To own or not to own
Much has been written regarding the advisability of owning your dental facility vs.
Much has been written regarding the advisability of owning your dental facility vs. leasing space. I do not recall a single article, continuing–education course, or even a casual conversation — other than our design group efforts — encouraging dentists to own their practice facility. Cynics of facility ownership often include lenders, equipment dealers, practice–management consultants, investment advisors, accountants, practice transition specialists, developers, and even dental specialty designers.
How can it be that the perceived benefits of owning your own home vs. renting an apartment do not translate to owning your practice facility? If current tax law only offers business owners incentives to lease space, there would not be any space to lease. Why would developers (as business owners) develop space on a speculative basis? Development on a speculative basis that hopes to entice future tenants to occupy the space once it's constructed is a far riskier proposition than an owner–occupied dental facility. Of course, the reason developers create ownership properties is that financial gains can be considerable. So is the risk if the projects are poorly conceived and managed.
Dentists as community leaders: Dr. James Pride spoke passionately to his dental colleagues, encouraging us to be community leaders. My college advisor filled my elective curriculum with political science courses because he believed dentists, as service professionals, invariably assumed influential positions in state and local governments, professional organizations, school boards, etc., in addition to practicing dentistry.
If you agree that dentists are community leaders, here are four compelling reasons to own your own facility:
1) Dentists are financially and emotionally invested in the community and surrounding areas through their patient base and family life. They have much more incentive to maintain their property than out–of–state developers, bureaucratic real estate management companies, and other building owners isolated from the day–to–day activities in their investment property. Instead of fearing the decline of the practice neighborhood, a well–maintained, quality–constructed, owner–occupied dental facility has the potential to influence others and set a positive example.
2) Lease space occupants have no control over the building owner's selection of other tenants. Nonsynergistic tenants can hamper your ability to build a successful practice. Retail strip–center locations can be very problematic for dentists envisioning comprehensive practices. Imagine your facility positioned between a liquor store and a pawn shop. It happens.
For more on this topic, go to www.dentaleconomics.com and search using the following key words: practice ownership, leasing, appreciation, Dr. Jeff Carter, Pat Carter, Dave Fazio.
3) Dental facilities have very unique infrastructure requirements ... requirements that are not anticipated by generic developers, especially the ones who decided recently that health care is recession–proof and a “good thing to get into.” Facility building system outcomes that include poorly performing HVAC units, inadequate thermal insulation, and undersized electrical panel amperage can add tens of thousands of dollars to utility bills over the term of a lease, in comparison to the utility bills of an energy–efficient, dental–specific outcome designed for the end user — a dentist! We have yet to see this utility cost addition as a negative accounting line item when a proponent of leasing over ownership makes his or her case.
4) At a minimum, real estate holding will retain value and typically appreciate over time as a long–term investment.If you can't sell your dental practice as a business entity, you will still have a structure and property to sell or lease. I would question basing your retirement goals on the ability to sell a mature dental practice in a lease space when a young practitioner may have the option to create a start–up practice “across the street” in an area with an immediate demand for dental services.
Initial steps to facility ownership:
- Establish your facility vision.
- Structure the business entity that will own the facility.
- Create equity. Ground–up construction projects and even condominium spaces will require more equity to obtain additional financing than lease space options. In ground–up construction, a strategic approach is to first purchase property that has been “qualified” to support your facility vision. Often, in two or three years, the increase in appraised value of the property can create sufficient equity to advance the project into design and construction.
Visit http://www.dentaleconomics.com/downloads/ to see charts that compare leasing vs. ground–up construction.
Jeff Carter, DDS, Pat Carter, IIDA, and Dave Fazio, AIA, are owners of PDGFazio Design Group, located in Austin, Texas. For more information, call (800) 511–7110 or visit www.pdgfazio.com.