“Do’s & Don’ts” of Owning Your Practice Location – Episode #336

Owning your practice—and the building that houses it—seems like a dental tradition. But does the risk/reward of commercial real estate still make sense? On this episode of the Dentist Money™ Show, Ryan and Adam Watts, a real estate developer specializing in health professional locations, talk about the “do’s and don’ts” of being the landlord of your practice location.

 

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Podcast Transcript

Ryan Isaac:
Hey everybody. Welcome back to another episode of the Dentist Money Show sponsored by Dentist Advisors, a no commission, fiduciary comprehensive financial advisor just for dentists like you all over the country. Check us out at dentistadvisors.com. Today on the show I’m interviewing Adam Watts of North Star Builders. We’re talking about everything commercial real estate development that you’ll want to know about and more. This was such an informative conversation, and it will be followed by a webinar at dentistadvisors.com in March of 2022, so you can just go to the website and search for that. And we talked about everything, from land development to acquisition to times when you should say no to setting your lease payments at the right rates, having other tenants in the buildings, taking down too much land for the building, treating your building like a business. This was a great, fantastic conversation. It will be very helpful for a lot of people who are thinking about it or in or might have real estate construction in their future for their building. Thanks for tuning in. If you have any questions, go to dentistadvisors.com, click the Book Free Consultation link, and let’s have a chat anytime you’d like. And thanks for being here. Enjoy the show everybody.

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 Dentist Advisors, a registered investment advisor. This is Dentist Money. Now, here’s your host, Ryan Isaac.

Ryan Isaac:
Welcome to the Dentist Money Show, where we help dentists make smart financial decisions. I’m your host Ryan Isaac. Today on the show, I have a like, a friend of a family member of a family member of a friend, Adam Watts from North Star Builders talking real estate today. Adam, what’s happening, man? Thanks for being here.

Adam Watts:
Hey, when I got the call or the text, I’m gonna be honest, I felt like I went from like peewees up to the big leagues, you know?

Ryan Isaac:
We called you up, man. We called you up.

Adam Watts:
[laughter] You called me up, and I’m honored, I’m humbled. What’s funny is you might or might not remember, but I actually spoke to you about four years ago. No, four and a half years ago.

Ryan Isaac:
Yes.

Adam Watts:
And it was sort of our first medical/dental deal…

Ryan Isaac:
Yeah.

Adam Watts:
With clients of yours, and just walked you through what we were doing. And obviously have been a fan of yours and Reese and Matt, and I have been to the events, and just have seen your guys company grow and have been very, very impressed with what you’re doing.

Ryan Isaac:
Likewise, man.

Adam Watts:
And in fact, I have conversations with multiple dentists, orthodontists, perio, you name it, and how you guys’ name is frequently dropped as being their advisor, so…

Ryan Isaac:
Cool, man. Well, I appreciate it. I do remember that. We’re gonna get into this. I remember meeting you guys and thinking that you had a pretty interesting business model with… And just the process, so let’s do a little intro. We’re talking…

Adam Watts:
Sure.

Ryan Isaac:
I mean, your company, North Star Builders, you guys specialize in medical/dental commercial real estate construction, but maybe how about you elaborate on that? Who’s Adam Watts and what is North Star? [chuckle]

Adam Watts:
[chuckle] Yeah. Good, great question. So North Star was actually founded back in 2005, and started out and is still very much a residential custom home…

Ryan Isaac:
Oh, began as custom residential. Okay. Cool.

Adam Watts:
Yep, that’s right. And still, in fact we have multiple projects going right now today that are big custom homes here in Salt Lake City and Park City and sort of all over. And then so what happened is a lot of those clients were medical/dental practitioners.

Ryan Isaac:
Wait, are you saying that dentists like to build expensive custom homes too?

Adam Watts:
[laughter] Yes they do.

Ryan Isaac:
Okay, alright, carry on. I just wanted to make sure.

Adam Watts:
They build beautiful homes. And so what happened was, obviously naturally there’d be conversations about, “Tell me about where you’re currently practicing?” And, “Oh, we’ve been in this building for 15 years and we’d really love to own something, but look, frankly, we don’t have time, and for lack of better words, we don’t know how to go about it in an efficient way.” And so we said, “Look, I think there’s an opportunity here where we can take that residential skillset and we can basically shepherd our provider partners from development.” So we’re a development, construction and ownership group. So we take it from soup to nuts, right? From site acquisition, right? “Let’s find the site,” to developing that property, to entitling it, to running the financial models, to setting up the structures, to doing the legal work, to building the building, everything, to owning it, managing it so that our provider partners get what they ultimately want.

