Premises Lease
Is the premises leased or for sale along with the practice?
Leased Premises
Owned Property
A commercial lease is a very long, legal document that will ultimately be reviewed in detail by your lawyer as part of due diligence. The bank will also take the lease into account when structuring a practice loan. The length of tenancy and the various terms in the lease could have considerable impact on the value of the practice, and the ability to assign the lease and operate the practice at its current location. As a result, the premises lease deserves due consideration.
The option to purchase the real estate in conjunction with the practice is typically of benefit to a buyer because it puts them in control of their own tenancy. There is no longer risk of insufficient tenancy length or detrimental lease terms that could significantly impact the value of the practice down the road, or potentially require the practice to relocate. However, the cashflow from the practice would need to be able to support both the practice loan and the mortgage on the real estate unless you’re able to contribute personal funds and/or security.
Most commercial leases for a dental practice are “triple net leases”, which means the tenant is charged a base rent per square foot, as well as a proportionate share of the landlord’s operating costs, primarily property taxes, maintenance and insurance, plus applicable taxes.
Some factors to consider when conducting a preliminary review of the premises lease: Tenancy Length
Assignment
Ideally, the lease would have a minimum of 10-12 years of tenancy certainty made up of the current lease term, plus renewal options. Practice loans are typically amortized over 12 years, with banks requiring tenancy certainty over the entire amortization period. If for instance, there are only eight years of tenancy available, the bank may choose to amortize the practice loan over eight years, increasing the annual loan payments, making it harder to service the debt. This lack of tenancy length could just be an oversight by the practice owner; however, it creates risk that you may have to relocate and build a new facility in eight years if the landlord doesn’t grant further renewal options.
Assignment is the ability to transfer the lease to a purchaser of the practice. In almost all cases, this requires consent of the landlord, which typically can’t be unreasonably withheld. However, in some cases the consent may be unreasonably withheld, or the landlord has the right to terminate the lease instead of consent to assignment. In other cases, you might have to own assets or provide financial documentation to support the ability to make the lease payments before the landlord will grant assignment.
12 | Dental Practice Buyer’s Guide & Workbook
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