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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Graham Garrison is managing editor of Veterinary Advantage, a Today's Veterinary Business sister publication. for insurance, taxes and general up- keep and maintenance. Among the few responsibilities the landlord will sometimes assume is mainte- nance of the building's structural components and replacement of the roof. Although buyers might accept these responsibilities, they and their lenders will build replace- ment reserves into the underwrit- ing and offer a price based on the reduced net operating income. Because of this, leases that con- tain landlord responsibilities for the roof and structure are slightly less valuable than those deemed "absolute triple net," where the landlord has zero responsibilities re- lated to maintenance. Also note that leases that include landlord responsibilities for any- thing else — parking lot maintenance or heating, venti- lation and air conditioning systems, for example — can meaningfully impair the value of the real estate. Tenant/Guarantor The lease is a long-term finan- cial agreement that should be approached in the same manner as if someone is lending money. After all, the real estate owner is essentially lending the land and the building to someone for a long period. The potential tenant should be scrutinized in the same manner as a bank would vet a borrower. One of the more overlooked aspects of the veterinary lease is which entity is on the hook for pay- ments over the course of the agree- ment. In many instances, landlords know their practice inside and out and are comfortable with the busi- ness being able to support the rent. However, the broader net-leased marketplace is not as familiar with the operations of a single practice and instead will analyze the proper- ty in a way a bank would a loan. In the bank analogy, a bigger and stronger borrower will receive better terms and a lower inter- est rate. The same applies to the net-leased marketplace. A bigger and stronger entity backing future lease payments will result in a low- er required return for prospective purchasers, and therefore, they will be willing to pay more for the prop- erty and its future lease payments. This is extremely important when negotiating any lease. In situations where a practice owner is selling and leasing to an associate, the seller must make sure to receive personal guarantees of the lease payments from all partners of the entity signing the document. In situations where a corporate group is buying the practice and leasing the real estate, the seller must make sure the "tenant" as de- fined in the lease is the corporate entity that owns all the veterinary operations of the corporate group. If it is not, a guaranty of payment rider should be executed to name the corporate entity as an addition- al guarantor of the lease payments. What is important in these sit- uations is that the co-signing entity is not a subsidiary of a corporate group and that the corporate par- ent is on the hook. Final Thoughts Animal medicine has become ex- tremely sophisticated over the last 20 years and has attracted signifi- cant investment from the corporate world. As the treatment of animals has become more complex, so too have the tangential aspects of the industry, such as real estate. Much like it is paramount to adapt a practice's operations to be at the forefront of animal medicine in order to provide optimal patient care, it is equally important for independent practice owners to secure their financial future by arm- ing themselves with the knowledge necessary to make the right choices about their real estate assets. Business REAL ESTATE As the treatment of animals has become more complex, so too have the tangential aspects of the industry, such as real estate. Find all the product information you're looking for all in one place – the growing Today's Veterinary Business Resource Library. Get product detailers, videos, promotional flyers, white papers and more FREE! Learn More Product Resources at Your Fingertips

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