:49
if we kind of just advise third kind of bring up the topic of now, someone purchasing a practice where they're purchasing the space in my experience, just so our listeners understand the practices are usually Really collecting a lot more money than what the building is worth. So people go, Oh my gosh, how can I buy a building? And well, you're buying a million dollar practice inside of a $240,000 building, right? So dentists are doing a lot more revenue than usually what they're building is worth, is that what you find? Most of the time? It depends on
Rob Montgomery 10:17
the market. But yeah, a lot of the times, and I think, I guess I, I approach this as buying the real estate, where the practice is located is sometimes just a necessary evil, you know, and should be regarded as such. Like, I think, IF listeners have heard me say, over the years, you know, just don't fall in love with owning the real estate, you know, like, sometimes it works. And sometimes it makes sense. But it becomes this whole other thing that you have to deal with, you know, when it comes time to transition, the practice that you're gonna have to sell that to the buyer, you're gonna become a landlord, you know? And if you are selling your practice, do you really want to be a landlord?
Paul Goodman 10:54
So what are we talking about here? Like, I mean, I encourage an entrepreneurial spirit, but like, there's the 63 year old seller really want to collect $1,800 a month for five months, this sort of this big way to make extra money. You know, it's like, you know, so I find sometimes it is a, you know, as we talk about these deals, it's also just another, we did this back in science class litmus test, right? For the get along the ability of the person you're dealing with,
Rob Montgomery 11:22
yeah, I look, really you're selling your practice, and you're gonna move to Palm Beach. And then a month later, you get this call from the tenant, the roofs leaking, right? You know, there's a problem with the parking lot, there's a sinkhole next door, like, you know, like, you got to deal with that stuff, you know, and it's nice to get the money, right, like you collect the rent, but anybody that owns investment, real estate knows that, you know, you might go for several months, and you're even years where everything just runs on autopilot. And then all of a sudden, you feel like every week, you're throwing money, and
Paul Goodman 11:53
this is the moment, you know, if someone buys the building, and they pay it off, and now they're gonna sell their practice, and they bought a $300,000 building is paid off, why not just sell it, and now you have a whole nother win to the day of closing, right? Like, sell your practice for over $50,000 You get $300,000 for a building, it's a nice day. And now you're totally your hands are totally wiped as they say of the whole thing. And you can just now it's the new buyers deal. It's the you know, the of the building and the practice.
Rob Montgomery 12:22
Yeah, I Zack a great point, Paul, you know, and the other thing, too, from a buyer's perspective, is we talked about sort of, like, where the modern practice is located. And again, this is this varies, you know, by by region, as well. But, again, as we said a few minutes ago, a lot of the good locations where the demographics are good, you've got lots of foot traffic, and their modern offices are not in buildings that you can own. Right, exactly. They're in retail centers, you know, and it's not about owning the dirt. It's about making money as a dentist. That's a
Paul Goodman 13:00
good point, too. Because to people, you know, it's great to have goals and visions. But I'd say, Paul, don't show me any practices where I can't buy the building, I go, this is just unnecessarily restrictive. Yeah, for the most important decision of your life. Yeah, it's almost like saying, it's like, don't show me any homes that don't have a pool, but I want to be in the school district. And I need to be in this area, say, Well, you could join a pool club. I mean, you've said it lectures, hey, if you want to invest in real estate, go do that somewhere else, go buy
Rob Montgomery 13:25
some some commercial grade investment, real estate that has a liquid market. And, you know, again, falling in love with owning the real estate has just I think is a really bad idea. But you know, sometimes we are looking at the situation where you would buy the practice and then have to enter into a lease with the seller. And with that, you have to approach this just like any other landlord, it's an important aspect of the deal. This is where you is, is gonna be the document that governs where the practices, you know, located, the control, and the ability to operate out of that location for as long as you own it. And so making sure that maintenance responsibilities are clearly clearly delineated making sure the economics are good, making sure there aren't things in there that we refer to as footfalls where you can make a mistake. And that could lead to being in default, or breach of the of the lease. Because, again, if you've paid a million dollars for the practice, you need to be able to have a place to practice. And also, you
Paul Goodman 14:31
know what, I've seen things go in all different directions. You know, I mean, you know, things can happen with real estate that you can't predict long term and as the buyer, you do get to control your own destiny when you own it. And maybe you just want to, you know, my brother and I, we don't have the bandwidth, or we could just sell our building and move it to move our practice into a larger location in a retail complex we want but we just have total control of our destiny.
