The appraisal gap

Feb. 1, 2011
The appraisal gap is the disparity between the actual construction cost of a dental facility and the lesser value placed on that facility by real estate appraisers.

Jeff Carter, DDS, and Pat Carter, IIDA

For more on this topic, go to and search using the following key words: dental office design, dental office construction, Dr. Jeff Carter, Pat Carter.

The appraisal gap is the disparity between the actual construction cost of a dental facility and the lesser value placed on that facility by real estate appraisers. The decreased value assessment potentially protects lenders in case of foreclosure and the need to sell the dental facility as generic office space to a nondentist buyer.

This disparity "gap" often limits a dentist's ability to obtain sufficient funding for a project due to lending practices based on typical 80% to 90% LTV (loan to value) ratios. If your project appraises for 80% of the actual construction cost and the lender funds 80% of the value of the construction cost, your equity requirement into the project to make up the remaining unfunded percentage is greatly increased and may be well beyond what you are prepared to invest.

Fortunately, for those pursuing a new dental facility in a lease space, no appraisal is required and lending is based on the value of your practice as a business entity and what it can generate in cash flow vs. expenses.

So, which dental facility types involve real estate and as a result are impacted by the gap?

  • Ground-up construction building
  • New construction facility in a condominium space
  • New construction facility retrofitted into an existing building purchased by the dentist
Where does the "gap" occur in the appraisal value?

The gap is mainly attributable to the enhanced infrastructure requirements for plumbing, electrical, and HVAC.

Plumbing - Plumbing costs for dental facilities typically range from $20 to $30 per square foot (SF) vs. $7 to $10 for generic office space. The addition of compressed air lines, vacuum lines, and multiple sinks partially account for the higher cost per SF. Another significant cost addition to the plumbing category is the inclusion of plumbed nitrous oxide. In a five-operatory facility, plumbed nitrous oxide (excluding manifold, connector panels, flowmeters, and rubber goods) can add up to $20,000 to the project.

For example, a 2,500 SF real estate agency facility with two restrooms and a kitchenette projects plumbing costs of $7 x 2,500 SF = $17,500. Contrast that with a 2,500 SF, five-operatory, dental facility with plumbed nitrous oxide. Plumbing construction costs for the dental facility project at $30 x 2,500 SF = $75,000, or $57,500 higher than the real estate agency space.

Electrical - Dental facility electrical costs project at $20 to $25 per SF vs. $10 to $15 per SF for generic office space. The addition is due to the equipment- and lighting-intensive environment required to deliver dental treatment. Our friends at the generic real estate agency facility have little need for air compressors, vacuum pumps, autoclaves, and computed tomography units.

HVAC (heating, ventilation, and air conditioning) -Dental offices are a complex mixture of static and dynamic activity zones with an overlay of psychological and physiological anxiety symptoms to complicate occupants' perception of adequate temperature control. A typical 2,500 SF, five- or six-operatory facility requires three HVAC zones in the cost range of $12 to $14 per SF vs. $6 to $8 per SF in generic office space.

In fact, the IRS has recognized the unique additional infrastructure costs of dental and medical facilities. In 1997, the Hospital Corporation of America won a landmark decision against the IRS making the case that additional plumbing, electrical, and HVAC infrastructure is "essentially" part of the equipment requirements to provide treatment delivery and thus should be in the short-term depreciation schedule along with the equipment.

Is there anything you can do to counter the appraisal gap?

Yes, there are three things you can do to prepare for the appraisal gap:

  1. Acknowledge there is a gap and don't be misled by novices in dental design and construction who assure you it won't be an issue.
  2. Prepare to inject up to 20% equity into your project. That equity can be factored in from a number of sources. No one, to our knowledge, has ever obtained 100% financing of a dental facility involving real estate.
  3. Search for lenders who analyze your project in terms of cash flow and the value of your practice as a business entity vs. equity lenders dependent on appraisals that compare your state-of-the-art dental facility to generic office space.
Jeff Carter, DDS, and Pat Carter, IIDA, are owners of PDG- Practice Design Group. Located in Buda, Texas, PDG offers a full range of design and consulting services to dentists nationwide. For information, call (800) 511-7110 or visit

More DE Articles
Past DE Issues

Sponsored Recommendations

Clinical Study: OraCare Reduced Probing Depths 4450% Better than Brushing Alone

Good oral hygiene is essential to preserving gum health. In this study the improvements seen were statistically superior at reducing pocket depth than brushing alone (control ...

Clincial Study: OraCare Proven to Improve Gingival Health by 604% in just a 6 Week Period

A new clinical study reveals how OraCare showed improvement in the whole mouth as bleeding, plaque reduction, interproximal sites, and probing depths were all evaluated. All areas...

Chlorine Dioxide Efficacy Against Pathogens and How it Compares to Chlorhexidine

Explore our library of studies to learn about the historical application of chlorine dioxide, efficacy against pathogens, how it compares to chlorhexidine and more.

Whitepaper: The Blueprint for Practice Growth

With just a few changes, you can significantly boost revenue and grow your practice. In this white paper, Dr. Katz covers: Establishing consistent diagnosis protocols, Addressing...