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What Should You Do with Your Building? – Episode #338


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As DSOs buy more practices and rising interest rates continue to increase the focus on real estate returns, how and when you take the equity out of the building that houses your practice is becoming increasingly important. On this episode of the Dentist Money™ Show, Ryan welcomes real estate dental space specialist, Tanner Milne, to talk about selling your building.

 


 

Podcast Transcript

Ryan Isaac:
Hello, everybody. Welcome back to another exciting episode of The Dentist Money Show brought to you by Dentist Advisors, a comprehensive fiduciary, no commission financial advisor, just for dentists all over the country. Check us out at dentistadvisors.com. Today on the show, I’m interviewing a longtime friend of Dentist Advisors and a really, really smart dude in all things real estate, especially commercial real estate’s Tanner Milne, and Tanner has been in the commercial real estate space specifically with dentists and a lot of high net worth commercial real estate investors for, I think almost close to 20 years now. He’s been involved in a few different companies and operations and all kinds of all sides of the commercial real estate industry on the buying and the selling side and in the tenant and lease side, tons of experience, tons of wisdom. Today we’re talking about some of the common things with sale leasebacks and getting rid of real estate at the end of a career.

Ryan Isaac:
And a few questions along the way. Tanner knows so much about this stuff. So really glad to have him on the show. Really thankful that he spent some time with us today. He’s a busy guy and grateful that he was here to share a little bit of wisdom. So thanks to Tanner for spending some time with us. And if you have any questions for us, you can go to dentistadvisors.com and click on the book free consultation link. We’d be happy to chat with you anytime, but thanks everybody for being here and enjoy the show.

Announcer:
Consultant advisor, 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 or 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 Dentist make smart financial decisions. I’m your host, Ryan Isaac, and I’m here with a longtime friend of the show. Tanner Milne. What’s up Tanner. How you doing, man?

Tanner Milne:
I’m doing great, Ryan. Thanks for always good to see you. Good to hear you.

Ryan Isaac:
Yeah, thanks for being here, man. Many of you have probably heard Tanner over the years. Well, mostly just involved in the commercial real estate activities of Dentist around, around Arizona and tons of experience. And we’ve had a lot of conversations about space and leasing and negotiating leases. But today we’re we’re gonna talk a little bit about exiting a building and this it’s a really interesting time in a dentist life dentist who owns a building when they’re trying to figure out what to do with it. Maybe they’re still mid-career and asking that question. Certainly at the end of a career, when the practice is kind of done and they want to know what they should do, what they’re building from an investment standpoint, cash flow, liquidity taxes, like whatever, there’s, there’s a lot of questions up there. So that’s what we’re gonna talk about today. And I think this be really, really helpful for people we’re in a interesting environment. As everyone knows with a lot of buyouts and a lot of money falling around to buy dental practices from these big groups.

Tanner Milne:
Let me just start. I love real estate. I’ve always been a fan of real estate. I’m I’m a fan of, if it makes sense for the business, I’m a fan of doctors owning their real estate. And totally. So this is like, I just want to put that out there so that it there’s no, like, I I’m trying to like wedge my, you know, my interests here, but but as we watched the aggregation and, and I can, I feel like I tell some of the same stories all the time, but yeah, it’s the mid-career guy that I, you and I were like, well, they’re not selling. Why would they sell? Yeah. And then they’re like, they got a silly offer from a DSO and it’s like, I just sold. Yep. Okay. Well, so now what, right. What do you do now? You own the building.

Tanner Milne:
And so as we watched this happen, as I watched this happen called the last three years, the real estate component was a, it was a challenge because his historically the most dentists saw two options and it being one being, you sell the BU the building to the buyer, the practice. And I think most generally that over the last 30 years thought, that’s what you do. Yeah. You, you, you run your practice for, whatever it is, 20 or 30 years, if you own the real estate, you sell the real estate and the practice to the associate. And that’s just how it rolls. And so that was what most saws that’s what you do. And then what happens is, you know, student costs of becoming a dentist have become extremely more expensive. And so the ability for the buying dentist to buy the practice, to buy the building, and this was forget the, forget, the, the current, like private equity market and DSO market yeah.

Tanner Milne:
Went to buy the practice in the building, became more of a difficulty. And it was like, I can’t get a loan for both the practice and the real estate.

Ryan Isaac:
Yep.