Ryan Isaac:
Because otherwise when somebody builds a new building, they have to manage all those pieces from the beginning to the end.

Adam Watts:
Yeah. And a lot of times they are the quarterback, so they are the developer. They’re the ones who are finding the architect and the engineers, and they’re having to shepherd that through the city, and they’re having to run their own financial models, and they’re having to negotiate their own financing with banks, and you know how that goes.

Ryan Isaac:
Yep.

Adam Watts:
And then they have to find a builder, and some builders just do core and shell, right? They don’t do the guts. So then they’ve gotta find potentially a TI builder, who’s separate from the core and shell builder. And then everything that comes along with that, right? Their own leases and insurance and…

Ryan Isaac:
Well, and not to mention running and being a… Running a dental practice [chuckle] and being a dentist the whole time along the way.

Adam Watts:
Yeah.

Ryan Isaac:
As if they have just tons of time to do all this stuff. And it’s a huge project, not to mention expensive.

Adam Watts:
What we see today is that it’s becoming more challenging to make money on the real estate side, given the increase in labor costs, material costs, the interest rate rising right now.

Ryan Isaac:
Yep.

Adam Watts:
And rents are not keeping up with all of those additional cost constraints. And so what happens is, is that compresses your cash flows, which then you start to do that cost benefit of risk reward, and, “Does this make a lot of sense for us?” So it’s been… And I’ve seen that over the last five years, it’s a continual…

Ryan Isaac:
I know, just…

Adam Watts:
Pinching of profits and cashflow over the years.

Ryan Isaac:
Yeah, I’ve seen… Utah’s one of those places where… And there’s a lot of places around the country where there has historically, not really anymore, been a lot of available land to build on. And it’s been interesting to work with dentists around the country who live in places like that where building a new building is oftentimes a lot easier than just finding an existing one to buy or lease.

Adam Watts:
Yeah.

Ryan Isaac:
But that, on the same side, like you said, as you guys being the developers and builders and partners, the dentists feel the same pinch now too where even if they still are in a place where there’s a lot of land and construction is the best choice for their new location, they’re feeling it too. They’re looking at these costs just going, “My gosh, the percentage of my PnL that this payment’s gonna represent now is starting to get just ridiculous.” Not like leases aren’t following that, but…

Adam Watts:
Right.

Ryan Isaac:
You know, they’re just starting to contemplate, like, “Maybe, maybe we don’t build this project or do this, or… ”

Adam Watts:
Sure.

Ryan Isaac:
I was curious if you could maybe walk us through, having seen a lot of projects and ups and downs, if you’ve maybe could walk us through a little bit of maybe some common mistakes that happen when people build their spaces.

Adam Watts:
Yeah.

Ryan Isaac:
At any point in the process at all, big or small, just to maybe give people a heads up of things to work… To look for when they’re working on these projects, because it is still super common that people are still biting these big deals off. But what are some common mistakes dentists make when getting into building commercial real estate?

Adam Watts:
Sure. So one that I see, and then I’ve got a few that we could talk about, but what I see all the time, and this is at the start of the project… And for the people that are listening, my focus is mostly on the development piece. And so as a partner and in these deals, my sole focus is to ensure that the real estate project that we’re doing actually works and makes money for people, I.e., myself and you as a partner, right?

Ryan Isaac:
Yeah.

Adam Watts:
And so the first one that I see all the time is buying too much land. And so most people are like, “Well, gosh, I should just buy as much land as I can get because they’re not making more of it.” And so just two weeks ago… And let me give you a story.

Ryan Isaac:
Yeah, I like stories.

Adam Watts:
I like to tell that… Stories are always great, so… Let me give you…

Ryan Isaac:
Yeah. I’m basically a child, so just tell me stories. This is good, yeah. I actually got my cup of tea here, so let’s, you know, buckle up.

Adam Watts:
Yeah. I think there’s the quote of, “The best arguments in the world won’t change a single person’s mind. The only thing that can do that is a good story.”

