On today’s episode of the Millionaire Dentist podcast, Jason Smith and Brogan Baxter discuss the pros and cons of building vs. leasing your dental office.
Announcer:
Hello, everyone. Welcome to the Millionaire Dentist podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances, and business practices to help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue and may not be safe for work. Now, here's your host, Alan Barry.
Alan Berry:
Hi. Welcome to episode number four of the Millionaire Dentist podcast. I'm your host, Alan Berry and joining me today is Jason Smith and Brogan Baxter, president and COO of Four Quadrants Advisory. Gentlemen, how are you doing today?
Jason Smith:
Good. How are you doing today?
Alan Berry:
Not bad. Brogan?
Brogan Baxter:
Outstanding. Thank you.
Alan Berry:
Beautiful. I was looking over some of our emails talking about today's episode and it looks like we're going to talk about building versus leasing. I'm assuming that we're referencing practices buildings.
Jason Smith:
Right, right. This is a subject matter that I've wanted to approach in this format. For some time, Alan. When I was starting in my career, it was still very much the epicenter of somebody's dream to build their own building for their dental practice. That has, something over the years that I've seen become really, really watered down as far as the value that it offers. I've seen a lot of people do it and frankly, lose money when they sell the building, which is something that would be hard for some people to imagine. I'm talking in some practices where the practice sold for a profit, where it was a gorgeous 4,000 to 5,000 square foot brick building in a city with a major college university and in a prime location.
Jason Smith:
The fact is sometimes the market is the market in somebody's commercial real estate market. It might not trend with what's going on with residential markets. A lot of times what it takes to make a good real estate decision for a dentist has to do with their cash flow and timing and opportunity in the community. A lot of times those are the biggest derivative versus lease or buy. Those are things that come into play now where due to cashflow being too hard sometimes to make a build of a new building make sense, or the cost of buying the land, the cost of building the building. At the end of the day, if you have a beautiful spot and the cashflow is good, then go that direction. For example, that would be a situation where maybe leasing would make sense for somebody because we were seeing people 12, 13 years later sell buildings and not profit or barely break even. You have to question if it was worth in the first place.
Brogan Baxter:
I'll insert my two cents on this. 2008, besides being an awful year for the market and the economy and everything, that all spurned out of a financial crisis. That financial crisis dramatically impacted [inaudible 00:03:16] Homes. People listening to this podcast may have been underwater on a home, or certainly know somebody, or have patients that were underwater on their homes. It wasn't just residential homes that, that impacted. That did significantly impact the commercial real estate market as well. What you had was a lot of people hitting the reset button on some of the values of their buildings. Now, up until that time, hey, it was anything goes as something that you build, it's going to appreciate, it's going to be great. It's going to be wonderful. 2008 put doubt back in everybody's mind. A lot of people lost their ass on it.
Brogan Baxter:
To be honest with you, a lot of people lost a lot of money on their commercial real estate buildings. Now, moving forward post 2008, besides being incredibly difficult to obtain financing and all the hoops you have to jump through to get the financing to actually build. You also have to take into consideration what if it doesn't appreciate? The utopian idea for a lot of the dentists out there as well, I will build a building. I will get multiple tenants. They will pay my bills for me. Well, that's okay, as long as you can get the tenants. It's a tight commercial real estate market in some of the different areas throughout the country. Sometimes it makes sense to do it. Sometimes it doesn't. There's a lot of things that need to be taken into consideration, like what the banks are going to require someone to, or to not charge on their rent.
Brogan Baxter:
They don't get to make that choice. That's not a landlord choice, it's their building, but they don't get to make the choice. That's the bank's choice. They'd rather the building sit there potentially empty for months on end until they can get the top dollar that they want, whether it's market or not, they don't care.
Jason Smith:
If you do something like, I would also highly advise and some of the thoughts that the Brogan had, if you force what I would define as a highly aggressive project, or say you build a dental practice with 10 or 12 operatories, if you create something that is equivalent to the field of dreams, and if you build something crazy like that, nobody's going to build a freaking afford it. Good luck with your transition, because you're going to have a hard time finding a young doctor who's able to want to take all that on or buy the practice. Then by real estate, that would be that significant in size and I guess, scope and depth of a project. it'd be too intimidating for a lot of people.
Alan Berry:
Let me say back to you, what I think I'm hearing. Are you guys saying that it's an absolute not to buy the property or are you saying that it just varies from case to case, and some people have the mindset that it's always an absolute to buy because real estate always goes up. I think what you guys are saying is, "Hey, take a step back. Real estate doesn't always go up." Is that fair?
Jason Smith:
Well, that's one of the things. Yes.
Brogan Baxter:
Yeah, I think so. I think that's fair.
Jason Smith:
If I may, the topic today is build versus lease. It wasn't build versus buy. Buying an existing building is a different scenario in and of itself. When we're talking about building, we're talking about building from scratch out there. I would highly advise a lot of people out there that are listening to this right now, second guess that. You really got to get comfortable with those numbers.
Brogan Baxter:
We love buying buildings, generally speaking. That is a route, even if it's a very, very nice building, that's typically a route that is awesome. Some of the reasons why it's awesome is because some of the bullshit that I said to you earlier, such as we just had a wonderful practice sell [inaudible 00:06:54] asset was 12 years old and was a beautiful building. We had to sell it for less. That is also happening to our clients who are buying new practices.
Alan Berry:
No. Okay. I appreciate the clarification, because that does make more sense now, because sometimes it would seem like, Hey, if you can get the building, somebody is cash tight and you can get the building on a good deal and it makes sense and it's a proven location, then you want to take advantage of them being cash tight.
