All of us at some point in our careers will have to make the decision of whether to build or lease space for our practice. The decision will follow the decision to pursue a startup or purchase an existing practice.
The Startup
Let’s consider a scratch start practice. A scratch start can be done today , however it is difficult on several fronts. Believe me; I know , I built 3 scratch start practices. Things were a bit different 20-30 years ago. I leased space , I purchased an existing building , and I built a clinic from the ground up. I went into small communities that had several established dentists . I worked very hard and credit much of my success to my people skills. It is a given that you had better have the clinical skills. I was not afraid to get out in the public and market myself. You are in a business and you will be selling whether you like it or not. Each of my practices were cash flowing after a couple months.
The first step in a startup is to develop a business plan . Consider your market and competition. Ideally, you will want to choose an area with one dentist per 1200- 1500 people. How will you market your practice and gain new patients ? What are your projections and are they realistic? The lender will want to know. Your DDS degree is all you have . Will you be able to secure financing? The answer is yes . Lenders see dentists as a good risk with very low default rates, Typically less than 1%.
Lenders will want to see you have some liquid savings so don’t pay off your student loans at the expense of saving. Lenders expect student loans. You should have a good credit score . Loans will fall in the $500,000 to $750,000 range for startups . Financing is available, with a down payment . The lenders I speak with report many startups taking 2-3 years to cash flow. They recommend that a dentist work as an associate while they build their practice. I believe that you spread yourself too thin in this scenario. You must focus all your energy on your practice right from the beginning. Real estate is amortized over 20- 25 years . The financing limits of a startup will make it hard for you to build a new clinic and fund equipment as well as working capital. Leasing space will be your best option here.
When considering a lease, particularly in a start-up, negotiate the tenant improvement allowance as high as possible. It is extremely important to hire a good attorney with experience dealing with leases . Do not go it alone. Landlords can take advantage of your inexperience . Everything is negotiable. In one of my start-ups, I was able to get the landlord to pay for my buildout. The landlord constructed the addition to his strip mall , building the 1800 square foot clinic including the buildout for my space . I only paid for equipment and furnishings. It took about 4 months to complete . I agreed to a 5 year lease with guaranteed 5 year extensions. When I sold my practice 20 years later my triple net lease was $1500/ month. This was a super affordable 4 op clinic. I did not have to go into massive debt . The landlord was in construction and this arrangement allowed him to secure a long term tenant. This was a win-win for both of us. It just so happens that this practice was in Dyersville Iowa, home to the Field of Dreams.” If you build it they will come”, and the patients sure did. Make sure that there is a provision for the assignment for your lease. I had this provision which made it easy to transfer the lease to the new owner when I sold the practice.
New Construction vs Buildout
Typically , the dentist will pay for the buildout. There are companies throughout the country who specialize in the construction and buildout of dental clinics. These firms are well worth the money. In fact, they will save you money in the long run. They provide everything from emographic research and site selection to developing the architectural design specific to dentistry, and guiding the dentist through the permitting and regulatory maze . They take into consideration technology, workflow, sterilization , room size , and even the number of parking spaces . Everything! They are thorough and worth every penny!!
Clinic size will depend on your number of treatment rooms. Figure 400 square feet per treatment room. If you want 6 ops then you are looking at 2400 square feet. If you want a bigger feel,then go with 500 sq. ft per op. Remember that overhead is a function of space. I know too many dentists who have overspent on their clinics. Many who built and equipped 10-12 ops and only utilized 60- 70% of their space. Consider going in with a colleague to spread the capital expenditures over a couple dentists. Keep your practices separate however . Many dentists will not consider this . I had a large patient base of farmers and I asked them why they didn’t spread the exorbitant machinery costs over several farmers. Combines cost $750,000- $1 million dollars and $ 500,000 for tractors etc. They would say that they were too independent. I guess that sums it up for dentists as well.
Checkout my online powerpoint presentation titled the Financially Savvy DDS. I discuss the cost differences for new construction vs a buildout as well as interest rates. These costs are going up as I write. I also share my formula for how much clinic and house you can afford.This is valuable insight! You must stay within these parameters or you will grossly overspend and be clinic poor.
