Practice transitions and acquisitions almost always involve a commercial real estate component, whether with a non-related third-party landlord, or when the selling doctor who owns the practice also owns the real estate. In both scenarios, real estate is often the most misunderstood element of the transaction. Additionally, both the Buyer and Seller frequently have legitimate concerns about being taken advantage of simply because of their willingness to make a deal.

In part 2 of this series, we cover more concerns and questions that need to be addressed when selling your practice’s real estate.

To simplify the process for both parties, the following considerations should be evaluated:

QUESTIONS 

• What are my real estate options?
• What does it look like to lease the real estate for cash flow vs. sale value?
• Should I consider a lease with an option to purchase the real estate at a later date? If so, what are market lease rates and future purchase terms?
• How do I achieve the most favorable purchase price without overpricing the real estate to a potential practice buyer?
• What is the value of my real estate if sold to a non-related third-party investor if the Buyer is only interested in leasing?

BUYER CONCERNS

Each Buyer has their own unique concerns. Many Buyers are willing to pay a premium for the real estate if it ensures they are able to successfully purchase the practice, as long as they understand and are educated on the interior value of the building and their future upside as well. However, they don’t want to be taken advantage of. As such, when a Buyer feels they are not being treated fairly they tend to get “cold feet”, or worse, they feel slighted and back away from the deal. Lenders who specialize in practice transition sales can verify that one of the primary reasons that deals fall apart has to do with the real estate; unfortunately, this commonly takes place in the 11th hour.

FAIRNESS

Sellers and Buyers both want to be treated fairly. To accomplish this, the margin or range of value needs to be assessed both for the real estate and for the practice, with additional steps beyond what an appraiser would commonly perform. Appraisers typically will not evaluate and check the current lease terms the selling doctor is paying themselves, along with other real estate expenses, against the adjusted market lease rate or purchase price value. Nor will an appraiser typically evaluate what the 3rd party value would be if the real estate were sold to an outside investor. There are also times, though uncommon, where replacement cost is the appropriate metric used when determining value. Properly applying the replacement cost approach requires industry-specific construction knowledge, which most appraisers do not possess.

Next, it’s extremely important to identify both the Seller’s and Buyer’s goals in the practice purchase. Some Buyers who intend on owning a practice do not have enough desire or financial strength to purchase the real estate at the same time as the practice.

However, what if the Seller wants to sell both the practice and the real estate at once and is not interested in leasing the real estate to the buyer? One solution may be a lease with a purchase option at a later date. A short-term lease with an option to purchase can be an advantageous strategy for many Buyers. However, these are often structured poorly, creating such a disadvantage to the Seller that the Seller is not willing to agree. The majority of transition advisors don’t have a strong comprehensive real estate understanding that would allow them to assist in a lease structure that is beneficial for the Buyer, yet protects the Seller from several potential risks. On the contrary, a healthcare real estate expert will be able to structure a deal that works for both parties.

COMPARABLES

Comparables for real estate must be well-defined. For a practice sale, it’s imperative to work within realistic and defined parameters of other relevant options. Comparable properties must include appropriate adjusted value for the specific market of the practice, including:

• The interior value
• Depreciation vs non-depreciative factors
• Market value
• Competitive offerings
• And more…

Frequently, market comparables require the modification of lease rates and purchase prices in order to represent fair market conditions. 

COMMON MISTAKES

Another common mistake Sellers make, often at the advice of their attorney or consultant, is using an Appraiser to determine real estate value at the time of a practice sale.

First, it is imperative to understand that appraisals do not determine value. Appraisals are subjective and are utilized by lenders to mitigate risk, not to determine an ‘official’ price or value. Appraisals can be grossly over or underestimated, and for a transaction to fully come together, both sides need to feel comfortable that the range of value and price is accurate. It is not uncommon to see a disparity of 20% or even up to 40% between two appraisals on the same property.

When Seller financing is required, or an Appraiser cannot justify the value of the real estate, structuring strategies are needed to accommodate the deal or potential shortfall. The same is true if a Seller desires to sell to an associate, but a consolidator is offering 30%-50% more in the practice purchase. A real estate specialist can assist to help the Seller make up the difference of a competing consolidator’s offer through real estate.

CONCLUSION

Sellers and Buyers should always seek the advice of a professional for their transition, start-up, purchase, lease renewal or additional offices, especially when it pertains to commercial real estate. Even sophisticated investors utilize their teams in each transaction to ensure they are protected. No two deals are the same, and often there is a laundry list of variables. Having the right team in place will help avoid many of these issues, preserve lasting relationships, and ensure accurate information is presented in order for both parties to make the best decision.

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