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Do you know the art of the real estate deal? Avoid common mistakes dentists make when buying or leasing office space.
Colin Carr, founder of CARR, is Reese’s guest on this episode of the Dentist Money™ Show. Colin describes the “aha” moment in real estate when he knew good representation was needed to protect dentists from getting taken advantage of in real estate deals.
Plus you’ll find out what to look for when buying office space, when leasing might be the best option, how to keep the upper hand when dealing with landlords, and a whole lot more.
Reese Harper: Hey, everybody. Reese Harper here. Thanks again for tuning in to another episode of the Dentist Money Show. Today, I’m chatting with Colin Carr. Colin’s business has focused exclusively on representing you, the buyer. This puts him in a unique position to be able to have a chance to talk about some of the most important pitfalls that dentists have when negotiating and getting into new space. I hope you enjoy the episode as much as I did.
Announcer: Consult an advisor or conduct your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by Dentists Advisors, a registered investment advisor. This is Dentist Money. Now, here’s your host, Reese Harper.
Reese Harper: Welcome to the Dentist Money Show, where we help dentists make smart financial decisions. I’m your host, Reese Harper, and we have a very special guest, who I first met several years ago in a coffee shop in Highlands Ranch, actually. I think it was close to Highlands Ranch, one of my favorite places in the United States, this great state of Colorado. I’d like to welcome to the show Colin Carr. How are you doing, Colin?
Colin Carr: I’m doing excellent. Really appreciate the chance to be here.
Reese Harper: Yeah, man. So, has there been any snow in Colorado? Because to my knowledge, Utah got the first snowfall of the country last week. I don’t know if you guys got any. Did you see any notice of veil or anything getting snow?
Colin Carr: Steamboat got two and a half feet in June.
Reese Harper: It was still snowing in June. Yeah, okay.
Colin Carr: [crosstalk 00:01:35] the calendar. If the year changes in July or August, then you guys win. For sure.
Reese Harper: Ah, that is true. Okay, I did go skiing at Snowbird in July on the fourth. Steamboat’s actually like a hidden gem. I swear, it’s a little inconvenient to get there, but it’s a great place to ski. Colorado’s got a lot of great places. You have to drive a little bit, though.
Colin Carr: That’s true. Yeah, it’s not as close as you guys are.
Reese Harper: Yeah. All right, well this isn’t a skiing podcast, although I would like it to be, because that’s one of my favorite topics. Today we’re talking about real estate. Colin’s probably one of the most qualified people to do this episode on. And for those of you have already the intro, you know who Colin is and you know what he’s built. But I want to start by asking people, why did you start Colin? What was the initial driver? Because you had done a lot of transactions. You were a broker in Colorado, you owned that market.
Did you start the business on your own, or were you working for a broker before? Give me a sense for the journey.
Colin Carr: Yes, I’ll give you a little bit of background. I started in real estate at 19. I got out of high school and I didn’t go to college. I was well capable of going to college, but just didn’t have a sense of direction as far as what I wanted to study and pursue. So I sat through a couple of college classes and audited them, and just realized that it wasn’t either for me or wasn’t the right time for me. I started getting busy with real estate right away. I met a gentleman who owned about 13 apartment complexes back in Michigan, and I asked him if I could just shadow him and ride around with him, just to learn the industry, and he was gracious enough to let me do that.
Colin Carr: And so, I started managing apartment complexes when I was 19. I moved to Denver right before I turned 21 and continued to do that, managing mostly mid-rise and high-rise complexes in the downtown Denver area, and then got my broker’s license at about 23. I started working for a gentleman that specialized in tenant rep for large retailers, so I got exposed to Walmarts, Wendy’s, Blockbusters, those types of transactions. And I worked at that shop for a couple of years, switched to a large international publicly traded company after that and worked there for about five years.
Colin Carr: I had a couple of very specific transactions that really woke me up to the need in healthcare. I had done a lot of transactions up until that point, and I had been a generalists. I’d done a lot of landlord work, a lot of tenant work. I did retail, office, industrial, investment. If the deal moved, I would chase it. That was great, because it gave me a lot of exposure. I had a couple of specific transactions that it just all clicked for me, and I’ll share one of them.
Colin Carr: I was listing a couple of class A medical office buildings in the Highlands Ranch area, and they were owned by a large, publicly traded real estate investment trust. We were marketing space in the building at about 24 dollars per square foot. We just had done an ENT deal … It actually was one of my clients. I did the deal, and we got the terms at 24 dollars a square foot. We got a 40 dollar per square foot tenant premium allowance.
Colin Carr: We got five months free to build out, and about four months free when they opened. It was a fantastic transaction and great location. I was also the listing agent, which caused some issues as far as who was actually representing. I got in a phone call with the asset manager out of Scottsdale, and we were looking at the red roll of which tenants leases were becoming available, and we started going one by one.