Ryan Isaac:
Oh man, I’ve never heard of that, that is so… That is awesome. Very true.

Adam Watts:
Right. So there you go. [chuckle] So two weeks ago we we’ve been collaborating with a potential provider partner, and he’s wanting to do 20,000 square feet of building. So he wants to take 10 and then lease out 10,000. And so his agent that we’ve been working with brought us 1.3 acre site. Now, of course, how do you know how much land to buy?

Ryan Isaac:
Yeah. Yeah.

Adam Watts:
Like, that’s a hard thing to know. That site was too big for his 20,000 square foot building…

Ryan Isaac:
Even though, I mean, that’s a big building too, right?

Adam Watts:
It’s a big building.

Ryan Isaac:
That’s not a normal size building… Yeah, for the average dentist, yeah.

Adam Watts:
Yeah, that’s a big building. And so we ran the model and came back to him and just said, “Listen, this is too big. You can do it, but the numbers don’t make a lot of sense, right? From a real estate standpoint, from a project standpoint.”

Ryan Isaac:0:11:29.0 RI: And meaning, just to break this down, you’re meaning that you guys… You’re
running the cash, the future cash flow numbers, and you’re saying, “Well, this building should cash flow X.”

Adam Watts:
Yeah.

Ryan Isaac:
“But the cost, because of this land, make it, uh, unreasonable.”

Adam Watts:
Yeah. Yeah. And so let me break it down even further. Well, why is that? Well, because typically when you look at a 20,000 square foot building, and I’ll give you a sort of a rule of thumb that I live by, now listen…

Ryan Isaac:
Cool.

Adam Watts:
Everything that I tell you is one guy’s opinion…

Ryan Isaac:
Yeah. Open for interpretation and different in every situation. Yeah.

Adam Watts:
In a very large market with many players. So is there somebody that’s listening that’s gonna disagree with me? I’m sure.

Ryan Isaac:
Yeah. I mean, that’s great. Yeah, totally.

Adam Watts:
Right? Okay. So I just wanna throw [chuckle] that out there. So, typically based on my experience in 20,000 square foot buildings that we’ve done in the past, you are looking to purchase anywhere from an acre to 1.2 acres.

Ryan Isaac:
Okay.

Adam Watts:
So if I have 1.38 acres, the problem is, Ryan, is that that additional land doesn’t add to square footage that I can rent out and get revenue from.

Ryan Isaac:
Yeah. ‘Cause this thing’s a business, buildings are a business. They…

Adam Watts:
It’s a business.

Ryan Isaac:
It has to be. Yeah.

Adam Watts:
So every piece of dirt has to generate income for me. The problem is the additional land doesn’t help me get more square feet, but the problem is now I’ve gotta allocate a bunch of costs to that land, I.e., I’ve gotta landscape it.

Ryan Isaac:
Yep.

Adam Watts:
I’ve gotta pave it, I’ve gotta put irrigation on it. I’ve gotta put asphalt. I’ve gotta stripe it. I’ve gotta put concrete barriers. I’ve gotta put underground storm tech detention systems. I’ve gotta do all of these things…

Ryan Isaac:
For useless, wasted land.

Adam Watts:
Exactly.

Ryan Isaac:
Yeah.

Adam Watts:
Now the pushback, of course, Ryan, is you’re gonna have people driving in their cars to work that say, “Well, yeah, but I can just use it for parking.”

Ryan Isaac:
Yeah. That’s what I always hear.

Adam Watts:
That’s true. And you can. You can totally use it for parking, but parking is not generating revenue from the real estate side. I understand, maybe from the dental perspective side that it might get patients in…

Ryan Isaac:
Convenience.

Adam Watts:
The convenience.

Ryan Isaac:
Yeah.

Adam Watts:
But again, like I told you from the start, my sole focus for my partners is to say, “Does the real estate make sense? Does it cash flow? Is it gonna be profitable for you in the long run?”

Ryan Isaac:
Yeah, yeah.

Adam Watts:
So let me give you my rule of thumb. 5,000 square feet, we typically don’t build anything larger than 20,000 square feet because medical/dental, they’re typically not large groups looking to take down huge spaces.

Ryan Isaac:
Right.

Adam Watts:
So 5,000 square foot building, very challenging to do, you’re probably 0.35 to 0.45 of an acre.