Jason Smith:
We have a lot of clients that we're helping in their local communities expand due to opportunity such as that, if it makes sense for them. We've had a lot of people expand their practices that way and/or even add practitioners.
Alan Berry:
Let me ask you this. If the situation is right for a leasing opportunity, is there a certain amount of years that you recommend your clients to sign for a lease?
Brogan Baxter:
Not hard and fast. It's really a case by case scenario. In some parts of the country, California let's say, you pretty much have to sign a 10 year lease out there. Nobody else is going to give you the time of day. It's way too expensive to go build something from scratch out there. That's cost prohibitive as well so unless you're going to buy an existing building, you're going to probably have to sign a 10 year lease. Now, Midwest, the South, Oh, you can get away with a five-year lease. Generally speaking, if you're going to go in and a landlord's going to put some money into some tenant improvements and give you, front you some money to do a build-out, they're going to want generally, at least a five to seven year commitment on your part that you're going to be around because that's a losing scenario for them and let's face it. They're in it to make money.
Jason Smith:
In that setting, the truth is you would probably have to push it depending on the area to close to 10 years, especially if it was more in the city, a little more popular, not so rural. To really get it to cashflow well and be a good project for the doctor, you'll probably have to leverage that relationship with that commercial developer to give you, for lack of better terms, give you enough money to make it an awesome project. They're probably not going to do that unless they know you're going to give them 10 years or get close to it.
Alan Berry:
When you get into a lease situation and you're, and you're talking about years, are there other things that you can negotiate with the person that's leasing the building? Is there some things that you recommend that they negotiate, that maybe they don't know about?
Brogan Baxter:
I think it's always really, really important when you're leasing on a given building, especially if there are other tenants within that complex. I think you darn well better know what the parking rights you have for your practice and how many patients can park there so you don't end up getting in a proverbial sword fight with some of the other tenants there and look up one day and find that you don't have enough parking spots for all your patients in the morning.
Jason Smith:
Money they give you on the front end, tenant improvements, free rent, whatever, all that stuff's negotiable and the longer the lease you would commit to, the better leverage you have to be able to negotiate some of those things. Those are certainly a couple of different areas that you could certainly expound upon. For the listeners out there in the future, we will probably have in some guests to talk specifically about some commercial real estate during this podcast. They can certainly get into much more nitty gritty than our high level approach today.
Jason Smith:
I would make sure, Alan, that we tell people, per your question, to not back down and be wimps about trying to get as much signage as they can, having a great sign on a building, makes all the difference in the world and really even understanding by going through that process upfront and negotiating. You need to find out if your, frankly, if your landlord is a dick or not, and if they're really user-friendly and willing to help you because the good ones will usually find a way as long as it's well done and classy, we'll find a way to really support your needs there.
Alan Berry:
What about going into some of the other current tenants businesses and just asking them saying, "Hey, I'm looking at maybe renting from this landlord. How do you guys feel about them?"
Brogan Baxter:
Yeah. If there's a commercial realtor involved on the behalf of the dentist, they've done that leg work. That's been done. You certainly could do that, or from a grassroots standpoint, you want to go in and talk to some people about that, that's okay. Everybody has good experiences, bad experiences or whatever, but if you're working with somebody that is a commercial realtor, the reputation of the landlord precedes them in most situations.
Jason Smith:
Or in a situation like that, Alan, I would request that from my commercial broker versus it being perceived that I was going behind their back to meet some of their tenants. I would give them the benefit of the doubt that they're on the up and up and that they will take me to introduce some of those people, or maybe take me to meet him to lunch or set up a meeting where the doors open for me to go over and introduce myself to him.
Alan Berry:
Maybe the more professional thing is just to ask. Say, "Hey, may I speak to some of your tenants? Let me know when and where."
Jason Smith:
For sure.
Alan Berry:
Now, would it be unprofessional to play the game of calling on behalf of a fake personality and acting like that you want to rent that spot as well.
Jason Smith:
Nobody has time for that. Nobody really wouldn't have time for that.
Brogan Baxter:
Yeah. Nobody wants, I mean, you start doing bullshit like that, nobody's going to rent to you. That's kind of weird.
Alan Berry:
Looking at the clock, it looks like we're starting to run out of time, but Brogan, I believe you had something else you wanted to chime in about.
Brogan Baxter:
Yeah. Whether you're looking at building from scratch and/or leasing, anytime there's going to be an acquisition of some property or a move, anything major like that, you do have to make sure getting back to our previous podcast that your overhead is in check. You got to know how it's going to impact your cashflow, what sort of impact that's going to have on your practice, what your break even is in production that you're going to have to make up for this new cost. That gets back to the good decision-making and keeping your overhead under control.
Jason Smith:
Yeah. That's a great point on his part from just a looking at the timeline of where you are in your career path in dentistry. For example, if this is your very first location or the first practice you buy, and it has four operatories, but your dream is to have eight operatories one day, then maybe bring in an associate. Well, if you don't figure out a way, how to drive down that overhead in that first location, and then you ultimately move, you'll end up with just absolutely terrible overhead. You're going to be one of those guys then on 1.5 million in total production, you make $180,000, which is just pathetic.
Jason Smith:
That's what can happen to you and it can happen that fast.
Alan Berry:
After being a part of a couple of these podcasts, it's, it's really amazing how many things go into running a dental practice. It's not just the knowledge that they go to school for, but there's so much more than I just really didn't get that until we started doing these. Thank you very much for stopping by and thank you to the listeners for tuning in. We'll see you next time.
Announcer:
That's all the time we have today. Thank you to our guests for their insight and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentists Podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go on over to fourquadrantsadvisory.com and see why year after year, they retain over 95% of their clients. Thank you again for joining us and we'll see you next time.