Colin Carr: The first one that we started with was a plastic surgeon’s whose lease was coming up in a couple of months. The asset manager asked me these questions, he said, “Does he have a broker?” And I said, “No.” So I’d gone and met with him and interviewed him and found out where he was at. “Does he have a broker?” My answer was, “No.” He said, “Does he know the market?” “No.” “Is he willing to move?” “No.” And his response was, “Great. Go back to him with 29 a square foot.”
Colin Carr: I said, “He’s paying 27 right now. I get the idea of doing the best you can with what you have, and we’re already getting a premium. It’s a pretty healthy increase over the asking rate. Do we really need to push it that hard?” He said, “Yes. Get it done,” and he just hung up the phone. Not that that’s confusing or that’s not everyone’s objective. If you were going to sell your house, you personally, and your house was worth 500,000 and your agent said, “Hey, Reese, I think we can get 650 for it because it’s the only house available for sale,” you’d sell your house for 650.
Colin Carr: You’d say, “If someone’s paying me 650, that must be the market.” The landlord was looking at it the same way, and so … But their trigger points or their indicators are, “Does the person know the market? Are they represented, are they willing to move?” The definition of a market lease rate for most landlords is the most they can get that tenant to pay.
Reese Harper: Yeah.
Colin Carr: So I got the idea with that landlord, but it just woke me up to the idea that there’s a really huge need representing healthcare providers, and I looked around and nobody was doing it. There was a handful of brokers that loved to list the buildings, they loved to work on the hospital campuses, or they loved to work for the hospital systems, but no one was wanting to run around with a 2,500 square foot dentist and really be an advisor.
Colin Carr: So I started taking more of an intentional approach at representing healthcare providers, and the results were that they were extremely thankful. It was a personal relationship. I had done the deals with Walmart or Wendy’s or these large retailers that have asset managers or deal makers, and you’re just … You’re another number, another transaction. What I loved about the healthcare side was I got a connection with the actual doctor and their office manager, a lot of times their spouse.
Colin Carr: If I moved the needle for that client and helped them save, literally, a couple of hundred thousand dollars or 30, 40 hours of their time or help them avoid a pitfall or a costly complication, it meant something to them. And so after doing that for a handful of months, I took the idea to the company I was working with and they just passed on it and said that they didn’t think it was a viable option. They encouraged me to start my own company, and I took that advice and I did, and it launched in the beginning of 2009.
Reese Harper: A perfect time to launch, right?
Colin Carr: Absolutely.
Reese Harper: 2009 … Did you feel like that first year … Well, let’s back up just before we go into that. It seems like the summary of what you saw that I think was a genesis for why you’ve built your business the way it is, is you saw how a landlord can basically … They have information. In the stock market, we call this “information assymetry”, when one person knows something that someone else doesn’t know or sometimes believes they know something that someone else doesn’t know.
Reese Harper: When information is freely flowing, prices tend to be fair. When information is asymmetrical, someone will get screwed on that deal.
Colin Carr: There are definitely the mom and pop landlords where maybe the playing field’s a little bit more leveled, but even then, they’re going to bet on the idea that you’re not willing to move. At the end of the day, if you don’t have multiple options that you can execute, you’re going to get pushed into a transaction that’s not as favorable. We came up with a concept of leveling the playing field by educating the doctors, letting them understand what all of their options are.
Colin Carr: A lot of times the doctors … It doesn’t matter if it’s a company or a doctor, they just assume they can’t move, there’s no good options, it’s too expensive, and they don’t understand that there could be a lot of options they’re not considering that are both listed and unlisted. So we recommend clients go to the market ahead of time in the proper time frame, and they need to look at what’s for lease, what’s for sale, what’s available in retail, what’s available in office, and are there other options that you might not be aware of that aren’t listed.
Once you’ve figured out all of your options and then you actually start negotiating with those people and get bonafide offers, you can then take those terms and compare it to what that landlord would propose to you. A lot of people take the approach and they say, “Hey, why don’t you give me an offer?” The reality is, there’s no benchmark to measure that against. There’s no ruler. If they give you an offer, is that a good deal? Is that a bad deal? It depends on what your other options are, if you don’t know what your other options are prior to negotiating with the current landlord in that scenario, you have nothing to measure it against.
Colin Carr: It’s like saying, “Hey, how tall is that wall from 20 feet away?” You can guess, but in the game of real estate, if you’re off by a little amount of money, that could be tens or hundreds of thousands of dollars.
Reese Harper: So a couple of pro tips here that you’ve been gracious to share. The first one is, assume that your landlord in most cases is assuming that you will never move. Right? That’s pro tip number one. Their assumption is you’re not going to want to move. It’s a pain. And you don’t want to move, it is a pain. But what you have to do, this is pro tip number two, is you have to get yourself into an situation where you actually want to move, where you’ve found a deal so compelling, you’ve found another option that’s so attractive that you’re literally willing to consider moving.
Reese Harper: No one really takes it that far, though, Colin. I think they like the idea of … It’s just less time consuming and less difficult to just pretend like you might want to move, but really believing you want to move means I have to actually go and get my mind in an emotional place where I’m willing to uproot and leave. There’s no way people are going to do that without a good agent to help them find space. It’s very difficult. I’ve tried moving several times.