Ryan Isaac:
Okay.

Adam Watts:
8,000 square foot building, you’re probably 0.48 to 0.55 of an acre. 10,000 square foot building, you’re 0.60 to 0.75. 15,000 square feet, you’re typically 0.78 to 0.90. 20,000 square feet, you’re typically an acre to 1.2 acres. So I’m hoping that’s helpful for people that are listening and that didn’t wanna…

Ryan Isaac:
Sure. It’s incredibly helpful.

Adam Watts:
Try to go and do their own thing.

Ryan Isaac:
Yeah. Okay, so mistake number one, taking down too much land. What would the… Well, I’m just thinking of this story, if they took that advice and went with those benchmarks, they would just buy a little less of it, but it makes me wonder about the seller of the land and what they would do with an extra 0.2 or something, just carve it off…

Adam Watts:
Well, the problem is the seller is gonna say, “This is what it is.

Ryan Isaac:
It’s either all or nothing.

Adam Watts:
Either you buy it or you don’t buy it.” So we’re of course looking at a different site now.

Ryan Isaac:
Okay Cool. Mistake number one. Oh, that was really helpful. Yeah. And I’m sure it happens a lot. I’m sure the temptation is there. I hear it all the time, “We’re gonna get a lot of land and we’ll just use it for parking, and, who knows, maybe we’ll develop another building, or I’ll build a garage out there back to keep my boat in it or something one day or… ”

Adam Watts:
Yeah, or… All the time I hear, “Well, look, I’m gonna put a basement in this bad boy.”

Ryan Isaac:
Yeah.

Adam Watts:
Or for storage, or, “I want to have a music studio or something.”

Ryan Isaac:
Yeah.

Adam Watts:
And again, that’s great, but that’s gonna add cost and not bring in any extra dollars, right?

Ryan Isaac:
Yeah. Okay. Alright. Mistake number two.

Adam Watts:
Mistake number two. I would call this devaluing your real estate. And I know that’s really broad, but again, let me give some background and then I’ll give you a story.

Ryan Isaac:
Okay.

Adam Watts:
When your building is done, appraisers have to come in and appraise your building. There are multiple ways that appraisers appraise buildings, so let me just really high level.

Ryan Isaac:
Okay.

Adam Watts:
There’s the sales comparison approach, there’s the cost approach, and there’s the income capitalization approach. And appraisers, they do all three of these on every single commercial appraisal that you’ll ever get, okay? So sales comparison approach is very simple, right? They’re looking at what’s sold in the last couple of months to a year, and we’re gonna benchmark that against your building. Okay? The cost approach is, “Okay, I’m gonna… ” The analysis is that the buyer is judging the value of your building and comparing it to what does it cost to build a new building. Right? So like, what’s the new cost versus what you’re trying to sell it at. Can I build it cheaper…

Ryan Isaac:
Yeah.

Adam Watts:
Than what you’re selling it for? Right?

Ryan Isaac:
Yeah.

Adam Watts:
The income capitalization approach is they’re looking at the net income. What does the building generate cash flow wise, right? What can I take home after the mortgage?

Ryan Isaac:
Yep.

Adam Watts:
And then they’re dividing it by what’s called a capitalization rate. And so how I explain this to partners is, “In the stock market, it’s always you buy low [laughter] and you sell high.”

Ryan Isaac:
Yeah.

Adam Watts:
“In real estate it’s actually the opposite when you’re looking at this metric, you want to buy a high cap rate and… ” And let me give you a simple example.

Ryan Isaac:
Okay.

Adam Watts:
Cap rates work like this. If I was to buy Sir Ryan Isaac’s building for a $100,000 at a 10% cap rate, I know that I can generate from the rents, if I buy your building, $10,000. That’s how we get the 10 cap.

Ryan Isaac:
Yep.

Adam Watts:
What you wanna do in real estate is you wanna buy it at a 10 cap and you want to sell it at a five cap, a six cap, a seven cap, and you wanna compress it, ’cause your value goes up.

Ryan Isaac:
‘Cause the value is part of the equation. The value goes up, the cap rate goes down, yeah.

Adam Watts:
That’s right. So it’s actually the inverse, and so I know it’s hard for people to wrap their mind around. So I tell you all of that because on the front end, our guys, and listeners, are inking leases with themselves. And I see this all the time, and we have this conversation all the time, “Well, Adam, if I own my own building and the market rate is $20 a square foot for my rent, I’m not paying that, it’s my building, I’m gonna pay 10 bucks a foot.”