Tanner Milne:
There was, they didn’t have enough liquidity there wasn’t, there wasn’t enough there, the lending wasn’t as advantageous for both at the same time, it’s like, you wanna buy a building? Great. There’s money out there. You wanna buy a practice? Great. There’s money out there. But to do both at the same time, that was a challenge. So it was so, so then for those guys it’s like, then became option two. Well, I guess I’ll hold the real estate. And there there’s many that thought, and I’m not challenging this, but many thought, well, it’s part of my retirement. Right? I’m gonna cash a check cheque for in perpetuity. It’s, you know, it’s, it’s passive, it’s passive income and for summit is, and for many, it’s not, it’s not, it’s just, even though it’s one more tax return, it’s, you know, the quarterly text or call that something happened or this or that, you know, it’s like, Hey, you know, the association or the roof or the, you know, something right.

Ryan Isaac:
That’s what you mean by not passive that’s that you’re couching this like passive idea with like, there’s still a little bit of stuff going on. That’s not so passive. You’re not just getting a check.

Tanner Milne:
Exactly. And, and it’s, and so what I watch and see is, and I’m not, who am I to say? It’s it is, or it isn’t passive. It’s just, that’s the, that’s the cons, that’s the, I believe the misconception and look, I own multiple buildings. You’re a real estate guy on my own. And I mean, I’m embarrassed to even admit this, but you know, when my, when my partner’s like, Hey, where’s my K one. I’m like, oh yeah, crap. The K one, you know, it’s like oh… Yeah, right.

Ryan Isaac:
Yeah. Yeah.

Tanner Milne:
So it’s just, it’s one more tax return. It’s one more. Yeah. Right. It’s it’s oh, shoot. I didn’t even keep the books and records up to date.

Ryan Isaac:
It’s still a business. Right. I mean, is that fair to say, it’s still a business, it’s an operating business.

Tanner Milne:
It’s a business and it’s not totally passive. And look, I own real estate. I like real estate. Yeah. But to say there’s nothing to do. And so for most, and, and I’m not trying to… Not all dentists profiles are created equal, but whether it’s wife dentist, husband dentist, whatever, it’s the other person takes care of that. And so it’s like all of a sudden… And I’ve heard this, either spouse or either… It’s like, “This is kind of a pain now. We’re done with the business, but we still have this business,” to your point. And so most… In fact, this is fairly rampant across the country, and I have hundreds of data points where it’s between six and 24 months from the time they sold the practice, they’re kind of like, “Yeah, I don’t think I wanna be a landlord.”

Ryan Isaac:
Totally. That’s my experience too, like, all the time.

Tanner Milne:
It’s almost like, you either commit you’re a landlord and you own property, or you’re not. And so look, there’s plenty of doctors out there that are like, “Oh, I got 12 single-family rentals, I own four plexes, I own… ” You’re a real estate guy, you own your real estate. Do it. Keep it. And for everyone else, now this box, this, “Well, what do I do now?” And there’s always been an open fluid market for this stuff, but we saw… What I saw in my former life as a broker, if Dr. Isaac said, “Tanner, I wanna list my building with you, go sell it.” Who buys this? It’s like… I used to profile and call this person Canadian Billy. I’m like, “I don’t know. Someone like rich Canadian that’s never bought a dental office before, but he’s got money,” and that’s… But that was my philoso, what guys have like, your profile, your philoso, whatever, doctor philoso the raptor, I don’t know what it is.

Ryan Isaac:
Yeah.

Tanner Milne:
Anyways…

Ryan Isaac:
It’s close, yeah.

Tanner Milne:
Something like that, but then it’s a lot of friction. That transaction is extremely… It takes time. It’s taxing on the people ’cause they’ve never bought it before. They’re not really… They don’t really have their ducks in a row, they don’t have their financing put together, so the transaction takes long, and I would say 50% of deals fall at escrow at least once, sometimes twice. And so again, and I’m not faulting. If I look at the brokers’ way of doing these deals, it’s just a lot of friction and they get frustrated, and then it’s like the broker sucks, and really it’s… I don’t care if it’s Jim at RE/MAX or Brandon at Colliers, or the best of the best, the worst, it doesn’t matter who it is, it’s still a pretty clunky process, and so that’s where insert challenge, where… And a lot of doctors are like, “Just make this… I want the most money, but I just want this to go away.”

