The Lease Of Your Worries

May 16, 2013 | Dental |

 

You wouldn’t launch a legal battle without a proven lawyer in your corner. You wouldn’t build your dream house without a skilled architect at your side. But you’d be amazed at the number of dentists who negotiate their own leases.

 

If you’re one of the many dentists who views an office lease as a standard document that doesn’t require inspection by an expert, you could be putting yourself, your practice and your finances at a competitive disadvantage. “There’s no such thing as a standard lease. It’s a myth as every landlord has their own standard document,” says michael Permack of Calgary’s spire group, a firm that specializes in handling lease negotiations and real estate purchases for dentists and other health care professionals.

“A lease document is a contract that outlines the financial terms, along with each party’s responsibilities, conditions, rights and remedies. As such, each party should make sure they have a very clear understanding of exactly what it is that they’re signing.”

 

“When it comes to negotiating or renegotiating their leases, many professionals tend to focus their attention on the rental rate or the square footage size of their premises,” says Permack. “A typical commercial lease can be up to 60 pages long. Rent and square footage generally represent just one or two paragraphs in that document. The question the professionals should ask themselves is “what is in the rest of the document?”

 

“The lease is so important that it can literally make or break a practice sale or a financing,” says Permack. “Think about it. The biggest portion of any practice sale is the goodwill. And the majority of that goodwill is based on the location of your practice and the accompanying lease. If you’re unable to secure the right location or buy a practice because of lease issues, that goodwill and, by extension, the deal itself, is out the window.”

 

Increasingly, dentists are enlisting the services of professional lease negotiation companies to guide them through the process. “We approach the deal from the lens of the dentist and look at every aspect of the lease, from A to Z, to make sure our client is informed and that their best interests are represented every step of the way. If dentists are considering a sale then a lease evaluation and possible renegotiation should be part of the upfront planning to maximize the value of the practice and to facilitate a smoother transition. Purchasing dentists need to carefully examine the lease to make sure it is secure.”

 

So…what sorts of potential problems can be found in the fine print of your commercial lease? Permack says one example is what’s called a ‘sale redevelopment clause’. “This essentially means the landlord can choose to knock down the building at any time and redevelop the land. Banks and purchasers expect to amortize their loan over a fixed extended period of time. When your financial institution and buyers see that the landlord is within their rights to demolish the building with six months’ notice, it may put your sale and the purchaser’s financing in jeopardy.”

 

Another potential problem can occur when a dentist is acquiring a practice in which the selling dentist’s lease term is coming to an end. The vendors in these situations often think the short-term nature of the lease helps to make the deal more attractive. In reality, however, the financial institution may be reluctant to amortize the loan beyond the length of the lease because so much of the goodwill of the practice is inextricably linked to the location and the lease itself. “This is just one of the numerous examples in where we recommend our clients use lease negotiation experts to address key issues and pave the way for a smooth transition,” says Seun Ogunsola, senior account manager with Royal Bank of Canada in Calgary.

 

One dentist who knows the value a lease negotiation firm can provide firsthand is Dr. Brayden McCue, owner of Inglewood Smiles in Calgary, Alberta. “Last year, I was looking for a plot of land to build my own clinic,” says Dr. McCue. “I retained the spire group to guide me through the process. They helped me find a suitable piece of land and crunched the numbers in a way that made it incredibly easy to understand.”

 

In the end, the firm helped Dr. McCue realize that building a commercial property from scratch wasn’t feasible at this point in his career. Then, the group shifted focus to purchasing a commercial building. “There were a lot of ups and downs through that process. At one point, after we had signed the sales agreement with the vendor, we realized the square footage the seller quoted was off by a few hundred square feet. The spire group worked to have the cost prorated as a result of this discrepancy. They kept level heads throughout and helped me understand the psychology of the deal.”

“Ultimately,” says Dr. McCue,“I got the property I wanted at a fair price. And the amount of money the lease negotiation firm was able to save me was magnitudes greater than what it cost to work with them.”

 

When asked about the ‘type a’ personality traits many dentists exhibit, Dr. McCue agrees there’s a tendency to want to,“do it yourself and save some money. But that’s missing the point. Most dentists will go through this process three or four times in an entire career. These people have gone through this process thousands of times and can really add value to the process of negotiating or renegotiating your lease.”

 

At a time when a typical dental practice can sell for a million dollars or more, there’s a lot on the line. “When you’re preparing to ask a buyer to pay top dollar for a practice, do you want the process to go smoothly or do you want to have complications?” asks Permack. “Time and time again we hear from professionals, financial institutions and practice sale companies that practice sale transactions go uncompleted after months of work because the lease was not set up properly for transfer”.

According to Ogunsola, if you know your lease is coming up for renewal or you’re contemplating an acquisition down the road, the key is to start early. “This process can take between six and 18 months. You want to have adequate time to engage the right experts, who can evaluate your situation, pick the most important things in the lease and to go after those.” The objective is to provide you with expert advice and put you and your practice in a position to create the best possible deal when it comes to signing on the dotted line.

 

This is yet another example of how assembling the right team of experts, whether they be your bankers, tax planners or lease negotiators, can help you and your practice succeed at any stage of your career. As Ogunsola says,“By working with the right experts, dentists can help mitigate any unforeseen risks, improve the profitability of their practice and gain peace of mind, allowing them to focus more of their valuable time and effort on working with their patients.”

Bottom Line:This article examines leasing issues most dentists face in the course of their careers.

 

The information contained in this article is for informational purposes only and is not intended to provide specific leasing, financial, business, tax, legal, investment or other advice to you, and should not be acted or relied upon in that regard without seeking the advice of a professional. Your advisor can help to ensure that your own circumstances have been properly considered and any action is taken on the latest available information.

®/TM Registered trademarks of Royal Bank of Canada. RBC and Royal Bank are registered trademarks of Royal Bank of Canada.

 

Dean Yuhar is the Vice President, Health Care Professionals at the Royal Bank of Canada. Dean leads the Commercial Health Care segment at RBC Royal Bank in Alberta. The Commercial Health Care team includes commercial account managers who have extensive experience helping health care professionals at every stage of their career. He can be reached at 780-448-6749 or dean.yuhar@rbc.com. 

 

Seun Ogunsola is a Senior Account Manager at the Royal Bank of Canada. Seun has experience working with health care professionals during their transition periods. He is well known and respected in the Alberta market. He can be reached at 403-292-3979 or seun.ogunsola@rbc.com.