Ryan Isaac:
Right, Yeah.

Adam Watts:
“I’m gonna save the money. Why am I gonna pay like 20 bucks a foot? I’m gonna pay 10 bucks a foot.”

Ryan Isaac:
You mean, why would someone who owns that building, who we’re assuming has like a separate LLC that holds that real estate, make their practice pay a fair market rate lease to the LLC of the real estate, yeah.

Adam Watts:
Yes. Yes. So very… Yeah, good clarification. “I own my building in a separate entity,” right?

Ryan Isaac:
Yeah, my practice pays it.

Adam Watts:
And we’re gonna talk about this next. Yep, practice pays it. “But I own my practice, and why am I gonna pay 20 bucks a foot when that’s the market value? When I should pay… When I can just pay myself 10 bucks a foot and I’m fine?”

Ryan Isaac:
You cover the note on it, and that’s it.

Adam Watts:
“I cover the note, that’s it.” Okay? Clearly the caveat here guys is that you actually own your building, right? If you’re a tenant, then you obviously you wanna pay us the least amount of rent. [chuckle] So what happens is on the front end, we’re having these conversations and we are saying, “Look, well, if I’m gonna own the building, I don’t wanna pay market value.” The problem is, is that let’s fast forward three or four years from now, or five years from now, and a DSO or private equity company comes to buy your practice. You wanna retain the ownership, right? Or you wanna sell the real estate in conjunction with the practice, right? Or there’s a private individual that wants to do this. The appraiser coming in is going to look at the rent that you are paying and is going to peg a value based on current cap rates. So what happens? If you take a span, Ryan, of $10 to $20, and I wish we could have a slide and I’ve got a slide.

Ryan Isaac:
Wait, that’s a good little tease. You’re gonna be on a webinar coming up, showing some slides and spending more time than this, so… [0:21:24.3] ____.

Adam Watts:
That’s right. Yeah, I’ve got a slide. Basically what’s happening is between 10 bucks and 20 bucks a foot. And we can look at some of these assumptions, you could potentially lose over $800,000 in value by devaluing your real estate because you want to pay yourself less. And so what’s happening is now with a lot of our partners, we’re paying fair market value top of market, because they’re able to expense that from the dental practice side, and pick that capital up on the real estate billing side.

Ryan Isaac:
In the LLC.

Adam Watts:
That’s right. And they’re able to offset that as an expense on their dental books, pick it up in their pocket on the other side, and when the appraiser comes into do the appraisal, well guess what? Their valuation is so much higher and they can either exit and cash out at that higher value, or they can refinance and pull that additional value out as cash tax free. And so again, on the front end, Ryan, if you’re not dialed into these details, you are going to hurt yourself on the back end, by devaluing your real estate. [0:22:37.7] ____.

Ryan Isaac:
And not even knowing.

Adam Watts:
Not even knowing.

Ryan Isaac:
And not even knowing. Like, I look at PnL’s probably every day of my life, and there are a lot of people who, well, they think they’re overpaying… That’s what they always say to their LLC, their real estate LLC, “Well, I overpay my rent, I overpay mortgage payment,” and they just take the rest as income, but it’s always just seen as kind of a… I’ve never heard anyone say, “I do this because of this cap rate calculation.” And the formula basically, so that my values later on will be looked at differently. That’s a really… That’s a good way to like, realize why that makes sense.

Adam Watts:
Yeah. And it makes a lot of sense. And I think the way that you should approach it, and myself and the Hollywood mountain have been having… [laughter]

Ryan Isaac:
Shout out to Matt. Oh yeah, I love that. For a second I seriously was thinking of a geographic region somewhere like “the Hollywood Mountain”. [laughter]

Adam Watts:
Where is that? Matt, the Hollywood mountain, will come. We’ve been having a lot of conversations about optionality. And I think what this does is it really gives you optionality, because it’s gonna help you on a potential sale, it’s gonna help you on a potential refinance, and just that ownership piece in general, right? Gives you so many more options, and if you can structure that really wisely on the front end, you’re gonna benefit long term from that.

