The Dilemma of Selling or Holding Real Estate in Your Veterinary Practice Sale
Practice owners who also own the practice’s property often grapple with a dilemma after Closing: Do you sell the real estate or hold onto it? The truth is, there is no right answer to this question. It involves personal preference, risk profiles, estate planning, and, most importantly, the long-term potential for the building in its geography.
6 Key Factors to Consider in Your Decision to Sell or Lease the Property
Deciding whether to sell or hold your veterinary practice property is an important decision with far-reaching implications. Let’s unpack the six key factors you should keep in mind when weighing your options:
1. The Ownership Structure of the Vet Facility
If you or your family own the property, it’s generally easier to hold onto it long-term compared to when you have two or three partners sharing ownership. In the latter case, you’ll need to think about where everyone will live and how your relationship might change 8 to 15 years down the line when the lease is up. Being the sole owner and landlord is straightforward, but when there are multiple owners, things can get complicated, especially as everyone ages or even passes away. You may be aligned in your thoughts around the property at the time of sale, but as life happens, you and your partner(s) views may diverge which can create challenges. With that in mind, it’s important to consider what being partners with your current partner’s heirs might look like if you plan to hold the property long-term.
2. Your Vet Clinic’s Geographic Location
Major cities like Los Angeles, San Diego, San Francisco, New York, and Washington D.C. not only earn the highest hospital valuations but they also tend to have the highest property values long-term. Why? Because these metro areas have ‘scarcity’ value—there’s more demand for real estate and fewer options available due to their high population density. In these areas, if a veterinary clinic decides not to renew its lease, it’s highly probable you can find a new tenant.
On the other hand, in rural areas, suburbs, and even those growing outer suburbs, the situation can be different if a lease is not renewed. A new buyer might decide not to renew your lease for several reasons. Maybe they need a bigger or smaller space, want to move, or decide to build their own clinic. Either way, it can be very difficult to find a new tenant (veterinary or otherwise) to take over the lease.
3. Cash Flow
Especially if the property’s mortgage is fully or mostly paid off, it will serve as a strong cash flow generator throughout the lease term and any renewal periods. This type of reliable passive income stream can give you some security and peace of mind as you slow down or fully retire. The flip side is, if the new buyer of the practice decides not to renew, you are left with an empty building.
4. Implications with Your Veterinary Property’s Mortgage
When you sell your veterinary practice to a corporate buyer (yes, even if you retain a minority stake), your building is no longer considered “owner-occupied”. Instead, it becomes an investment property.
If the mortgage is nearly or entirely paid off, then this point doesn’t really matter. However, if you do have a substantial mortgage balance, your interest rate might increase when it’s converted to an investment property mortgage. The loan to value that a bank will lend against will also change as a result of the property no longer being considered “owner occupied”. You’ll want to think about that when deciding if owning the building is really worth it.
5. Lease Duration and Its Impact on Property Value
Your single-tenant property value is based on its lease term, rental rate, and tenant creditworthiness. As for the lease term, the property value won’t change drastically whether you have a 15-year or 12-year lease length set at the time of sale.
However, once the lease term dips below 10 years, the property value starts to decrease due to the shorter duration. For instance, a 7-year lease term will lower the value of the same property that has a 10-year lease term. Essentially, the longer the lease term, the more attractive the property becomes to potential buyers due to the predictable income stream it offers. If you decide to sell the veterinary practice’s property, this is something to keep in mind.
6. Diversification of Assets
Think about how much your building represents in terms of your overall wealth. If most of your net worth is tied up in this single property asset, it might be wise to diversify your investments. Spreading your financial risk across different asset classes can help protect you from potential downturns in the real estate market.
Scenarios Where Selling Your Veterinary Property Makes Sense
The option to sell your veterinary real estate is a multi-faceted one. Here are some scenarios where selling your property makes sense:
Multiple Property Owners
The number of owners can create issues down the road, especially if owners pass away or move out of town.
Veterinary Practice Outgrows the Property
The practice is growing and needs room to expand, but there’s no more space available or no avenue to a viable expansion.
Older Building with a Long-Term Lease
The likelihood of a clean renewal at the end of a 7 or 10-year term is lower for dated buildings with no recent remodels.
Case Study:
Dr. Anjanette Cabeza
- Employed a joint venture deal structure
- Exceeded her local broker’s value estimations
- Achieved expansion/renovation plans with her buyer
Poor Neighborhood Outlook
What will the neighborhood look like some years down the road? The future of your neighborhood can significantly impact your property’s value. If you anticipate a decline in neighborhood quality over the next decade, owning a building or veterinary practice there could pose a risk.
Multiple Heirs Lacking Business Expertise
If you’re planning to leave a significant inheritance to your family, leaving an illiquid real estate asset can complicate things, particularly if the property is nearing the end of its initial or renewal term. Dividing real estate among heirs, especially if they lack some business acumen, could bring challenges and disagreements. Selling the property and converting it into more liquid assets may simplify estate planning and make it easier for your family to manage.
Building Value Peaks
The highest valuation of your property often coincides with the sale of your practice. This is largely due to the long-term lease in place and securing a reliable tenant with good credit (your corporate buyer). While selling means giving up consistent rental income, the lump sum can be strategically reinvested for potential growth.
To Sell or Hold: Navigating Your Veterinary Practice Property
Should you sell or hold onto your veterinary practice property? That’s the million-dollar question, isn’t it? Unfortunately there’s no one-size-fits-all answer and it really depends on your unique situation. The key is to carefully weigh your options and consider how they fit into your overall financial picture and long-term goals.
If you’re feeling unsure about the best path forward, don’t hesitate to reach out. We’re here to help you navigate the complexities of selling your practice and making smart decisions about your real estate.
Make the right call on your property, schedule a conversation with Ackerman Group to explore your best options.