Dentists who are buying a dental practice will have 1,001 questions that need to be answered before the acquisition is complete. Many of these questions will be related to the lease and it’s important for buyers to have realistic expectations regarding this part of the process.
Relocating a practice to a new space shortly following a transition will involve a substantial capital investment and can cause considerable irreparable damage to the goodwill of the practice. For these reasons, securing a long term lease is a crucial element of any practice transition.
Assuming the real estate is not part of the sale, the buying dentist will be dealing with either the landlord or the landlord’s representative, usually a property management company, to negotiate a lease assignment or new lease. There is typically an existing lease in place with the selling dentist, so a lease assignment is usually the most efficient option in a practice transition. Therefore, a buyer should be prepared to meet the obligations of the current lease as well as any renewal options that were previously negotiated by the selling dentist. We have also found it helpful to assure the landlord that neither side of the transaction is looking for a commission. This helps to put them at ease and can speed up the process of assignment.
While every lease is unique, in the Texas commercial property market, we usually see triple net leases for dental practices. A triple net lease (Net-Net-Net or NNN) is a lease agreement on a property where the tenant agrees to pay a base monthly rental rate plus their prorated share of real estate taxes, building insurance, and maintenance (the three “Nets”) on the property. When buying a dental practice, it is important to consider all of these costs when evaluating the overhead of the practice.
When is the best time to approach the landlord during the process of buying a dental practice? Some factors to consider are the relationship of the current dentist to the landlord and the degree to which confidentiality is an issue. We find that the best time to approach the landlord is after financing has been arranged and the purchase contract has been substantially negotiated.
If there is a lender involved in buying a dental practice, they will want to review the lease to make sure the remaining term and any renewal options cover all or the majority of the buyer’s loan term. They will also factor the costs associated with the lease into their cash flow analysis for the practice.
When working with a dentist who is buying a dental practice, McLerran and Associates can assist in the facilitation of the lease negotiation while keeping in mind that a smooth practice transition is the ultimate goal.