Ryan Isaac:
On this subject of having a dentist position their real estate in a way that lets their… Lets them be able to sell it one day for the right price, the rise of it… I mean, it’s happening in medical for a while, but it’s beginning to be more common in dentistry, the rise of these early sale leasebacks, like mid-career sale leasebacks. Dentists are being approached more frequently by groups. We’re gonna interview some coming up here, but basically say, “Hey, well, let’s buy you out of your space earlier than you want for probably a premium to the market, cash you out, you will resign a long term lease with us,” that’s not cheap usually, “And then and let’s do it.” Any thoughts on that? If there… If you don’t have any thoughts on that, that’s fine, that’s kind of out, maybe outside your scope. I’m just curious, you’ve probably seen those and have been maybe involved in those, and I’m just curious if you have any thoughts on them.

Adam Watts:
Yeah. I think thoughts on… So there’s two, I guess, views, Ryan. Is it thoughts from the dentists’ perspective sort of selling out or on the real estate side buying in?

Ryan Isaac:
Yeah, yeah. Either way like, yeah. So maybe you… Yeah, ’cause you’re an owner. I mean, you’ve got… You’re a partner and owner with, did buildings with dentists, so you probably you’re seeing both sides of this.

Adam Watts:
Yeah. Yeah. So I think it depends on, again, what does the dentist like… We were chatting with a guy, not in Utah, who is older in his career, and for him, it’s not about so much hanging on to the real estate long-term and passing that asset down for multi-generational wealth. He wants to cash flow now because he wants to retire and take a big pop and go and do something different, and so a lot of these decisions we can run models on, and it’s a cold-hearted calculation, but you and I both know, ’cause you’ve had way more conversations than I have with these owners is those decisions are really made at the dinner table or in bed with partner, spouses, whatever. And so all of that, I think, needs to be considered. Is it a good idea? It depends on your situation. Obviously, it’s nice to cash out and get that pop instead of the drip, drip, drip, month over month, but then if you’re staying on, well, then now you’ve gotta service that lease.

Ryan Isaac:
Yeah, now you’ve got a lease, and they’re usually higher than what you have been paying, so…

Adam Watts:
Sure, because it…

Ryan Isaac:
Well maybe, unless they took your advice in step two though, that’s actually… I’m really glad you brought that up because as I’m hearing more of these conversations about sale leasebacks, a lot of times the pushback is like, “Well, the new lease payment is a lot higher than what we were bearing before,” because it’s probably market rate and they were not paying themselves market rate before.

Adam Watts:
That’s right.

Ryan Isaac:
Now hearing what you’re talking about today, I’m like, “Well, maybe you should have been this whole time and it wouldn’t have been… Maybe it wouldn’t have been such a shock, which maybe would have allowed you to take the offer and make the decision that was best for you.”

Adam Watts:
Yeah, totally, that’s… You’re exactly right, and the first thing I start off with when I have these meetings with these potential provider partners is I say, “Look, you’ve been driving a 2002 Honda Accord. I don’t have anything against Honda, I don’t have anything against a Honda Accord… ”

Ryan Isaac:
Yeah, I had a ’98 that I brought for my grandfather years ago, it was one of the best cars I’ve ever rode actually, so I got you, yeah.

Adam Watts:
[laughter] There you go. “But now what you are wanting is a 2022 Porsche 911 Turbo, and they don’t cost the same.” And so it’s really, really hard for these owners to be like, “Wait a minute, that’s what my new rental payment has to be,” and I just say, “That’s where we’re at in the market, so… And if you’re not comfortable, look, I’m not gonna push you, but that’s… I’m just gonna tell you what it is, right?”

Ryan Isaac:
Yeah. Matt, it’s time.

Matt Mulcock:
Time for what, Ryan?

Ryan Isaac:
It’s time to book a free consultation at dentistadvisors.com, just click on the big Book Free Consultation button on the homepage and talk to one of our friendly advisors today.

Ryan Isaac:
How often and what advice would you have about dentist building, buildings, or maybe even buying them, that they’re the only single occupant? That maybe they’re a stand-alone, maybe it’s a condo in a bigger space, maybe just from an investment standpoint? Because separate from this whole conversation, in dentistry I think it’s really unique in that owning expensive commercial real estate is not part of most career paths. There’s millions of business owners around the country that never even think about buying the space that they run their business out of, ’cause they’re not in that business.

