Transitions Roundtable

We ask two experts the same question to give you two different answers on a complex issue

QUESTION

“I am negotiating the sale of my practice and the value of my building has decreased significantly. The buyer wants to purchase my real estate now, so what should I do?”

Lynne Nelson

If you can negotiate a fair lease rate and are willing to be a landlord, it would buy some time. If the building is older or less desirable, this situation could leave you vulnerable to having a vacant building if the purchaser later chooses to move the practice to a newer location. If this is not a concern, he or she may want an option to purchase at the end of the term in order to feel secure that he or she will eventually be able to buy the building.

If you don’t want to be a landlord or your purchaser is unwilling to purchase the practice unless he or she can buy the building immediately, you may want to consider carrying the note on the building so you can recoup the loss in the form of interest payments on the note. It is extremely rare that a purchaser would be willing to pay more then appraised value for the building and bankers will not loan on more than the appraised value. If you know the approximate appraised value, figure the difference in value presently versus the value lost in the downturn so you know at what point you have made up the loss through the interest payments. Have a balloon payment due at that time or around the three- to five-year mark (depending on what the difference is that you need to make up). This scenario assumes that after practice overhead and practice and building payment, the practice continues to provide a positive cash flow to the purchaser.

This may be a time when you want to work with a qualified broker. It is much easier to figure out the best way to structure your sale before you find a buyer as your expectations can be introduced from the beginning. With the help of a knowledgeable broker, it can be presented to a pool of candidates rather than just one.

Lynne Nelson is senior broker at Consani Seims, Ltd. ADS Northwest, and cofounder of Practice Management Associates, LLC. For more information contact her at (866) 348-3849 or [email protected].

QUESTION

“I am negotiating the sale of my practice and the value of my building has decreased significantly. The buyer wants to purchase my real estate now, so what should I do?”

Tom Snyder, DMD, MBA

This has been an ever-increasing problem that many dentists are facing since the beginning of the Great Recession. Commercial real estate values have taken a major hit in most markets, forcing many real estate owners to take pause on the timing of selling the property now or waiting for a real estate market rebound. There is one factor that may influence your decision to sell now: the Bush era tax cuts conclude at the end of 2012. More than likely, capital gains will rise to 20% or higher, so you need to take into consideration the tax impact of waiting. Will your local real estate market rebound sufficiently in the next few years to offset that looming tax increase? As to your question relating to selling the property now, it is dependent on your purchaser agreeing to pay rent for a number of years, allowing you to recoup some of your lost value, and their willingness to defer ownership now. Perhaps you can offer the purchaser a “below market” rate as an accommodation for waiting.

The next big question is when will the property be valued? Some buyers may not be too keen on waiting a few years to pay a higher price and perhaps do so at a higher interest rate. Thus, you may have to offer an attractive proposition. Suppose you “locked in” the building’s value today and adjusted the future sale price by a cost of living adjustment at the time of sale. This could account for the time value of money which may be a viable solution. Remember, if you continue to receive rental income for several more years, that additional income may offset some of the loss in value that you will experience if you sold today. For all we know, the normal commercial market’s value appreciation may not even equal the future cost of living in these uncertain times. This approach is similar in theory to valuing a dental practice at the outset when an associate joins a practice for a deferred purchase.

In the end, as is the case with any practice transition, sound financial planning must be part of your strategy to ensure that you are making a wise financial decision.

Tom Snyder, DMD, MBA, is the director of transition services for the Snyder Group, a division of Henry Schein. He can be reached at (800) 988-5674 or [email protected].