Dental practice transitions and real estate conveyances

June 26, 2015

Dentists will spend an inordinate amount of time attempting to transition his or her dental practice to the general marketplace. Sometimes they will employ a practice broker to save the effort and lost production while working on their own. The lost production while away from the chair while trying to arrange the necessary documents and market the practice will invariably cause the dental practice value to fall during the process. The actual approach to a transition and the marketing aspect can take many months until the correct buyer appears. If the selling dentist owns the building in which the practice operates, the hours spent negotiating with the buyer about its potential acquisition should also be discussed since the buyer may or may not want to acquire the real estate. In the event that the dental practice is worth less than the real estate, an especially difficult task lies ahead.

The retiring dentist

If the seller of the practice is interested in retiring to Arizona, as an example, and the practice is in Pennsylvania, he or she may not want to retain the real estate. The worry about collecting rent, maintaining the property, or other areas of concern when the building is owned by an absentee landlord is something that would not typically interest a retiree. Even if a management company were to be retained for the real estate, the seller of the practice may still not want to be involved. If the buyer of the practice is borrowing the funds to acquire the dental practice, that buyer may not have the credit to obtain a mortgage. Even with good credit, a buyer of real estate would need between 20 and 25% of the purchase price as a down payment for a conventional lender to advance funds for the acquisition of the real estate. Some dental specialty lenders will lend funds to a dental practice allowing a distribution to the buyer for the down payment to acquire the real estate as well. In the event of the real estate being equal or higher than the value of the dental practice, this would normally not happen. Another approach to a sale of the building when the dental practice buyer can’t or won’t purchase it is to attempt to syndicate the sale of the building to investors who would have a lease from the new owner of the dental practice. The new tenant would be a strong one and this could be a possibility that would entice a group of investors. The seller may know those who would want a lease with a strong tenant and the seller may be able to sell the building to investors on his or her own.

Options to purchase and rights of first offer

Popular approaches to attempt to sell property to the buyer of the practice include options to purchase that real estate. With this concept, the seller grants a lease for the property and, as long as it is not in default, the option allows the tenant a partial set-off for the some of the lease payment against a future purchase price. It gives the tenant/new practice owner an incentive to buy later when credit or money available as a down payment is easier to obtain. A right of first offer allows the landlord to look for another buyer of the real estate, but it allows the tenant to make an offer first. Sometimes this reduces the availability of potential buyers. Some consider this a waste of time in attracting buyers while keeping the tenant interested since the tenant would come first.

What are other ideas when the practice value is below the real estate value?

This is one of the toughest types of practices to sell. Another idea is to sell the practice records to a dentist while selling the real estate as a completely separate transaction. It may be easier to sell the patient records while selling the real estate to an investor or a different type of owner who would occupy the premises, rather than to a dentist. The patient record sale will avail itself to many dentists who might be in a close geographic area and can afford to pay for the records yet not want another operating facility. The real estate could bring a much higher value immediately to a non-dental investor/occupier of the building. These avenues can be advanced simultaneously while maintaining the patient flow until one or the other approach occurs. It is important not to have a vacant building in any situation.