So, you’ve decided you want to own all aspects of your new dental practice, including the real estate or land housing your office. Whether you are a first-time purchaser or a seasoned owner-operator looking to expand, you are off to a great start by reading our blog and doing some research before buying a practice with real estate.
Although the concept of a dual purchase (i.e. buying a dental practice and the attached land) may seem straightforward at first, the added element of a real estate transaction introduces some nuances you may not have considered. Below, we will discuss five main factors which every potential purchaser should be aware of:
- Separate Appraisal for the Property
- Lease for the Premises
- Additional Insurance Requirements
- Multiple Closings
- Asset Purchase vs. Share Purchase
Separate Appraisal for the Property
Not only is obtaining a professionally prepared appraisal for the target dental practice a good idea, but it is also almost certainly a pre-requisite for any lending bank to agree to fund your purchase or pre-approve a loan. In a sale involving the transfer of a commercial property, that means you need not one but two appraisals – one for the goodwill and assets of the dental clinic and another for the value of the real estate. For that reason, it is generally a good idea to follow up early and often with the vendor to ensure that they have engaged a mutually satisfactory appraiser so that you may obtain a property valuation report sooner rather than later. The valuation reports for the dental practice and the property are two of the most crucial pieces of a buyer’s diligence, and having them in hand early on in the process will save you a lot of potential headaches.
Lease for the Premises
There is always a lot of paperwork involved in closing a property deal. And in some cases, the paperwork required by your lending bank may include a form of lease document that will govern the dental practice’s use of the premises moving forward, even though you (as the property owner) would technically be your own landlord. For example, if you buy the land through a holding company (a “Holdco”) and not through your DPC, your Holdco would be the landlord and your DPC the tenant. The lease would then set out the term (in years), net/gross rent payable, and other conditions governing the relationship between the Holdco and DPC. Common reasons why banks or lenders may require such leases include
- amortizing their loan over a set period (e.g. 12 years) and
- protecting their stake in your business by ensuring that if you end up selling the land/building, you will have the right to remain at the premises to run your dental office.
Even if not required by the bank, this form of a lease can sometimes be useful for your practice in the future. A lawyer experienced in dental property leases will be able to help you determine the best way to draft and negotiate this noteworthy piece of the transaction.
Additional Insurance Requirements
Along with the usual coverage expected of practice owners (including adequate policies for life/disability, fire, general liability and malpractice), owning commercial real estate will mean that your financial backer expects additional insurance. The precise type(s) of additional coverage will vary depending on your lender and what sort of property is changing hands. For example, a practice housed in a condominium unit may have specific insurance requirements mandated by the condo board. In contrast, a practice housed in an older building with the dreaded and outdated ‘knob-and-tube’ wiring may require additional insurance or may not even be insurable if that wiring is not removed. No matter the specific circumstance, it is fair to expect more insurance obligations as a building owner than as a tenant.
When purchasing a dental practice with real estate, there will usually be a separate purchase and sale agreement for the property in question. Consequently, there will almost always be two individual transactions that must be closed to complete the purchase
- one dealing with the handover of the practice’s patient charts and other assets
- one dealing with the land/building
Unfortunately for buyers, a separate transaction usually means twice the paperwork. For instance, if you opted to use a real estate Holdco to purchase the property, it would need its own set of corporate documents prepared, in addition to those prepared for your DPC.
However, there are certain exceptions where there would only be one transaction to handle. In terms of simplicity, the ideal situation is where a vendor owns both the real estate and the dental practice assets through one entity (namely, their DPC). In such a scenario, the vendor could transfer everything to you as a sale of shares of the DPC. This type of sale would only require one contractual agreement and one set of closing documents. Whether this is the appropriate deal structure depends, of course, on whether you can find such a vendor (whose DPC holds the property).
The good news is that with proper planning and communication, you can have both sets of closings synchronized to take place at the same time (known as a contemporaneous closing). An experienced team can ensure simultaneous closings are completed smoothly, and on time, for your dual purchase. However, a contemporaneous closing may not be in your best interest as a buyer. It is vital to have an advisor experienced in dental transactions to help you determine whether this option would be best for you.
Asset Purchase vs. Share Purchase
There are numerous ways to configure a deal, but generally, there are two types of an agreement under which real estate may change hands: an asset sale or a share sale. There are certain elements unique to either form of agreement, some examples of which include:
- In an asset sale, you (or your Holdco) could owe a provincial land transfer tax upon registering your land interest on the provincial Land Titles system. You may also be subject to an additional municipal sur-tax, depending on the city where the purchase occurs.
- In an asset sale, depending on multiple factors, the seller may not need to collect and remit HST. If this is the case, as the buyer, you’d want to consult your accounting professionals to ensure that they correctly assess and remit what’s necessary and see if you are eligible for any input tax credits.
- In a share sale, there would presumptively be no need to engage separate real estate counsel to handle a Land Titles transfer (as may happen from time to time in an asset deal). So either or both parties could end up saving money on additional legal paperwork and disbursements.
- In a share sale, the seller’s proceeds from the sale of their practice may be exempt from being taxable as capital gains, depending on whether they have access to a lifetime exemption to offset such gains (which, itself, depends on a whole host of other technical requirements, which have been discussed at length in our previous articles and posts).
People often say that asset deals are the preferred route for buyers, while sellers prefer share deals. Generalizations aside, the choice of a deal structure will be an informed decision made by both the seller and buyer rather than a unilateral decision. Knowing which deal type suits your needs and specific scenario will, like many business decisions, come down to what you and your advisers decide is best.
Buying a dental practice that includes real estate is an excellent opportunity for dentists who want to expand their business and build equity. And even though there are many unique factors to consider, you can rest assured that these challenges are manageable with the right professional team. Any potential pitfalls can be overcome with a bit of thought and planning.
If you’re considering buying a dental practice with attached real estate, you can contact us for a free consultation. Not only can we advise you on strategy and assist with drafting legal documents, but we can also connect you to the right seller. Since 2011, we have learned the nuances of the dental industry and have created a powerful professional network. We can help you find the right people you should talk to in order to buy a suitable practice and set it up for continued success. Send us an email or call us directly at 416-443-9280 any time.