Pros of Owning Your Building
When you own you realize a significant tax savings. You can deduct your mortgage interest and can deduct depreciation. You have an appreciating asset . Your practice entity can pay you rent. Seek the legal advice of an attorney and accounting professionals to help you with the appropriate legal entities, leases, and the tax structure. Rent charged must be fair market and not inflated . Owning allows you control. You are building equity .You can build more space than you need and lease to another business entity creating additional income. Be careful, as becoming a landlord causes a plethora of other issues. It can turn into a nightmare.
One day when you retire from practice, you have the option of leasing or selling the building.
Should you decide on building, I suggest you build early in your career so you can enjoy the facility and start building equity.
Cons of Owning A Building
You will have to find available land sufficient for your project. Site preparation can be very expensive. Purchasing the land at the same time as the construction loan is wise.
Owning commercial real estate requires a significant amount of capital and a downpayment of 20-30%. Your building will be for a specific use .Will you be able to find a dentist to purchase the building someday? Your architectural fees will run 10-14% of the project . You will be responsible for property taxes but will most likely as well with a triple net lease. Each year you should budget 3- 5 % of the building for maintenance and repair even for a new building. The regulatory compliance and costs all fall to you. Once you build you will be there for 30 years.
Pros of Leasing
Leasing requires less upfront cash allowing you to invest more in equipment and technology. Management hassles fall to the landlord. You have freedom of mobility to a degree. Dental practices are not super mobile though . Lease payments are 100% tax deductible expenses. Leasing can allow you to locate in a high traffic location that you may not be able to afford to buy and build on.
Cons of Leasing
You have little control. If that bothers you, do not lease. You may sign a lease with a great owner, only to have the owner sell. The next owner may not be as attentive to your needs.You may lease in a building with other tenants . A tenant may give off noxious odors and be loud. You will often be required to sign a triple net lease making you responsible for property taxes and other expenses you would normally pay if you owned. Your rent payments build equity for the landlord. You get no appreciation. Your lease terms could change and your lease could be terminated.
My Advice to the Young Dentist
Purchase an existing practice, and at the same time buy the building if feasible. You hit the ground running with a patient base and cash flow. You have a staff and systems in place . The startup today is extremely difficult.
When buying a practice you can obtain 100% financing for the practice loan with a 10-15 year term. National lenders will loan 1.5- 2 X your annual collections for real estate and can amortize over 20 to 25 years. This includes land , building , and equipment. Some lenders will lend as much as 3 X your collections based on your growth projections. The point is, lenders like to see a track record for the practice. Buying a practice affords you the luxury of cash flowing from day one and in my opinion is the best way to go today!
If you consider building , I would do that early in your career which will allow you more time to enjoy it. After all, you will spend most of your waking hours there. Be sure to hire experts who can help you weigh the pros and cons of a buildout vs new construction vs. leasing space and go with a nationally recognized dental lender . Your local banks while they know you, they are not as familiar with dental building projects . They loan according to loan to value ratios secured by collateral; the building. The local banks typically loan 80-90% of the appraised value and these deals often don’t appraise which means the dentist will have to come up with a larger down payment. There are good local lenders but do your due diligence here. I know some inexperienced dentists who are paying way more in interest costs than they have too.
Follow Your Dream
Get help in finding the perfect practice .I have a network of outstanding practice brokers , lenders, construction specialists, attorneys and accountants who will help guide you. I am happy to put you in contact with them. An outstanding practice broker will help you find the best fit ! Reach out! I’m happy to help anyway I can. I am excited for you to start your dental career as a practice owner! YOU CAN DO THIS ! GO FOR IT !
It is exciting to create the clinic space for the practice of your dreams! Just be smart and stay within my guidelines.
Order my online Xtremely Productive and Profitable General Dentist and Xtreme Hygiene The Ultimate Profit Center along with the Financially Savvy DDS.These programs are affordable and guide you in the fundamentals of creating the profitable general practice! Best of Luck ! Post some pics of your new digs and share your stories to help educate and inspire others.
P.S. Please share this site with a colleague so I can help more dentists!