Ryan Isaac:
Let me ask you a question about… We kinda talked about the typical profile of maybe an end of-career dentist, how often are you seeing mid-career dentists not planning on retiring any time soon, building owner, but wanting to just liquidate, get out of the building’s ownership, get the money out of it, and do something else with it?

Tanner Milne:
Oh on that, honestly, that’s the piece that is really interesting because as a, I’d say, a fairly active investor and real estate investor, I look at that deal and say, “That return on equity is sort of done.” You know what I’m saying? And so if I had $1 million of equity in that building, I’ve got to imagine, if I called my friend Ryan Isaac and said, “Hey, I got $1 million to put into the strategies you’ve already deployed with the rest of my money. Can you continue to grow that?” And my sense would be that you could grow that money. If I kept that $1 million in the building for the next 10 to 15 years, you’re gonna grow it more efficiently and passively for me than owning that building. And so this is where the, I would say more entrepreneurial, and I don’t know, maybe it’s like the ones that are more hands-off, are interested in the sale lease back. Maybe it’s the ones that are more entrepreneurial and see a more efficient and higher yield on their capital. There’s really no one-size fits all, because I’m not really advocating for boats and RVs and cabins, but it’s like if… And I’ve heard it all. So it’s like, “Hey, we’re gonna buy a cabin in the mountains and we’re gonna do an Airbnb,” or, “We’re gonna buy a beach house,” it’s like, you might actually get a better return on that and actually get to utilization where…

Ryan Isaac:
Than sitting it in your dental building, yeah.

Tanner Milne:
It’s funny, so I gotta just share this because my in-laws were in a 1031 exchange and they bought dental properties. And I’m 99% certain my mother-in-law will never listen to this, and so I… [laughter]

Ryan Isaac:
Okay. We won’t send it to her, yeah.

Tanner Milne:
Yeah, she’s like… I’m like, “This is a great 1031 exchange for you guys, and here’s why, and here’s the numbers,” and she’s like, “I don’t wanna visit my dental office.”

[laughter]

Ryan Isaac:
I was an investor, I was an owner.

Tanner Milne:
I wanna go to a cabin or a beach house. Yeah, right. It’s like, “That does nothing for me.” And I’m like, “Okay.” So there’s an emotional…

Ryan Isaac:
Totally, I wanna like what I own. Yeah, I wanna be interested in what I own.

Tanner Milne:
My God. Okay. Well, this is where it’s just hard to know like, if people wanna hold on to it, “I’m like, I’m probably the worst sales guy ever because I have lots of conversations that are like, ‘Well, convince me why I should sell it?'” I’m like, “I’m not.”

Ryan Isaac:
You shouldn’t. Don’t.

Tanner Milne:
Yeah, great. Keep it. It sounds like you got it all dialed. It’s like… There’s enough people that are like, “Unlock my equity, move it somewhere else. Be done with the building.” This is a great solution. It’s a super efficient process. It’s a great number. There’s very little fees. I mean, it’s…

Ryan Isaac:
Yeah.

Tanner Milne:
I don’t wanna say no fees, but it’s like, I mean, we’re basically offering a direct-source solution that, I mean, in the end, the net like it’s a great number. And by and large, I think when we get in front of the doctors that actually want to sell, they’re like, “This is a great solution for me.”

Ryan Isaac:
Yeah. Let’s walk through some of the mechanics, like some of the basics that people are probably wondering what are the mechanics of a sale leaseback, transaction? Like what’s actually happening?

Tanner Milne:
So, yeah, I’ll talk about like a De novo sale lease back, versus if you’ve already sold to XYZ, DSO, that’s… It’s not really a sale lease back, because now there is an existing lease and it’s valuation based on the annual net operating income of the building at that market’s capitalization rate. So we won’t really get too deep into that because that’s kind of a set known thing. But those that haven’t fully transacted yet, meaning you’re thinking about it. And this is where I would say, and I mean, I kind of have lots and lots of horror stories where guys don’t…

[chuckle]

Tanner Milne:
I mean, they’ll do their DSO deal or they’ll sell. And then, I mean, I’ve looked at hundreds where they’re like, “Hey, I was told you’d buy my building.” I’m like, “Yeah, I’m not touching this.” “Well, why not?” “Well, your, your lease sucks.” “What do you mean, my lease sucks?” It’s… You know, “This is a 300 store DSO or 150 store DSO or what,” “You know, whatever the… ” I’m like. “Yeah. But you got a five-year modified gross lease with no increases,” and…

Ryan Isaac:
As an investor, I don’t want that. Yeah.

