Expand, Lease or Sell your Veterinary Practice?
There’s no one-size-fits-all solution for veterinarians when it comes to planning for retirement.
When Dr. Michael McTigue looked into selling his veterinary practice at the end of 2021 with an eye toward retirement the following year, he initially considered keeping the building and leasing it to Amerivet, the corporate group that was acquiring his practice. However, after researching the real estate market – and with three different real estate buyers providing property evaluations and offers – he decided to sell. “After the final buyout of my ownership in the business, I became more interested in selling,” he said. “The practice’s corporate owner, Amerivet, was willing to give real estate groups a guaranteed 20-year lease, raising the value of the veterinary real estate and making selling more attractive than holding the lease myself, as I did not want to be involved with real estate management once I retired.”
Dr. McTigue looked at three institutional real estate investors, ultimately opting to work with Terravet Real Estate Solutions (Bala Cynwyd, Pennsylvania). “The company not only offered me the best price, but it also had experience in both general and veterinary real estate,” said Dr. McTigue. “They were organized, efficient, and easy to work with. From the initial contact and offer in November 2021 to the final sale in April 2022, the process was straightforward. In hindsight, I wouldn’t have done anything differently.”
Proceed with caution
Whether veterinarians are preparing to expand their business or planning for retirement, the process isn’t simple. Even the savviest of business owners is at risk of missteps without the direction of trustworthy real estate experts. When founder and CEO Daniel Eisenstadt began Terravet in 2012, he did so with the intention of helping veterinarians make sound financial decisions while getting liquidity for their real estate. “We often start with discussing the optimal outcome for the owner/ownership group and work our way back to the important real estate milestones necessary to achieving that outcome,” he said. This may involve educating veterinarians on what makes a lease marketable when selling their building, guiding clients through the fine points of expansion projects, or helping them position their real estate for future success – whether they eventually decide to expand their practice or sell or lease their property.
Although the circumstances may vary from one practice owner to the next, Eisenstadt offers essential insights for proceeding wisely. For instance, when looking to expand their business, if the existing lot is large enough to accommodate the expansion, it generally makes sense for veterinarians to stay put. “If a veterinary owner can fit ample parking on the existing lot, then a phased construction plan within the four walls of the existing building, or a small expansion of the building, can make sense,” he said. “In some settings, construction of a new structure on the existing lot while operating out of the old building during construction can be a viable solution. There are always sensitivities around maintaining operations during construction, but the risks associated with ground-up development on new sites (i.e., timelines, town approvals, costs, labor and zoning) can be a lot to manage.” Especially since approval timelines across the country for new projects are moving forward only half as fast as in pre-COVID timelines, it makes sense to limit obstacles, he said.
For veterinarians looking to sell their property, it’s important to plan strategically, Eisenstadt explained. “There are many factors that go into determining veterinary real estate value,” he said. “We often like to think of valuation as a three-legged stool. The first leg of the stool is the land and building. Factors such as age, construction, location, and size are all factors that impact value. The second leg is the lease instrument encumbering the property. Additional factors such as the length of the initial lease term, landlord responsibilities, and the amount and frequency of rental increases can impact value. The third leg relates to the credit backing the lease payments. Much like a credit rating in the bond market, there are entities of various financial performance and sizes that may be considered safer with respect to the probability that they pay rent in the future. Although far from perfect, it’s possible to get a valuation range by contacting a few buyers and getting indications of value from actual buyers. It’s also possible to reach out to brokers and get their opinions regarding the value, but it’s important to understand that some brokers may be overly optimistic.”
It’s rarely a good idea to sell the land separately from the building, he continued. “It is unusual for a developer to keep control of land under a building and then grant a ground lease to someone else to construct a building on it. Although this sometimes occurs in hyper-competitive real estate markets, it adds significant complexity and makes valuation more complicated.”
Sometimes, veterinarians sell their practice to a group that’s not interested in purchasing the real estate as well. In this case, Eisenstadt recommends considering four options, the first of which is to explore a cash sale to a direct buyer of veterinary real estate, such as Terravet. The next option would be to consider selling through a broker or intermediary. As a third option, veterinarians who do not have a need for cash proceeds and want to defer taxes might consider contributing their property to a real estate investment trust (REIT) – a company that owns, operates or finances income-producing properties. “Working with a REIT, such as Terravet’s REIT, involves the contribution of a building in exchange for ownership of a diversified pool of other properties,” he said. A fourth option would be to hold onto the property. “If a sale of the real estate was explored but unsuccessful, this could be an opportunity to resolve any issues associated with either the building (i.e., deferred maintenance) or the lease (i.e., a longer lease term is needed).”
Regardless of the direction veterinarians take, it’s always essential to retain competent real estate counsel with long-term experience negotiating leases and property sales, Eisenstadt advised. “It just as important to consult with professionals who know what institutional real estate investors and lenders want to see in a lease so that a future refinancing or sale will not be limited because of the lease,” he said, noting a few points in particular that can be problematic for institutional buyers and lenders:
- Significant landlord responsibilities related to maintenance of the building and/or replacement of key systems, such as air conditioning units.
- The initial term of the lease of fewer than 10 years.
- The corporate entity is the tenant or guarantor of the lease.
“Veterinarians considering a sale of real estate should plan carefully and develop dependable relationships with credible advisors, buyers, and intermediaries who are authentic and transparent.”
Photo credit: istockphoto.com/skynesher
Photo credit: Daniel Eisenstadt
