There are many things to consider when selling your veterinary practice, including whether to do the same with the real estate in which it operates. The practice and the real estate are two distinct assets; therefore, they should be considered separately. Today’s market offers several options for a seller to maximize financial gain on their real estate. But before you sell your practice, consider the following.
Your real estate’s earning potential is the best reason to lease it. In general, veterinary properties see an annual return between eight and 10 percent of the real estate’s value, depending on its location. In markets where real estate values are climbing, collecting rental income with the intent to sell the property at a later date is a great option.
That said, a veterinary hospital is usually designated a special-use building. As such, the property is most valuable when it houses a veterinary practice. As an investment, special-use properties such as this can be a bit risky, as suitability is limited to few business types. Selling the practice, while keeping the real estate, puts you at risk if your tenant chooses to move their practice. You could be left with an empty building that may require extensive remodeling to repurpose it for a non-veterinary tenant. Why’s that? Leasing to another veterinarian is usually not possible in those situations because the previous tenant has opened a new facility nearby and competition now exists.
1031 Exchange: A tax deferral strategy
Veterinary practice real estate has limited use and is probably not as good an investment as property designated for broader use. Moreover, the gain on the real estate sale is taxed as capital gain. Unless there is a change in our tax structure, capital gain tax will always be with us, and maybe at a higher rate. So why not take advantage of a 1031 Exchange? This allows you to sell a piece of property, reinvest the proceeds into a new property, and defer the income tax from the sale. Properly structured, a 1031 Exchange becomes a valuable tax savings and wealth-preservation tool. Be sure to seek the guidance of your CPA and a 1031 qualified intermediary (QI).
Sell the real estate with the practice
One of the biggest misconceptions is the buyer “can’t afford to buy it all now.” While this used to be true, it is not the case today. There are many commercial lenders who are aggressive in our industry, making loan funds readily available for buyers to purchase the real estate along with the practice, and usually with a small down payment. Moreover, with current interest rates and today’s favorable terms, the mortgage payment on the real estate is typically about the same as rent would be. Keep in mind most buyers who are interested in purchasing your practice would likely want to buy the real estate. It is not uncommon to have a buyer back out because the real estate is not part of the purchase.
Considering a sale to a corporate buyer
Corporate buyers generally prefer not to purchase real estate. However, most work with independent buyers or real estate investment trusts (REITs) to buy real estate and lease it to them. This separate transaction should be seamless. Some sellers may still elect to continue ownership of the real estate and lease it back to the corporate entity. The same considerations apply: Know your local market and be prepared to be a landlord with the understanding the tenant can move after the first lease period. Also, be willing to commit to a long-term lease, as most corporate buyers want to negotiate this as part of a purchase agreement. Ten-year, even 15-year lease agreements, are typical and to the seller’s advantage. If you do choose to lease, make sure you are fully aware of your property’s value, understand the non-negotiable terms of your lease, and obtain the most favorable terms and concessions possible.
Ultimately, the decision to sell or hold your real estate depends on many personal factors. Consider carefully whether you want ongoing involvement as a property manager after the sale. Also, take into account the current real estate market in your area. Last, but not least, evaluate your finances and long-term objectives for retirement.
Stacy Cadieux, CBI, is a veterinary practice transition consultant with Simmons & Associates Southcentral. She has extensive experience in business negotiating and provides her clients with customized solutions to reach their goals. Cadieux is a licensed real estate agent in Texas and, a member of the International Business Brokers Association (IBBA).