Reese Harper:You take a day to drive around thinking, “I just want to see what’s available.” You just are like, “Nevermind.” It’s difficult to move yourself. So what you’re saying is you guys take … You’re trying to find legitimate options for people that are compelling enough for them to want to move. How far in advance do you say we need to start that process?
Colin Carr: So if you’re doing a start up or de novo or a new location, you just start as soon as you’re ready, and that process typically takes nine months to a year. You can work the transaction, obviously, in a couple of months, but then the actual build out process, permitting, construction documents, that takes a solid six to eight months depending on what jurisdiction you’re in. If you’re doing an acquisition, same thing. As soon as you find the practice that you want to buy, you need to get an expert advisor to start reviewing that lease.
It’s extremely important to realize that, even though the selling doctor or the practice broker says the lease terms are fair or the selling doctor’s going to be paying it, that doesn’t mean that it’s a market rate. It could be below, and it could be about to spike substantially. It could also be way above market and there could be a huge opportunity to capture better terms, so de novo, startup, acquisition, you start as soon as you know what you want to do.
Colin Carr: If you’re established in a location and you want to look at potentially renewing your lease versus relocating or expanding, you need to start that process at least 12 months in advance. If you find yourself in a place where you’ve got three or four months left, the landlord’s going to assume that you don’t know what you’re doing and you don’t have enough time, and that you’re going to accept an inferior deal because you didn’t prioritize the process.
Reese Harper: Okay.
Colin Carr: If you want to buy a building, it’s the same thing. It’s about 12 months in advance. If you want to buy a piece of ground and build your own facility from the ground up or do a development, that’s a solid 18 to 24 month process. A lot of people have the mentality of pulling into a residential neighborhood where they’re building homes and you can pick out finished and you can get inside that home in six months. It takes a solid 12 to 14 months at the absolute fastest rate possible if you have everything lined up and you had no issues with jurisdiction, zoning, entitlement, et cetera.
Colin Carr: But if you are in most situations, it’s a solid 18 to 24 month process if you’re going to build your own building. So summary: 12 months in advance for most transactions. If you do want to go ground up, that’s a solid 18 to 24 month process. Let me throw pro tip number three at you, playing off of what you just said a second ago. The reality is, is that landlords don’t want you to move even worse than you don’t want to move. They’re just as scared or more scared that you’re going to move than maybe you are that you actually have to move.
Reese Harper: Yeah.
Colin Carr: And again, these guys are … They’re amenity assets that are worth millions of dollars, or tens of millions of dollars, so they’re very astute. They’re very good at playing the game. What we do and what we encourage anyone’s advisor to do is … You can’t just go out there and look at properties, like you said, and just guess, “Well, I wonder what I could get here?” You actually have to go through the process of negotiating. You actually have to look at, “What would it cost me if I wanted to move here by this building, and then how does that purchase compare to my current situation of leasing or other options that I have?”
Colin Carr: You’ve got to look at all of your options, because then you have a benchmark to measure it against, and then when you go back to your current landlord, you’re going to know, “Is this a good deal, or a bad deal?” And then you can weigh whether or not it makes sense. Most people are going to say, “Well, I don’t want to move where it’s inconvenient,” and the reality is, if the landlord knows that, you are going to get pushed into a very unfavorable term or very unfavorable deal.
Reese Harper: If you don’t have a legitimate option that you’re excited about, it shows in your face. They know you’re thinking about it. It might be more operatories, you might have a chance to lay it out better. You can have your real estate advisor, or if you happen to talk to the landlord, you can let him know, “I’m really just trying to find an option that really could help me scale my business better. This space is great, but I’m always trying to find a way to optimize my workflow and my layout.”
Reese Harper: That’s the posture you want to maintain. The truth is that just needs to be the truth in your mind, as well. You need to always be looking and never be content, because this is one of the biggest investments of your career. If you don’t have a space that allows you to maximize your productivity all of the time, it’s a pretty significant setback in your overall net worth growth, tax plan and wealth accumulation.
Colin Carr: Every month, the majority of dentists are looking at all of their overhead and how they can cut costs. Can they buy this product in bulk and save money? Is this manufacturer or dealer having a special? It’s the proverbial … You’re tripping over a dollar to pick up a dime. You make a mistake on your real estate and you pay an extra two or three dollars a square foot, times 3,000 square feet, and there you’re at … You can be 10, 12,000 per year above market real quickly.
Colin Carr: Then you times that by 10 years, all of a sudden you have a six figure issue. And then, you look at what do you have to produce to pay that invoice for the bill on the mistake that you made. You’re not talking about, “Can I save a couple of dollars on buying these latex gloves in bulk?” Or “Could I buy this bonding material cheaper if I get online or go through this catalog?” You get one at bat or crack at this thing every five, seven or 10 years, and you want to do the best you can with the opportunity.