Adam Watts:
Oh yeah, totally.

Ryan Isaac:
Dentistry is really interesting, they don’t have to, but there is a heavy emotional and kind of just… It’s the culture of dentistry that you own your real estate, right? And a lot of times the reason why people think they’re doing it is they think it’s for this above average asset class return. And the reason I bring this up is because what they’ll do is they’ll buy oftentimes a building where they’re the only tenant, so they occupy the… They’re the only tenant occupying the building for 20 years, holding a note, and then what I’m going with all this is, when the return would actually be good is when they’re done, someone else is in there, the note is done, and they’re just collecting that rent. That’s when mathematical returns would be better than when they’re just the tenant paying their own mortgage, right?

Adam Watts:
Right, right.

Ryan Isaac:
But that’s when they usually get rid of it, ’cause what they’re done with their practice, they just kinda wanna be done with all of it, independent of what the returns would be.

Adam Watts:
Every other deal that we’ve ever done is our provider partner is in at least 50% of the building and the other 50% or 40% is leased out to some other feeder group or symbiotic relationship where, for example, you’ve got pediatric dentists downstairs, orthodontists upstairs. You’ve got physical therapist downstairs, you’ve got orthopedic surgeon upstairs.

Ryan Isaac:
Yeah.

Adam Watts:
The reason is, is because we wanna leverage off of other companies and other businesses, right? So when we’re sleeping, this other company is continuing to crank and they’re also paying us. It’s not just our own business if something happens or we’ve had a less than stellar quarter or we don’t have as many patients coming in, we have this other entity that’s also providing capital and income to us as a partnership, and so I am a very, very big fan of having at least a two-tenant building where you can leverage off of another company.

Ryan Isaac:
Well, yeah, and that’s treating the real estate like a business, right? Because you have cashflows and incomes and expenses. When you’re the sole tenant and owner of a space, it’s not a business. I mean, it’s just not a business, until you’re gone. I’m curious what are… If you have any stories when have you discouraged somebody from building a building?

Adam Watts:
Oh dude, yeah. [laughter]

Ryan Isaac:
[laughter] So that’s lot? Yeah. Okay, yeah. Just curious, like…

Adam Watts:
Many, many, many times.

Ryan Isaac:
I love when the person who stands to make money from a deal says, “Don’t do this deal.” That’s the most pure advice you’ll ever get from somebody.

Adam Watts:
Yeah, yeah. Yeah. So… Yeah, oh man, I’ve got a lot, but let me give you one.

Ryan Isaac:
Yeah.

Adam Watts:
Individual, I won’t say male, female, whatever, individual came to us and said, “Hey I wanna do this deal.”

Ryan Isaac:
Yeah.

Adam Watts:
“Tell me if I should do the deal.” And I said, “Look, I don’t know anything about it. I, frankly, I don’t have time. I’m not just gonna go and do this huge analysis for you for free and say yes, do the deal.”

Ryan Isaac:
Yeah.

Adam Watts:
So the individual said, “Fine, I’ll figure it out.” I said, “Look, at a very high level, very high… I mean, I looked at this thing for 10 minutes, it appears as though it looks a little tricky.” So individual bought it, came back and said, “Hey, I bought it. I wanna do this thing. Let’s rock and roll.” So we dug in and I said, “Look, you can’t make this work. You have too much land. Your building is too small. And the space that you are wanting to take is a quarter of the entire building.” I said, “I don’t love the location. So if I was you, I would figure out another play on this.” I said, “I’ve run the numbers.” I said, “You… This will not work real estate wise. It might work for your dental practice.”

Ryan Isaac:
Yeah. But analyzing the real estate, like a business…

Adam Watts:
Like a business, I said…

Ryan Isaac:
It’s not…

Adam Watts:
This will not work. I said, “I do not want to partner with you.” I said, “We will not do this deal. I have another potential play on this where you could make money and hold this real estate in your portfolio, but it won’t be dental, and it won’t be for you yourself.”

Ryan Isaac:
Yeah.

Adam Watts:
And the individual said, “Nope, I’m still gonna do it.” And I said, “That’s totally fine.” But I tried to discourage this individual and…

Ryan Isaac:
Yeah.

Adam Watts:
And that’s okay.

