Often, when a dental practice seller also owns the real estate, they sell both the practice and the real estate at the same time (or at least that is their desire). At the same time, this ends up being an excellent opportunity for most buyers, that is, to buy real estate and become a real estate investor at the same time they become a dental practice owner.
However, what happens when the seller of the dental practice, who owns the real estate, does not want to sell the real estate at the same time they want to sell their dental practice? Is this a deal-breaker for the buyer? I say no, it does not have to be.
Let’s be clear on two things. First, the real estate piece is simply an investment opportunity, and you can be a real estate investor at any time. You have to think about real estate like any other investment opportunity such as stocks and bonds. Will this investment provide the kind of ROI you are looking for?
Second, the practice is the opportunity that will feed your family, put a roof over your head, and provide you with all the other necessary personal cash flow you need to live. This type of opportunity may not come along every day like real estate might. It would be best if you were clear on that distinction between these two assets/opportunities.
With that said, when a practice seller who also owns the real estate says they are not interested in selling the real estate at the same time as the practice, take that statement for what it is. It is an initial declaration by an individual with no other details. What you, the buyer, should do is take this opportunity to dive deeper into the seller’s mindset. Simply because they say they do not want to sell the real estate today does NOT mean they do not want to sell the real estate tomorrow. Ask the seller WHEN they think they would like to sell the real estate and see if it fits into your timeline to invest in real estate. If you, the buyer, can get the seller to agree to sell the real estate after twelve or twenty-four months, that may work well for you.
You, as the buyer, may also be in a position to negotiate some very generous rental terms from the seller since they will not sell the real estate today. For example, maybe the seller will agree to a lower than market rental rate for XX number of months/years. The seller may agree to freeze the rent for XX number of months/years and/or agree to cover the real estate’s normal operating costs. Maybe you can get the seller to make some immediate improvements to the space in return for NOT selling the real estate immediately.
At a very minimum, you want to try to get the seller to give you the right to buy after XX months AND give you the right to purchase the real estate when they do put it on the market. These are legal issues that your dental attorney should consider during the legal agreement stage of the practice purchase process. The dental attorney should make sure you have an airtight lease with all the pertinent protections, rights, and options so that you can own the real estate when you want, AND the seller/landlord can arbitrarily evict you from the space and leave you and your practice without a space to see your patients.
Lastly, you, the buyer, might realize that you really do not want to buy the real estate if it does not suit your long-term occupancy needs. Maybe the real estate is too old and needs too much work. Perhaps it is too small, and the prospect of expansion is not available (think condo) or will be too costly (think stand-alone building on a tiny lot). Maybe the location is not that great, and you have your eyes set on better places in the same area. There are many reasons why a buyer may not want to own and be locked into a particular piece of property.
In summary, not owning the real estate at the same time you buy the practice does NOT have to be a deal breaker. If you would like to own the real estate property someday, work with the seller, find out what their plans are and see if you can work with them on a compromise on ownership and you may find you can negotiate some very nice rental terms while you are waiting to become a real estate investor.
DO NOT LET A GREAT PRACTICE OPPORTUNITY PASS YOU BY SIMPLY BECAUSE YOU CANNOT OWN THE REAL ESTATE AT THE SAME TIME YOU PURCHASE THE PRACTICE!
Author: Tim Lott
Tim Lott, CPA, CVA, has decades of experience working with dentists at all stages of their careers. He is a regular speaker at study clubs, societies, and dental schools. Tim is a frequent participant and a moderator of Dentaltown.com. You can reach Tim at email@example.com or any of the other dental partners/principals at (800)772-1065 or firstname.lastname@example.org