Rob Montgomery 14:55
Yeah, that's great. And look again, maybe you make $500,000 a year. Being a dentist, I challenge anybody to show me their dental office real estate that throws off $500,000 A year of income, right? It's the reason why DSOs don't buy the real estate, you know, it doesn't throw off any
Paul Goodman 15:15
the hassle factor to it too. I think what you're bringing up is like this, this piece, which isn't talked about enough winds up becoming a big deal. And you're saying it kills deals, it also creates a ton of friction I found as a broker where, you know, somehow it's like, almost like we've gotten on the same page about the Eagles and the Giants. Now, can we start fighting about politics? And I go, geez, right, yeah. So it's like, you got to kind of get these running side by side throughout the deal. With whatever it is, it sounds like, you know, you helped my brother and I realized we shouldn't do this deal, because we it was a third party landlord. Right, it was unreasonable. And then it you know, I also find Rob movie buyer's perspective, the seller kind of always thinks their buildings should be like a professional model. So meaning like, it's like when your grandparents thought you should be like a model, but the real world is like, we're not going to pay your child to be a model, right? Well, my buildings worth a lot more than what PSA is. And that can create a lot of friction.
Rob Montgomery 16:10
Oh, yeah. Well, and we do see that and that's something you have to be careful about. It's a great point, as a buyer, you know, if if the seller wants to wants to sell the real estate for more than an appraises for and they, you know, graciously put air quotes around that, agree to hold a note for that difference, you have to be careful, because when it comes time to sell that real estate, you're only going to be able to sell it for what it appraises for. And if you owe the seller money on that, on that seller note to close that gap when the real estate, then you're going to end up having to write the seller a check to be able to sell this real estate down the road. So it is one of the especially in deals where you don't have good brokers involved and good representation, managing the deal where that aspect alone allows people to quote unquote, overpay for the real estate. And it's just like, overpaying for any other real estate. But a lot of times it gets kind of thrown in as like an afterthought. But it becomes an albatross down the road sometimes to deal with it.
Paul Goodman 17:17
Well, you've you've taught me that leases, buildings are just so much more exciting than people give them credit for in these deals. And I see now, you know, I had a whole deal fall apart because of it. But I'm glad it happened. I mean, it was a good right move for me. Yes, I almost bought that practice. And I think this is where if you're really not working with the right team who knows what how to deal with this stuff, you really can just put yourself in a bad place.
Rob Montgomery 17:39
Yeah, that's great. That's a great way to leave off here. And so yeah, I think, really have to take the real estate aspect of things seriously and look at it as a standalone business project investment because that's what it is. And really be realistic of what it's going to be and what is not going to be and what it's going to look like when it comes time to transition in the future. Super important. Thanks, everyone. As always for listening. If you liked our podcast, give us a great review on whatever app you listen to and until the next time thank you.
Thanks for Thanks for listening to another great podcast with the dental amigos. And don't forget to tune in next time to have the dental business demystified. If you're looking for more information about today's podcasts, you can find it on the dental amigos.com If you're looking for Paul, you can find Paul at Dr. Paul goodman.com. And if you're looking for Rob You can find him at your dental lawyer.com This podcast has been sponsored by Orange Line Media Group. Helping dentists and other professionals create content people love find out how we can help you take your business to the next level at WWW dot Orange Line mg.com. Till next time