Colin Carr: And so if you could save and get an extra couple of months of free rent or a long build out period or lower annual increases or have a better assignability provision that if you want to sell your practice, it’s a lot more favorable and a smooth approach, let along the large economic indicators like lease rate or tenant approval allowance, if you’ve got an extra 10 dollars a square foot and you borrowed 30,000 dollars less on your loan and then you save another 15 or 20,000 on interest, that amount of money adds up to a great opportunity that you could reinvest in your practice, in your staff, in technology, retiring sooner.
Colin Carr: You’d be the perfect person to say, what if you saved 100,000 dollars up front on your next transaction, and you could put that straight towards your retirement or towards whatever investment you want to? What does that look like compounded over the next 30 years? The idea is just … It’s not a scare tactic as far as you have to work with an expert agent or you can’t do it by yourself, but you just have to realize there is an opportunity that you can capitalize on, and there’s also a cost if you don’t.
Reese Harper: We’re pretty shameless on this show when it comes to hiring professionals in a lot of verticals. In my experience, most of our listeners understand the value of getting the right help. They get frustrated when they don’t get the right person, right? I think that’s where your firm … If we go back just for a minute, in ’09 when you start this and you say, “You know what, I’m going to target working with dentists. I’m going to focus on healthcare,” I know that a lot of your volume in those early years probably came from dental.
Reese Harper: I know a lot of it is there today. Why does it matter that a real estate agent specialize in a particular vertical? Why does it matter that Carr works with a ton of dentists?
Colin Carr: A couple of reasons. First of all, there’s a huge difference between residential and commercial real estate. That should be pretty self-explanatory. If I’m going to sell my house, I’m not going to sell it personally, even though I’ve done 1,000 transactions personally and I’ve got almost 20 years of history now. So you’d say, “Well, for someone with that much experience, surely you could do the same job?” The answer is I can’t, because I don’t do it everyday. There is a skill set there that’s very valuable. I know enough about it to be able to do the transaction, but it’s not my specialty.
Colin Carr: It’s no different than a specialty procedure. If you had to have a procedure done in medical, do you want someone that’s done it once every two or three years, or do you want someone who does it four or five times a week? So commercial/residential, big difference. Once you get inside of commercial, less than one percent of all commercial real estate agents only work on the tenant and buyer side. 99% of commercial real estate agents are going to meet between landlords and tenants, buyers and sellers, and they’re going to lean heavily on the landlord side.
Colin Carr: And so there’s a big difference between working for a landlord versus working for a tenant, so that’s there, as well.
Reese Harper: Let’s slow down on that, because I don’t know if people actually … I’m going to just restate it just for emphasis. If a real estate is working for a landlord, in some cases … Their primary allegiance is to the landlord that gave them that listing, right? But in some cases, they’re getting compensated on the transaction, and they might make it feel like they’re serving you as the buyer. But I don’t know that dentists realize how agents get paid in a transaction.
Reese Harper: I don’t want to throw anyone under the bus that … Maybe you’ve got your brother-in-law, a friend, or a trusted advisor that does work for a landlord. It doesn’t mean they can’t do a decent job. I don’t want to make it sound like that, but I do think there’s a huge difference between the line in the sand that you drew and maybe what other real estate agents are choosing to do.
Colin Carr: Absolutely. That’s the most foundational conflict of interest. It’s the idea that you can’t advocate or advise for two opposing parties. If you were in a lawsuit and you were being sued, you would not ask the prosecuting attorney to also give you advice. You’d have to have a defense attorney on your side. If you’re being audited by the IRS, you’re not going to ask the IRS auditor if they would tell you what they think. You would have to have your own tax advisor, your own CPA.
Colin Carr: The concept is you can’t advocate for two opposing parties. Both have a mutual goal of potentially leasing a space or selling a building or buying a building, but how you get there and the means you get there are very different. The landlord wants the highest lease rate, you want the lowest lease rate. So having an advisor that only works on your behalf is extremely important. Most landlord brokers or listing brokers will do a tenant deal here and there, but they’re usually doing it, honestly, to get in front of more landlords.
Colin Carr: They’re going to find ways to interact with that landlord, and they will be at lunch with that landlord or asset manager prior to your transaction being completed, asking them if they’re happy with their representation and telling them how they’d love to work with them in the future. So a lot of tenants and buyers get used as a carrot that gets dangled in front of landlords, but also, they don’t have the expertise or the specialization.
Colin Carr: When it comes to that third criteria … So you get residential versus commercial, then you get landlord versus tenant, and then you go one more step or one more niche further into understanding healthcare or understanding dentistry. We just made it our goal from day one to learn everything we could possibly learn about, the difference between every specialty, the difference between the size of their spaces, the build out, the technology needs, the equipment.
Colin Carr: We got 100% involved in that industry, and we know what they’re looking for. We know the size of the space they need. We know the types of locations they want to be in. We know the pitfalls. We know who should be around them and who shouldn’t be. We know how to deal with landlords. We understand how to negotiate assignability clauses that allow them to sell their practice. There’s a lot of things that get very detailed with it, and the traditional broker doesn’t understand the difference between operatorial, they’ll call it an “exam room”, or they don’t understand the technology needs, the plumbing, all of those concepts.
