Our dental clients often ask us, should I own the building where I have my practice? Our quick answer is usually "yes," but the analysis is – as you'd expect – quite a bit more complicated. In this post, we discuss some factors to consider when deciding whether to lease or purchase real estate for your dental office, and why ownership tends to win out over leasing most (but not all) of the time.
First Things First: Where is Your Dental Practice in Its Life Cycle?
The merits of leasing vs. buying commercial real estate can often depend a good deal on where your dental practice is in its life cycle. Clients just striking out on their own in dentistry with relatively limited capital to invest tend to have different business priorities than those planning a mid-career move with an eye to strategic growth, who in turn have still-different priorities from colleagues with mature practices and hopes of retiring in a few years. Because of these differing priority sets, in every representation we first ask our clients to think through their immediate, mid-term, and long-term objectives in dental practice and, more broadly, in life. These objectives will tend to influence how our clients approach the lease vs. buy question.
With that caveat in mind, here are some of factors we routinely advise our clients to consider when deciding whether to lease or buy commercial real estate for their practices.
Capital Investment is a Good Thing If You Have The Capital to Spare
Owning any kind of real estate has advantages over leasing from the simple perspective that ownership holds the prospect of long-term capital appreciation. Money invested in commercial real estate represents equity that can grow. In addition, the cost of capital as of early 2019 remains near long-term historic lows, meaning even if you have limited cash to invest, the cost of borrowing what you need to purchase real estate tends not to be too much of a drain.
That being said, buying a building ties up cash in a relatively illiquid asset. If you already have a dental practice that generates a healthy cash flow, parking money in bricks and mortar may not concern you. On the other hand, if you are starting out or winding down and see a need for short-term liquidity (for example, to build out space, hire staff, or buy that retirement home you've always wanted), purchasing commercial real estate may not make as much sense.
Ownership Favors Predictability (Most of the Time)
A building you own is a building you control. When you act as your own landlord, you never have to worry about unexpected rent increases, changes in management, forced relocation, or any of the other potentially business-disrupting variables that accompany leasing commercial space. Also, long-term financing allow you to predict and budget for your practice's financial needs with reasonable accuracy year-to-year, while reaping tax benefits from depreciation. This kind of fiscal predictability lends itself to the long-term growth of any business, dentistry included.
Still, being a landlord can have its downsides. When essential building features like HVAC or roofing fail, you bear the burden of fixing them. That obligation may cause particular headaches if your practice is not the building's only tenant. Being a landlord to third party tenants not only requires making fixes when things break, it also involves making business calculations about your tenant mix, when to raise rents, when to evict a tenant, and the myriad other building management considerations that will, at the very least, take time away from your focus on dental practice. Not everyone is cut out to be a landlord, and those that aren't will need to take the cost of hiring a building manager into account in running the lease vs. buy numbers.
Ownership Promotes Long-Term Planning
Owning commercial real estate also gives you a degree of control over the future of your dental practice. Of course, you have to have some foresight and intuition to choose the right location and a building with the size and configuration that meets the needs of your practice now and in the future. But, once you have chosen wisely, ownership gives you the flexibility to determine if, when, and how your practice will grow or change. When you reach the end of your career, it may also give you the option of selling your practice while holding onto the lucrative income stream from the building's rent revenues.
Building ownership also gives you a cognizable stake in the development of the community and commerce that surround your dental practice. As the owner of a commercial building, not only do you get to choose your tenants, but you also reserve for yourself decisions about signage and exterior aesthetics that can shape the public's perceptions of your practice and its surrounding neighborhood. You also give yourself a voice in local zoning and planning decisions, should you choose to exercise it, that can make a big difference in how the community grows and changes around your building. In contrast, tenants in a commercial building must, to a certain degree, rely on a landlord speak up for their interests when local changes occur, which is rarely guaranteed.
Seek Legal Help in Making a Rent vs. Buy Decision
At Dental & Medical Counsel, PC, we routinely counsel dentists and other medical professionals on the decision between leasing and purchasing real estate for their practices. While we generally favor ownership over leasing, we also recognize every situation and opportunity our clients seek counsel for has its own unique considerations. The factors above favor ownership over leasing, but we caution you to treat them as the starting point, not the end, of your analysis.
If you are considering the purchase of a commercial building as the home for your dental practice, call Dental & Medical Counsel, PC at (925) 999-8200 or reach out to us online to schedule a consultation. Our years of experience advising dental and medical professionals on legal and business issues can give you a leg-up in choosing the right building, negotiating finance terms, selecting tenants, and planning for your practice's (and your personal) future.