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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.vetadvisors.com) and Medical Property Expert and Realtor Jason Winokur answer questions about the successful sale and lease back of veterinary hospital real estate.
Q: What is a sale-leaseback?
ON: 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 business going. 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 veterinarian 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 (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 their veterinary clinic property when they are paying rent themselves and getting a good return?
ON: 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 rent 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 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 gain 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?
ON: 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 animal 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 to sell 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 detracting from the value or profitability of the veterinary clinic business.
Q: What steps should you take to protect the value of your property if you are considering selling your practice?
ON: You have full control over your rental agreement before a sale. You lose that control as soon as you sell your practice. Therefore, you 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?
ON: Most consolidators don’t buy real estate – they raised their capital to buy veterinary businesses. Hence, veterinarians who have sold their business to a consolidator or are planning to sell 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 offers among buyers bring prices to the 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?
ON: The sale and lease back of veterinary real estate should not affect the sale of the veterinary business. Consolidators generally don’t want to buy real estate, but rather a fair market value. It is therefore recommended, before starting discussions with a consolidator about the sale of the veterinary business, to conclude a lease that is attractive to both the consolidator and the future purchaser of the property. 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 market value. Such a lease would not affect the profitability or value of the veterinary business.
Q: If a veterinarian wants to remain independent, how does the sale-leaseback of their properties affect their business?
ON: With a fair market lease, the vet owner can resell the practice real estate and lease it back without affecting the profitability or value of the practice. A skilled realtor can determine the best combination of rental and business profitability to maximize the value of both the veterinarian’s and the company’s real estate.
Q: Who are the most likely buyers?
ON: There are many private investors, family businesses, and small real estate investment firms, as well as national real estate mutual funds (REITs) looking for passive investments and likely to be veterinary real estate buyers.
Q: How important is leasing in a sale-leaseback transaction? What kind of lease is best?
ON: 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 company must have a solid history of profitability, net income that is at least three times the annual rent, and sustainability for the future at least as long as the term of the lease.
Q: How can a veterinarian make sure they are maximizing the value of their property?
ON: 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?
ON: The veterinarian can sell the property, unlock the profits, and diversify their investments while maintaining the usage, ownership, and distributions from the practice. The rent they pay, which can remain unchanged before the sale, remains an expense for the company. The vet owner has gained from the sale of the property and has retained all of 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 email@example.com.
Jason Winokur, a real estate professional and medical facility broker, is a principal of JH Winokur, Inc. specializing in medical property sales and leases, 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) 997-9200 or by email at firstname.lastname@example.org. More information is available at www.vetadvisors.com.
This Education Center article was written by Vet Asset Advisors.