Colin Carr: We take the time and effort to learn those things, and we can provide a much higher level of advice to the client.
Reese Harper: Ryan and I are pretty easy to talk with, and so are other advisors. Let’s just find a time that works for you so we can start a conversation about how to take control of your financial future. Give us a ring at 833-DDSPLAN to set up a free consultation, or just go to the website at dentistadvisors.com, and click “book free consultation”.
Reese Harper: So let’s talk about the type of transactions that you guys deal with that are the most common. We talked about lease renewal. You rattled off 15. Let’s just go at the most common five major transactions that you seem to be involved in the most.
Colin Carr: Absolutely. So I’ll stamp the one we just talked about, lease renewals. Lease renewals are the number one transaction in all of commercial real estate. For every new start up or new office you see, or somebody moving, there’s probably 30 or more lease renewals happening.
Reese Harper: And pro tip on lease renewal, top two mistakes in a lease renewal, the top two things that go wrong?
Colin Carr: Not knowing the market, and because of that, not being able to create a posture or leverage that the landlord has a risk of losing you as a tenant.
Reese Harper: Okay.
Colin Carr: If they don’t have a risk of losing you, you’re not going to get the best possible terms. You mentioned earlier, you can’t just bluff. If you can’t push a bonafide offer that you’ve gone three or four rounds in negotiations with the other landlord across the table and tell the current landlord, “There’s no bluff here. I’m not holding a pair of twos. I’ve got the royal flush right here. This is what we have,” if you can’t do that, you’re not going to get the best terms.
Colin Carr: You’ve got to be able to use real, factual comps and data to create leverage, otherwise it’s just … You’re bluffing. You’re, “Hey, would you give me this? Would you give me that?” And the landlords are masters at reading that in advance, so you’ve got to have real posture.
Reese Harper: Yeah. That’s great. What’s the second, maybe, biggest mistake you see besides … Not knowing the market, what were you thinking of when you said, “Not knowing the market,” that was different from posturing?
Colin Carr: You have to have market data to create the posture, so you could probably lump those together. I would say they’re different, but they play [crosstalk 00:25:45].
Reese Harper: Yeah, yeah. Maybe there another one. What’s another item, then?
Colin Carr: Assuming that the landlord’s going to treat you fairly. We get this one … I’m not exaggerating, 100 times a year. We get the idea where they say, “Well, my landlord’s a patient.” We say, “That’s great. That’s fantastic that you’ve gathered the landlord’s trust. But here’s the reality. Landlords are really smart people. Whether you like them or not has nothing to do with it.”
Colin Carr: If a landlord knows that, if they come to see you and they pay you 350 dollars per year and that they can overcharge you by 12,000 a year because you’ll be uncomfortable and you don’t want to approach them or you don’t want to get into a confrontation with them, it’s a really legitimate investment. You wouldn’t like that investor, right? It’s, “Give me 350 dollars, and I’ll give you 12,000 per year.” That’s a great return.
Reese Harper: That’s hard. I think that, unfortunately, dentists get taken advantage of a lot in situations with patients that are also a service provider of some kind. I won’t throw anyone specific under the bus, but it is a challenge. I think dentists tend to feel … We have this big debate. We’re just redoing our website, and one of the features of hiring us that we were going to put on there was, “We’ll be your bad guy,” because we get called, probably, by every client at least once or twice a year saying, “I got this patient, and he wants me to do this thing, whatever it is. I don’t want to make you mad. Can you be my bad guy? Can you talk to him for me so that I don’t have to tell him this bad news on my own?”
Reese Harper: We’re just like, “Yeah, sure. We’ll be your bad guy.” My marketing department wouldn’t let us use that. They said, “You can’t use that on the website.” It’s just a nice value added feature people get. They’ll find out about it when they request it every year. But I think that’s a challenge, especially if you’re close. Sometimes they’re not a patient, but your landlord’s usually a friend. It’s a colleague. You went through quite a bit with them to get the deal done in the first place. Some landlords just fight with their tenants all of the time, and the tenants hate their landlords.
Reese Harper: In some cases, I would say most cases, you’re at least amicable. You don’t want to make them mad because you’re dealing with them all of the time. I just think it’s so important to have someone … I tell people this in every transaction. It’s just really healthy to not be negotiating on your own behalf, because you’re going to just not be able to get the optimal outcome.
Colin Carr: Absolutely. We’ve done this transaction … I’m not exaggerating when I say we get 100 of these per year. We do a lot of these transactions, and it’s common. The landlord owns the building, and then they get to know you as a tenant and then they trust you. So they want to go to you as their dentist. That’s great. I’ve never seen a landlord stop coming to a patient that was their tenant because they decided to hire representation.
Reese Harper: Yeah.
Colin Carr: And if they did stop coming to you just because you said, honestly, “Hey, I don’t know what I’m doing here. I’m not a market expert.” If the landlord is going to use that not to come to you anymore, then you really don’t need that person as a patient. No one wants to lose money, no one wants to lose a patient, but there’s a difference between protecting yourself and having an advocate that advises you and getting taken advantage of.
