Do You Know What Your Veterinary Practice Real Estate is Really Worth?
Part 1- Creating Liquidity and Building Improvements
Written By: Daniel Eisenstadt and Ian Widensky of Calico Real Estate.
Thirty years ago nearly every owner of a veterinary practice owned (or wanted to own) the real estate where his or her practice was situated. While this continues to be the norm for many owners, like so many other aspects of veterinary medicine, “the times they are a changing.” Today, more practice owners are recognizing that their practice and building are different assets and that viewing each separately can create greater financial value and more flexibility.
In many other healthcare fields (dentistry, physical therapy, etc.) practice owners rarely own their own real estate, choosing instead to focus on building the business of their practices. Most owners enter into long-term leases for well-equipped facilities in good locations. In fact, most corporate groups that acquire veterinary practices utilize the same principles and negotiate long-term leases as part of a purchase agreement.
Similarly, certain consultants and advisers have come to view the separation of practice and property as a good way of creating options for owners. Says Dr. Karen E. Felsted, CPA, MS, CVPM, president of PantheraT Veterinary Management Consulting, “Traditionally, practice owners have sold their real estate when they’ve sold their practice. This is a good option for some practice owners but not necessarily for all. An opportunity to cash in on the value built up in the real estate without having to sell the practice gives veterinarians more financial choices and the ability to customize their succession plan to their individual needs.”
Although no situation is alike, there are several scenarios where value can be created by viewing and treating the practice real estate as independent from the practice:
After years of building a successful practice, many owners are content to practice for another decade (or more) and enjoy the stability of owning a healthy business. But many admit to feeling a financial crunch as their children grow older and head off to college. Many want to buy a second home or travel more, but feel unable to do so.
Some veterinarians may be concerned that selling the practice real estate separate from the practice may make a future sale of their veterinary practice less attractive. In fact, as long as a lease is assignable by the practice owner to a future buyer of the practice, the sale of the real estate will not restrict the sale of the practice. And, though some associates may be interested in buying real estate few associates and no corporate buyers will pass up the chance to buy a good practice because the facility is leased.
For most veterinarians their practice represents their largest financial asset. But without selling the practice, many see no easy way to create liquidity. Some veterinarians in this situation work harder to meet their increased personal financial needs while others put off personal needs and/or the responsible preparations for retirement. For these veterinarians, a sale of their real estate to a landlord that will lease the property back to the practice can be a creative solution to address this financial need.
After years in the same building, many practice owners recognize the value (or the impending need) of renovating and/or expanding their physical plant. But many of those same owners choose to defer these large-scale projects for financial reasons or because they don’t want to take on additional debt late in their careers. Regrettably, the decision not to renovate can compromise their ability to recruit quality associates or future buyers, detract from the customer and patient experience, and lead to a deterioration in the practice’s value. Few consider the option of selling their building to a landlord who will invest and manage a renovation project and integrate these costs over the course of a long-term lease.
Coming Soon: Part 2 of “Do You Know What Your Practice Real Estate Is Really Worth?”- Diversification and Maximizing Value.