Today's Veterinary Business

DEC 2018

Today’s Veterinary Business provides information and resources designed to help veterinarians and office management improve the financial performance of their practices, allowing them to increase the level of patient care and client service.

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Thirty years ago, nearly all veterinary practitioners owned or wanted to own the real estate where their hospitals were situated. But times are a-changin'. Today, as institutional capital flows into the veterinary industry and clinics continue to be purposely built for specialized care, the decisions that practice owners make related to their real estate are having larger impacts on their overall financial well-being. Let's explore the impact of institutional capital on the veterinary real estate space and identify certain business decisions that can hurt or improve a practice owner's financial health. An Overview The veterinary real estate marketplace has shifted substantially over the past decade because of the influx of corporate practice groups. The primary driver for the shift is that most corporate groups do not buy the real es- tate associated with the practice. This results in a larger percentage of practice sellers holding on to the real estate and signing leases with the new operators. As multiples on practices climb due to increased competition, sellers often become blinded by the practice valuation and fail to ad- dress lease terms in the letter of intent, result- ing in far less leverage with the purchaser. This can depress the future value of the real estate since the lease instrument will be a large factor in determining the value of the property when the time comes to sell the real estate asset. Here's what should be addressed when negotiating a letter of intent so that the future real estate value is preserved. Lease Terms Understand that initial lease term and lease extension options are separate concepts. It cannot be stressed enough that while lease renewal options are nice, the future value of the real estate asset will depend largely on the number of years the tenant has committed to occupying the property. Too often, for example, veterinary real estate owners report having a 20-year lease with the tenant but then find out after reading the document that they approved an initial five-year term and three five-year extensions at the tenant's option. While veterinary practices infrequently move locations, banks will under- write real estate debt based on the initial lease term, so a shorter term will impair a purchaser's ability to obtain market financing and ultimate- ly might affect the price a purchaser can pay. Tenants in the current market environment are more willing to sign longer initial lease terms, real estate experts say. These experts recommended that, at a minimum, a 12-year initial term be sought. A term of 15 or 20 years, if agreed to, will result in significantly higher proceeds at the time of sale. Landlord Responsibilities Veterinary real estate is a unique asset class and is considered a hybrid of medical, specialty and office real estate. The real estate is almost always occupied solely by the veterinary prac- tice, and as such the lease should most closely resemble what is considered the "market" for a single-tenant, net-leased facility. One of the most attractive aspects of net- leased real estate is the lack of landlord respon- sibilities over the term of the lease. Tradition- ally, net leases make the tenant responsible Business REAL ESTATE Secure your financial future The lease terms agreed to when you sell a practice but keep the property can make a big difference in the final proceeds. By Graham Garrison

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