Colin Carr: If a landlord’s going to tell you that you don’t deserve the right to have representation or that, “I’m not going to work with your agent,” what’s that landlord really communicating to you? What they’re saying is, “I will only work with you if I can take advantage of you and have the upper hand, and if not, then I won’t.” That’s not the message that is fair, and that’s not the message that you should be following.
Reese Harper: So in a lease renewal, in the contract, what are some of the things that you’ve seen that are the most egregious? A couple of items that stand out. If you’re renewing someone’s lease, what are you going to jump and look for that you feel like sometimes is not always … That’s one of the red flags?
Colin Carr: Well, there’s about a solid dozen, probably maybe even up to 15 or more items that need to get looked at on every lease. If someone called us in and just said, “Hey, I signed this lease eight or nine years ago, would you look at it?”, we’d start getting into the basics. “When does the lease expire? What are you currently paying?” Then we’re going to instantly check that and compare to the market. You’ve got to know what your holdover provision is in case you don’t get the deal done in time.
Colin Carr: Is there a set renewal option that has specific terms or rates? You need to know that as well, too. You need to know what type of assignability provisions you have. We’re always looking at assignability provisions, even on startups, even on young doctors, because things might change.
Reese Harper: What’s an assignability provision, for those who don’t know?
Colin Carr: An assignability provision is the provision that allows you to transfer the rights of occupying your space to the person that buys your practice. A lot of people get fooled in this area, because they’ll have an assignability clause in there, but a lot of times it’s going to say, “So long as the buyer has equal or greater financial strength,” if you’re selling to a large group or a DSL that’s there. But if you’re a 60 year-old dentist selling to a 30 year-old dentist, the odds of them having equal or greater financial strength is very rare.
Colin Carr: So you’ve got to get a better provision in there. Convincing a landlord to accept a tenant with inferior financials, that takes a strategy. But yeah, really, what it comes down to is where is the current lease rate at, what is the market and then, what are your options if you want to purchase a building, relocate, et cetera?
Reese Harper: Let’s go to the transaction type number two that’s the most common. I’ve got that lease renewals are pretty critical. What’s the next most common transaction?
Colin Carr: I’d lump startup, de novo, or relocation. So basically, a new office. Whether you’re an associate starting your first practice, whether you bought a practice five years ago and it’s time to move into a nicer, new location, or whether you’ve got multiple locations you’re adding the next office, it’s the new location.
Reese Harper: So what role do you guys play in helping decide on the structure? I would imagine, just based on my own anecdotal experience with people who bring real estate questions to me, everyone wants to own their space. Right? They think that owning their space is the best thing, and it might be in some markets. It is in many markets. Do you get that comment quite often? “I’m looking to own. I’m trying to find space that I can own?” Is that more common than, “I’m looking for a good lease?” Or does it just depend on the city?
Reese Harper: I know you guys have advisors in almost every major metro market. It probably varies, but it seems like to me I hear ownership most often requested. Maybe that’s not the case.
Colin Carr: Owning the building or the office condo or space that you occupy for your practice can be a phenomenal investment. If someone says to me, “Is it better to lease or own?”, my response is, “It depends on a lot of variables.” And then they say, “Should we look at options to purchase?” The answer is absolutely. Every person, unless you are 1,000% certain you know exactly where you have to be and every other detail with it, you should look at options to lease and options to purchase. You should look at options that are in retail, options that are in office.
Colin Carr: You should know the entire market. Again, you’re not looking at options that don’t make sense, but you need to have your top options pre-qualified and then have a perspective, because if your option to purchase is off the beaten path and maybe it’s a mile further than you want to be and you turn left to get there and then go down the street, turn right and then it’s the forth building at the end of the business park, and then the option to lease is on a major thoroughfare with 50,000 cars per day in front of a major grocery store and Starbucks is next to you and Chipotle is next to you, and there’s an inherent marketing campaign of thousands or tens of thousands of people seeing you per week, you’ve got to weigh that.
Colin Carr: So you’ve got to look at the numbers. Would it be better to own real estate and build an additional asset? That’s fantastic, but if that means you’re going to produce 30 or 40,000 less per month in that location, was that really the right outcome for you? So really, what it comes down to is, if you get a chance to own, it’s a fantastic investment. And then, you just have to look at, “How does it affect cashflow? What’s the principle pay down? What’s the depreciation? What are the tax deductions?” If those numbers stack up to the lease option and it’s a comparable location, we love purchasing.
Colin Carr: Especially in this market. Interest rates are as competitive as we’ve ever seen before, and there’s just some really fun things with ownership. You can stop the landlord game, you have more control. You’re building an asset. Every time you cut that check per month, your net worth increases, and you’re also picking up some really, really healthy tax deductions in the form of depreciation, mortgage interest, et cetera.
Colin Carr: I guess my point to that is, there’s no one size fits all.
