Your office: own or lease?
Ownership or leasing is a dental business decision with pinnacles and pitfalls.
by Bill Blatchford, DDS
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Ownership or leasing is a dental business decision with pinnacles and pitfalls. At Blatchford Coaching, we advise dentists on their facilities at different times:
- Newly graduated dentists who want to move steadily toward their goals
- Those who have been in practice about five to 10 years and now have a partner, or a building that is too small, not in the right place, or not efficiently designed
- Those who are mid-practice and looking for a facelift or a move
- Those thinking of retiring who are now ready to sell their practices, which comes with an old building
In this column, we can't cover every aspect of building a practice vs. leasing. With 25 years of dental business coaching, I've seen America grow rapidly. Land values have moved through highs and lows several times. My philosophy is to lease.
Doctors become discouraged with a monthly lease payment, but it is only 3% to 5% of gross. The leadership and business of the practice is separate from the doctor's real estate portfolio (the building). Doctors say, “Real estate always goes up.” Yes, it does always go up ... except when it comes down. Real estate and owning your own building are no more a sure thing than any other investment.
A dentist loses flexibility in owning a building that may have been a terrific design in a stable part of town 20 years ago, and now definitely is not. In selecting a site and subsequent building, you unknowingly compete against all local real estate professionals who have looked at that property and decided against it for some reason. Dentists' emotions say “yes,” but our inexperience in the real estate market is a detriment.
Too often, we see offices overbuilt. Again, it is the emotion of being in control and making decisions when we rationalize, “I could sometimes use seven chairs and experience an art gallery in the reception area.”
Communities do change. The space you think is so great today and decide to build on could have a completely different face in 20 years, and then you're stuck. One California dentist who built his own building subsequently had a freeway built overhead. He really wanted and needed to move, but his choices were very limited. He could have changed his practice name to “Under the Freeway Dentistry” and made the most of branding!
A building pitfall could be the dentist deciding to become a landlord by building enough spaces to lease to others. The rationale is “now my building won't cost me anything.” Commercial developers have many spaces and when one is empty, they hardly feel it.
If your space is empty, you have a 50% occupancy rate and are paying double rent. Now you're angry because your successful practice just isn't producing enough to cover your poor real estate choices.
Now you want to sell the building and it can be a real deterrent. A new graduate is already $250,000 in debt and can obtain financing to purchase the practice, but doesn't want the building. So, next you look for a tenant for a 30-year-old building. This begets an important point: Do not include your building value in your retirement portfolio.
You build and sell a dental office when you need to, rather than buying low and selling high. I needed a dental office 10 years into practice. Interest rates, inflation, and unemployment in Oregon were all double digits. I built it anyway, and I sold it when I needed to sell it.
Even banks lease their spaces so they can make money financing dentists to build their own buildings. A costly drawback during the one-to-two years of the building process happens when the highly skilled dentist loses focus, time, and energy. Production drops, the team falls apart, and leadership doesn't exist.
The real kicker is your accountant legally depreciates the building over its life. When you sell, you must pay the tax on that depreciation. You purchased it for $350,000, depreciated it for $200,000, sold it for $650,000, and owe tax on $500,000. It's true! Dentists have emotional pride in owning their own buildings. They do this so they can spend Saturdays cleaning the gutters and sweeping the parking lot.
We feel the best answer is to lease for five years, with two, five-year extensions. This allows you the flexibility to move to a better area as your community changes. What amazes me is leasing or owning is 3% to 5% of gross production, yet doctors are willing to have staff salaries come in at 35%, when it should be 20%.
Dr. Bill Blatchford, America's dental business coach, has just published his second book, “Blatchford BLUEPRINTS — The Art of Creating Practice Success,” available at www.blatchford.com. The Blatchford FILES is a monthly membership of new ideas and classics. Dr. Blatchford's oldest daughter is graduating from Oregon Health Sciences University in June. Reach Dr. Blatchford at (888) 977-4600 or firstname.lastname@example.org.