"How does owning or renting my office affect the sale of my practice?"
The disposition of real estate is a key issue in every transition, not only because the buyer needs a place to practice, but also because rent affects the overhead expenses (and, therefore, the price) of the practice.
We ask two experts the same question to give you two different answers on a complex issue
Preston Lovelace, JD, MS
The disposition of real estate is a key issue in every transition, not only because the buyer needs a place to practice, but also because rent affects the overhead expenses (and, therefore, the price) of the practice. Additionally, in order to fund a practice acquisition loan, lenders usually demand a lease with a term (or options to renew) that lasts for the life of the loan.
Dentists who lease space need to check their leases for clauses concerning assignment or recapture, as the terms of the lease can often complicate a transition. Lease assignment is often allowed with the written permission of the landlord, and most landlords are happy to switch tenants as long as the rent is getting paid. However, leases often do not release the assignor (seller) from liability under the lease after the assignment. Additionally, some leases forbid assignment or allow the landlord to recapture the premises if an assignment is requested. In these cases, an unscrupulous landlord can use the lease to basically extort money from the seller for consenting to an assignment.
For office owners, the situation is easier, as the practice owner and landlord are one and the same. Office owners must first decide whether the sale of the building is a requirement for the sale of the practice, or if they would be willing to act as a landlord for the buyer. Either way, the mortgage or rental expense for the buyer will directly affect his or her overhead expenses and the price the buyer is able to pay for the practice.
Tom Snyder, DMD, MBA
If you own your building and are ready to sell, a critical issue a buyer will address with you is having an option to purchase your real estate in the future. This is typically a fairly straightforward matter, especially if you have a single-use facility. However, if there are multiple partners owning the real estate (usually with multiple units), more than likely you will need their approval to offer a future purchase option to your potential buyer. In fact, we have seen cases where one of the building partners already has a purchase option when one of the partners wants to sell their interest in their respective unit. This can create a significant problem with your practice sale. Additionally, with interest rates still relatively low, more buyers today are interested in purchasing your real estate now, along with the practice. Therefore, you must be prepared to accept that reality. If you have planned to receive long-term rental income from a tenant, your practice sale may be at risk if the real estate is part of the buyer's offer. We've seen purchasers walk away from a practice purchase if unable to purchase the real estate.
If you are a tenant, your current lease contract may become a problem in a sale. The key issue that most sellers who rent must address is the "assignment of the lease" clause. This can become a major impediment to your sale. Buyers do not purchase practices without control of the lease agreement, so you will need the landlord's consent to assign. If you are in the midterm of your lease, you must also negotiate being released from any personal guarantees on that lease. Therefore, getting proper advice from an advisor well versed in lease/tenant matters before you start the transition process is critical.
Tom Snyder, DMD, MBA, is the director of transition services for the Snyder Group, a division of Henry Schein Professional Practice Transitions. He can be reached at (800) 988-5674 or Tom.Snyder@henryschein.com .
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