Reese Harper: Yeah. So tell me, what has to … You started to explain a pretty attractive option that would compel me to lease over buy. If I’ve got to pay 20 or 30, maybe even 40% more for a lease from a cashflow perspective, and I’m not building equity but I’m getting some of that back in tax benefit that maybe gets me closer, describe the features of a lease where you’d have a hard time saying, “Go buy because of these lease features.”
Reese Harper: What is it that you’re looking for, as a real estate advisor, that would make you push someone towards a lease, even though it was more expensive?
Colin Carr: Yeah, that’s a great question. What I would say is, let’s highlight some of the least benefits. Number one, you’re going to get a very healthy contribution from most landlords, and so you’re going to end up borrowing less money. You might get a tenant improvement allowance of 30 dollars, 40 dollars or 50 dollars per square foot or more to help pay for the build out of your space in exchange for you being a tenant there.
Colin Carr: You’re not going to pay rent during your build out period if it’s negotiated properly. You should be getting some free rent once you open the doors, as well. And then, if it’s a superior location and your practice is going to thrive and produce more, you’re going to have a more valuable asset in the demo practice. We typically tell people, “Listen. Your primary asset is your dental office. If you can build a secondary asset base of having real estate or other investments, that’s fantastic. But you can’t buy real estate to the detriment of it hurting your practice.”
Colin Carr: Whatever we do with real estate’s got to add value to your practice, and so those are the indicators. It comes down to, “How do the locations compare in terms of access, visibility, synergy of other tenants, other providers?” And then you look at the economics. It’s just a matter of just going down the list and comparing each property to each other.
Reese Harper: It’s tricky, man. I have seen cases where the dentist is barely … They go in, they get really ambitious. They build out a multi-condo either retail center or professional plaza, they can’t lease it all out, they weren’t able to sell off all of the units, and all of their practice profitability’s just subsidizing empty space for a long time. I don’t see that … Fortunately, not too often.
Reese Harper: But I’ve seen it more than I’d like to admit, and it’s crazy to see how people can get really cash strapped really quickly if they take on too big of a project without proper guidance and proper expertise to help them put the project in place that’s actually going to make financial sense.
Colin Carr: Yeah. I agree. We tell people typically, “Listen. If you want to own real estate, let’s focus first on you owning just your space, or a building that suits just your needs.” I think everyone, at some point in time, has heard some story about somebody who owned a building and that had a bunch of tenants that paid them a ton of money, and it sounds like it’s this phenomenal method of getting rich and getting wealthy. It can be, but there’s also a lot of liability there.
Colin Carr: If you’re looking at a building or space, if it fits just your needs, your risk factor’s whether or not your dental practice is going to be there to pay the rent. If you feel comfortable with that, that’s a lot lower risk. If you get into a larger investment plan where you have multiple other units you have to lease or sell, you are carrying liability. You have to look at concepts like tenant improvement allowances for the next tenants, commissions, attorneys’ cost, chasing bad debt.
Colin Carr: You have to realize, too, when a space sits vacant, you don’t just lose income. You still have to pay the proportionate share of property taxes, property insurance, [inaudible 00:38:42] maintenance. All of the operating costs, you still have to pay the proportionate share. Again, all of those are easily evaluated if you have the right numbers and the right spreadsheets and comparisons, but you need to make sure it’s the right decision for you. I agree. I’ve seen a lot of people go way too big and get too ambitious, and they’ve forgotten that they were first and foremost a dentist, not a landlord.
Reese Harper: All right, man. So tell me, before we let everyone go in here, any parting thoughts or concerns that you want to cover making people aware of … I think you’ve done a great job of providing a ton of value here. We’ve hit 16 pro tips.
Colin Carr: Yeah. I would give two main takeaways that I think are very valuable that apply for any dentist doing a real estate transaction. One is, there’s a myth that if you don’t hire representation that you’re going to save money. I compare that to you’re driving down the street, you see a moving truck and it says U-Haul, and right below it it says, “Move yourself and save.” That plays if you’re talking about moving your furniture from one home to another. What most people don’t realize is that you’re not doing a “for sale by owner” as a dentist.
Colin Carr: You’re subject to the landlord or the listing broker’s agreements that are already in place. When a doctor says, “Well, I’m going to do the deal myself and save money,” you’re assuming that you control whether or not they’re going to pay three percent or four percent, or whatever that commission is, and the reality is you don’t control that. The way commercial real estate works is the landlord hires a broker and has commission set aside for two brokers.
Colin Carr: If you do a transaction without representation, the listing broker gets a double commission, or the landlord just pockets that money. They don’t give it back to you. So it’d be the equivalent of buying home and there being a 10,000 dollar allowance to move you with the truck, with the moving crews, et cetera, and then you run over to U-Haul and rent your own truck and say, “I just saved a bunch of money,” but the allowance was there to move you the whole time.
Colin Carr: So the first concept is, you don’t save money without representation. And even on lease renewals, landlords love to tell, “Hey, don’t hire an agent and we’ll give you a better deal.” They’re not going to give you a better deal. They’re going to save a ton of money, and you’re going to negotiate substantially inferior terms which favors them. So they love to tell doctors, “Hey, don’t use a broker. We’ll give you better terms.” Or the brokers just think, “Hey, I’m going to save money without representation,” and it’s just not there.
