7 common mistakes made in vet clinic real estate

Most animal hospital owners also own their real estate and may not realize how valuable their property has become

By Jon Vick, Jason Winokur, and Doug Goldfarb • Vet Asset Advisors

Most animal hospital owners also own their real estate and may not realize how valuable their property has become. Due to the long-term success and profitability of animal hospitals (AHs), excellent credit history and rent coverage, and the likelihood that the AH will remain in the same location for many years to come, AH real estate has become increasingly attractive to real estate investors. This is reflected in the current competition to buy and leaseback AH real estate and the high prices being offered. Today buyers are offering prices that equate to multiples of 14X or more for AH real estate. Sellers can realize high selling prices, no change in rent, and retention of control through NNN leases.

Here are seven common mistakes made by sellers of AH/clinic real estate and some tips for maximizing the value of your real estate:

Mistake No. 1: Rent is too low.

AH owners often charge themselves below-market rent in order to maximize the EBITDA of the AH business. Rent is a primary factor in determining the value of AH real estate. Fair market NNN rent for AHs averages $20 to $30 per square foot, or more, depending on location. The multiples for the sale of real estate are significantly higher than the multiples for the sale of the AH business. With a CAP rate of 7 percent the buyer is paying a 14X multiple. Increasing the rent to fair market value will result in an increase in total value of AH assets.

Mistake No. 2: Selling AH business before improving your lease.

AH owners should increase the rent and term of the lease prior to soliciting offers to sell a controlling interest in their AH business as they may not be able to alter the terms of the lease after the sale. Prior to marketing their AH business, the owners should ensure that the rent and lease terms are going to maximize the total value of their AH assets. Lease terms should be 10 to 15 years plus renewal options, and be triple-net (NNN), to get the best price and most offers.

Mistake No. 3: Using a local broker.

Local brokers usually market to local buyers, and most often there are few local buyers who are educated on the value that AH real estate represents. Brokers who have a network of national buyers who already have funds available to acquire AH real estate will bring in higher offers in less time. Sellers should engage a broker who already has buyers for your AH property and a proven track record, not just any local commercial broker.

Mistake No. 4: Not obtaining competitive bids.

Brokers with national buyers will solicit and leverage multiple competitive offers to get thesellers the highest price for you. Sellers You will always get a better price and terms when multiple buyers are submitting competing bids. Sales should be made when there are multiple buyers seeking to buy AH/clinic real estate, which is currently the case.

Mistake No. 5: Partnering with a consolidator that will allow only short-term leases.

Real estate investors want at least a seven-year and preferably 10-year or longer lease. Some AH consolidators will not allow lease renewals of more than five or seven years. This will greatly reduce the number of buyers interested in the your AH real estate and will lower the value of the real estate. In some cases, if the lease is too short the AH real estate may not be saleable.

Mistake No. 6: Not reading or understanding the sales contract.

Often there will be onerous terms in the sales contract that create significant difficulties for the sellers after the sale, such as personal guarantees, or conditions for modifying the facility or creating a new lease. Or frequent reporting requirements, restrictions on how distributions are made, or controls on what benefits and expenses the sellers may incur. It is important that the sellers utilize a broker who will advise them on terms of the sales contract that should be removed or negotiated.

Mistake No. 7: Waiting until too late to sell the real estate.

Timing of the sale of both the AH business and the AH real estate is critically important. The sales should be made when the owners or their successors are still young enough to have 10 or so years left to practice. Otherwise the buyers will discount the value of the business and the real estate as the veterinarian approaches retirement. At a certain point, unless there is an active and successful recruiting and succession plan in place, the value of both the AH business and the AH real estate will decline.

Notes:

  • CAP rates vary between 6 percent and 8 percent depending on location and terms of the lease.
  • Sellers may use a 1031 exchange to defer capital gains taxes and use the sales proceeds to reinvest in one or more income generating properties.

Animal Hospital owners can obtain fair market value rents, current cap rates, and a valuation for their Animal Hospital real estate by contacting Vet Asset Advisors, Inc. at 760-751-0250. 

Since 1984 we have advised owners of over 500 healthcare facilities on business and real estate sales and leasebacks, and property valuations. More information can be obtained at www.vetadvisorsinc.com.

This Education Center article was underwritten by .

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