Ryan Isaac:
The way you responded to my first question was you probably tell people to not do it fairly often.

Adam Watts:
Yeah.

Ryan Isaac:
Like your opinion, it’s not… It’s gotta be the right situation, which is… And I’m glad this… The conversation has kind of taken this shape because we’ve… We’re kind of talking about this like you have the business of dentistry…

Adam Watts:
Yeah.

Ryan Isaac:
Which our clients are in, they’re actually in, they went to school for it. They’re in debt for it. That’s what they spend all of their [chuckle] business hours doing. And then there is the business of real estate. Real estate shouldn’t be this like, “Eh, I guess I’ll do it. I’ll own some stuff.” It’s the business of real estate. And I remind our clients all the time, “We are first and foremost in the business of dentistry, you need to be in the space that allows for the most growth, the most revenue, the highest profit, the best location, convenience for patients, flow, everything.”

Adam Watts:
Yep.

Ryan Isaac:
“Secondary to that decision is what you’re gonna do with real estate. But if you’re gonna do it, we need to treat it like a business.” It has… We have to be in the business of real estate kind of, and treat it like a business. And I’m glad this kind of took that shape because I think that gets overlooked just for the sake of how the culture of dentistry is with real estate. It’s kind of just a thing you do, and it’s an afterthought, and… Although you probably met dentists who were like, “Oh, I made more money from my real estate over my career than I did in dentistry.” To that point I say, “You either got really lucky in a city you had no idea it was gonna get crazy busy or you didn’t run a good dental practice.” [chuckle]

Adam Watts:
Yeah. [laughter]

Ryan Isaac:
You probably should have made more money from your dental practice than your real estate probably, just being honest with you, but…

Adam Watts:
Yeah, we try to come at this from a methodical approach as a business. And so if we see something that doesn’t work, I’m… We’re going to tell you like, “I’m not gonna do that deal.”

Ryan Isaac:
Yeah.

Adam Watts:
You know, doesn’t make sense.

Ryan Isaac:
Man I could just keep going, but we’re gonna… We’ll push, we’ll put a little pin in it there, we’ll just have you come back soon. I have a… I wanna talk about land development, that’s…

Adam Watts:
Yeah.

Ryan Isaac:
That’s a whole other thing, we have clients all the time who maybe mistakenly assume that you just buy raw land and it’s just kind of this easy process to develop it and turn it and get it… I’m like, oh man, I don’t… I’ve seen otherwise. But maybe for next time. If you’re listening to this episode post March 8th, 2022, then just go to dentistadvisors.com. Adam and the Hollywood mountain, Matt, are doing a webinar on this subject, but they’ll be covering more, and obviously it’s a webinar, so you can see some cool stuff that Adam has there. And, man, thanks for being here. I’m not sure you… This is the thing where all these people are gonna be reaching out to you unless they’re local looking to partner and build, and if that’s the case, how do people reach out and get in touch with you guys?

Adam Watts:
Yeah. So you can go to northstarbuilders.com, you can email me at adam@northstarbuilders.com. We’re happy to, yeah, I mean, look at any deals. We’re co-investors with dentists, we do all sorts of things. And I would say there’s no question too big or too small…

Ryan Isaac:
Cool.

Adam Watts:
To ask and to reach out. And I think one thing that I would leave everybody with is that a year from now, you will have wished you started today. [chuckle]

Ryan Isaac:
Yeah. In everything.

Adam Watts:
And I see that so often with a lot of our clients.

Ryan Isaac:
Yeah. Man, thank you for your time and sharing your expertise with us. We’ve been I remember texting you two years ago about doing this show, [laughter] I’m glad we finally made it happen, man. We’ve been busy. We’ve all been busy. But, Adam, thanks for spending some time with us.

Adam Watts:
Yeah.

Ryan Isaac:
I appreciate it. Alright, everyone listening, thank you for tuning in again. If you have any questions for us, just go to dentistadvisors.com. Click the Book Free Consultation link, we’ll have a chat. Adam, thank you, man.

Adam Watts:
Yeah, thank you.

Ryan Isaac:
We’ll catch you on the webinar soon.

Adam Watts:
Awesome.

Ryan Isaac:
And everyone, we’ll catch you on another episode of The Dentist Money Show. Take care, everybody. Bye bye.

Adam Watts:
Thanks Ryan.

Real Estate