Colin Carr: People say, “Well, how do I know if you’re getting paid by the landlord or the seller, that they’re working for me?” The answer is, because you’re going to make the final decision. If I go to the market and I find the top seven or 10 or 12 properties after I’ve sifted through 15 or 20 options, and then we tour and you tell me your top three or four properties, and then we go three or four rounds in negotiations, you can see what three or four different landlords that are all competing against each other are willing to do to get you in their building or keep you in their building, you’re going to know once we hit best and final terms on those four properties, you didn’t leave a drop in the bottom of that barrel. You scraped it dry.
Colin Carr: And so when you make that decision as the principal in the transaction, not you’re broker making it for you, but when you make it, you’re going to know, “I didn’t leave any money on the table. My broker didn’t go safe on the landlord and try to make an extra couple hundred bucks. I saw the best properties.” That, honestly, is worth more than the savings in my opinion. That piece of mind is worth more.
Reese Harper: Oh, totally, man. Piece of mind carries a huge psychological benefit that, emotionally … I don’t know. That’s half the reason people hire a financial advisor. We’re not leaving any stone left unturned. You can sleep at night knowing that you’re optimizing every possible area of your financial life and you’re doing the best you can. I think there’s a huge value, psychologically, to that.
Reese Harper: Does that change the personality profile of people that are attracted to your firm, or are you just saying, “No, look. I’m just coaching my guys to follow this process, and because they follow this process, it’s really less about a transaction. It’s just more about the process,” and the customer feels that, the dentist feels that?
Colin Carr: So we have a very, very intentional culture. When I started this company, I came from a very cutthroat, a very vulgar industry. It just was a place that … It was uncomfortable. It was a place where, if I had to go to a Christmas dinner, I didn’t want my wife to come with me. It was that type of atmosphere. And a lot of industries, unfortunately, take on those personas.
Reese Harper: Yeah.
Colin Carr: So when we talk about integrity … There is a right thing, but the way I define integrity is be the same person everywhere you go. If wouldn’t put it on Facebook or put it on a film or a video, or if I wouldn’t send it out on an e-mail, I’m never going to say it. I’m not going to do it, I’m not going to go there. If everything that I did got broadcasted to the world, would I be comfortable with my approach? When you have a very, very transparent approach as far as how you communicate, how you think, what you’re doing, how you’re trying to help people, it puts you in a place where people do trust you.
Colin Carr: And then, one step further, the way that our company operates … This is cliché, but we live and die by it … And we don’t die, we live, by the way. It’s a money where your mouth is. We tell our clients all of the time, “Listen. If you talk to us and you don’t think that we’re the best fit for you, do not hire us. There’s too much on the line. If we start working for you, and three months down the road you wonder if we’re the best fit and you meet someone who’s a better fit, do us the favor and fire us, because we need that feedback.” We need to know that we’re not the best at what we do in the industry.
Colin Carr: If we’ve done 45 deals for you and worked with you for a decade and you meet somebody who’s a better fit, you don’t owe us anything. You’re not indebted to us. There’s too much on the line when it comes to your real estate, when it comes to your practice, one of your largest assets. You’ve got to hire and find the best people who are the most qualified, who bring the best results but who have the highest level of integrity. It’s got to be people that you trust. We tell everyone we work with, “If you trust us, if you believe that we’re the best fit, we’d love to represent you and we’d love to have a 20 year relationship with you.”
Reese Harper: Yeah.
Colin Carr: However, if we don’t perform, if you trust us, if you’re ever concerned that we don’t have your interests at the top of our list, we’d love to hear about it so we can have a chance to address it. But if you’re convinced it’s not there, you need to go find someone who’s going to do a better job for you, in that type of a “you don’t owe me anything” mentality, that we live and die by every deal we do. We have to perform at the highest standard and the highest level. That creates a brand and a level of integrity that’s just unparalleled in the industry, and I believe it’s why we’re having the success that we’re having.
Reese Harper: Well, Colin, we’ve covered about … We’ve covered part one of our four part series that we’ll have to do over the next four years, and it’ll be fun. I really appreciate you coming on and talking about all types of transactions, and adding a lot of value for people that will end up using you and people that won’t. I just really appreciate your transparency and all that you’ve shared today. It’s been really helpful.
Colin Carr: Reese, I appreciate it, too. I’ll leave you guys with this. This isn’t a company for us. This is an entire lifestyle and an industry that we are 100% entrenched in, and we’re doing it because we believe in it. I believed in it from the first day that we started the company, and I believe in it every bit as much today. We’re thankful to have a chance to be involved in people’s lives and make a positive impact, and if we do our job, we can save people a lot of money, a lot of time and energy, and we believe that we’re having a very positive impact on the entire dental community and healthcare industry. That’s super rewarding for us.
Reese Harper: Well, man. It’s been a pleasure. It’s always fun to chat with you, and I look forward to catching up again soon. Thank you so much, man.Real Estate