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By Jon Vick and Jason Winokur • Vet Asset Advisors
Often, veterinarians not only own their practice, but also their real estate. And just as often, the owners do not realize how valuable their properties have become.
Jon Vick, Founder and President of Vet Asset Advisors, Inc. (www.vetadvisorsinc.com), and medical property expert and broker Jason Winokur answer questions about the successful sale and re-letting of veterinary hospital real estate.
Q: What is a sale-leaseback?
A: A sale-leaseback is an agreement in which the veterinarian sells his property and the practice rents it back from the buyer at the same time. That way, the vet gets the money and maintains control of the property they need to keep their practice running. The money can be used for any purpose including buying other diversified assets.
Example: A vet owns a $ 10,000 veterinary clinic and pays a rent of $ 25 / SF or $ 250,000 per year. This is considered income, so the vet pays normal income tax on the rent received. In a sale-leaseback transaction, a buyer pays the vet a cash purchase price of $ 3.5 million (using a CAP rate of seven percent) and the practice signs a 12-year triple net Lease Agreement (NNN) (meaning the renter continues to pay insurance, taxes and maintenance) at 25 USD / sf plus an annual rent increase of 2.5 percent with multiple extension options that tie the property for 30 years or more. The vet retains control of the property with an NNN lease.
Q: Why would a vet want to sell when they are paying themselves rent and getting a good return?
A: There are four reasons:
1) Great Value: Veterinary clinic real estate has become very valuable and is being sold at a higher multiple than veterinary practices. The owner can sell at a high price, take the money off the table, and lease back at the same rent as before the sale.
2) Good Timing: There is currently an excellent market for veterinary hospital real estate and a lack of good real estate for buyers to bid on. Due to the currently extremely low interest rates, the prices offered are at the top of the market.
3) Your property is fully valued at standard market rents. The increase in rent, or your return on investment (ROI), is only two to three percent. The ROI from alternative investments is between six and 12 percent.
4) Rent is considered income and you are taxed at a tax rate of 30 to 37 percent, which significantly reduces or eliminates the profit on rent. In most cases, you will not get a “good return” on the value of your property.
Q: When does it make sense for a veterinarian to consider a real estate sale leaseback?
A: When the vet owner wants to make a profit on real estate and take some money off the table. In most cases, the veterinarian owner has significantly increased the value of the property by running a successful veterinary clinic. Property value is based on rent, and rental for successful veterinary clinics can be at the maximum market value, thereby maximizing the value of the property. The only way to unlock the value and profit is by selling the property.
The vet owner can sell their property, make a substantial profit, and lease it back for the same rent. The vet has cash to diversify investments without sacrificing the value or profitability of the veterinary clinic.
Q: What steps should you take to protect the value of your property if you are considering selling your practice?
A: Before selling your practice, you have full control over your rental agreement. You lose that control as soon as you sell your practice. Therefore, you will want to get a salable lease before entering into negotiations with a buyer of your practice. To maximize the value of your assets, you should sign a long term lease that will maximize the value of your practice and property before entering into negotiations with buyers. After the practice has been sold, you cannot change the rental agreement.
Q: If a vet has already sold their practice to a consolidator, does it make sense to sell their real estate now?
A: Most consolidators aren’t buying real estate – they raised their capital to buy veterinary practices. Therefore, veterinarians who have sold their practice to a consolidator or want to sell their practice to a consolidator and also want to sell their property will have to find another buyer. The market for veterinary hospital property sales is very strong right now due to low interest rates and more buyers than sellers. Competitive bids between buyers bring prices to their highest level.
Q: If a vet hasn’t sold their practice yet, but may want to do so in the future, how would a sale-leaseback of their properties affect their ability to sell their practice?
A: The sale and lease back of veterinary real estate should not affect the sale of the veterinary practice. As a rule, consolidators do not want to buy real estate, but rather a fair market value. It is therefore advisable to conclude a rental agreement with a consolidator about the sale of the veterinary practice, which is attractive for both the consolidator and the future buyer of the property, before starting discussions with a consolidator. These NNN leases usually have a term of 12 to 15 years with several extension options, annual rent increases of two to three percent and a rent at fair value. Such a lease would not affect the profitability or value of the veterinary practice.
Q: If a vet wants to remain independent, how does the sale-leaseback of their properties affect their practice?
A: With a fair market value lease, the veterinarian owner can resell and lease his property again without affecting the profitability or value of the practice. A skilled realtor can determine the best combination of rental and practice profitability to maximize the value of both the veterinarian’s and practice’s real estate.
Q: Who are the most likely buyers?
A: There are many private investors, family businesses, and small real estate investment firms, as well as national real estate mutual funds (REITs) who are looking for passive investments and are likely to be veterinary real estate buyers.
Q: How important is leasing in a sale-leaseback transaction? What kind of lease is best?
A: The value of your property is determined by the rental agreement. The lease is the key element of a sale-leaseback transaction and should be concluded with the sale in mind before any discussions with potential buyers. Leases should be NNN leases with a market-based rent with a term of 12 to 15 years, an annual increase of two to three percent and a lease guaranteed by practice. For the guarantee to be meaningful, the practice must have a solid history of profitability, net income that is at least three times the annual rent, and future sustainability that is at least as long as the term of the lease.
Q: How can a veterinarian ensure that they are maximizing the value of their property?
A: The value of the property is maximized by:
1) Increase in rent to fair value
2) Have a lease that is attractive to buyers
3) Have a long-term lease guaranteed by the veterinary practice
4) Get competitive quotes from multiple buyers
5) Using a broker with pre-qualified national buyers
Q: What are the advantages of a sale-leaseback transaction?
A: The veterinarian can sell the property, unlock the profits and diversify their investments while maintaining the usage, ownership and profits from the practice. The rent they pay, which can remain unchanged before the sale, remains an expense for the practice. The veterinarian owner has gained from the sale of the property and has retained all the benefits of the practice. Veterinary property prices are higher than ever due to a lack of quality property. Competitive bids raise prices and the current low interest rates allow buyers to offer higher prices in this “seller’s market”.
Jon Vick, Founder and President of Vet Asset Advisors, Inc., has helped develop, merge, and strategically acquire more than 250 medical facilities and practices since 1998. He has extensive experience in the valuation, sale and leaseback of real estate. He can be reached at (760) 751-0250 or by email at jonv@vetadvisorsinc.com.
Jason Winokur, a medical facility real estate professional and broker, is a principal of JH Winokur, Inc. specializing in medical real estate sales and leasebacks, lease negotiations, real estate appraisals and 1031 exchanges. Since 1998, he has completed more than $ 2 billion in medical and commercial transactions. He can be reached at (914) 216-3574 or by email at jasonw@vetadvisorsinc.com.