Tanner Milne:
And frankly, Canadian Billy doesn’t want that either.

[laughter]

Tanner Milne:
And so that’s…

[chuckle]

Ryan Isaac:
____ outta this. I see it.

Tanner Milne:
So that’s where the sale lease back is important. Every investor wants a triple net lease, which basically just means the… It doesn’t matter if it’s a full service lease or a triple net lease. The investor just really wants the obligation of all the operating expenses to be on the tenant. And if you’ve sold your practice, you don’t care either. I mean, really it’s it’s the operator. And if it was so disadvantageous to tenants, every McDonald’s, every Starbucks, every Walgreens, every they’re all on triple net leases. So if there’s… If somehow dentists feel like they’ve been attacked, like, “10… Triple net leases are bad for me,” it’s like, then you’ve been reading the wrong narrative. It’s not…

Ryan Isaac:
Probably reading the wrong Facebook forum.

[chuckle]

Ryan Isaac:
You’re in the wrong Facebook group. Yeah.

Tanner Milne:
Right, right.

Ryan Isaac:
Yeah.

Tanner Milne:
So it’s the triple net lease there. There’s gotta be rental increases and there’s a… I don’t even wanna dig into this because this is… We’re in the inflationary environment, we’re in rental increases or…

Ryan Isaac: Right.

Tanner Milne:
Like, what’s gonna happen here? But some form of rental increases. And if you think about it from an operator, the DSOs, they would rather have no increases, you know, flat rent for 10 years.

Ryan Isaac:
Yeah.

Tanner Milne:
No one’s buying that building.

Ryan Isaac:
Yeah.

Tanner Milne:
So this is the problem. You sell your practice for a big number. And today you’re like, “Well, I don’t care. I’m not selling the building.” That’s fine. You’re gonna be saying that for the next 10 years, because you’re not buy… You’re not selling your building because you just stuck the rent at a flat rent and that’s very… Canadian ability doesn’t want that either.

Ryan Isaac:
Well, and this has to be just a product of… Dentists are in a unique industry where they become involved in very large scale commercial real estate projects and ownership that most people, when they’re involved at that scale, like there there’s a lot of experience… Like that’s their career. There’s a lot of experience behind that. And dentists get involved with it kind of almost by default sometimes. So when they make these deals… And I’m sure you’ve seen thousands of lease problems over the years when they’ve executed leases or they have tenants and their landlords, they just don’t… It’s not their world, I guess is what I’m saying.

Tanner Milne:
Right.

Ryan Isaac:
It’s not their world. Like these are not things that cross their mind because they’re still worried about all the dental stuff that they’re trying to run in the business. So all this commercial real estate stuff is not their world for the most part for most people. And so those mistakes are really easy to make. And then yeah, you sell to a company and lock in a lease that no actual investor in the real estate investing world wants to touch. And then you’re like, “Okay, now I’m stuck with this thing, now I can’t get out of it.”

Tanner Milne:
Well, and it’s hard for me to totally get… I mean, I had a conversation with an orthodontist who’s a friend and it wasn’t… I was really just being a friend. So I wasn’t trying to insert any sort of transactional-like bias, but he was getting a really big number for the practice. And I said, “Dude, you’re leaving like 800 grand on the table in your building.” And he is like, “Well, but they’re paying a big number for the practice.” I said, “No increases, no.”

Ryan Isaac:
Yeah.

Tanner Milne:
Yeah. Like, the rent’s too low and there’s no rental increases. Like, it… Well, it doesn’t matter. It doesn’t matter. I’m getting it over here. I’m like, “But you’re not, you’re not. Just push, trust me, push back and say the rent has to be this.” And that’s where going back to the… Where we kind of started with the whole sell lease back, if every seller of the practice… Forget selling the real estate. But if you went to the practice buyer and said, “These are the terms that I’m gonna have in my real… In my lease, it would… ” Even if you held it for 10 years, you want rental increases.

Tanner Milne:
You want a long term lease. You want market rent, but you want… Like, you don’t want super-low rent because then you… I mean the function of your building is valued based on the annual… Total annual net rent essentially. So I would say those are probably the three… And I already mentioned lease types. Those are probably the four or lease structure. Those are probably the four most important things to think about. And then from there, so as far as the sale lease back, this is where…

Tanner Milne:
Again, if you… Dr. Isaac said, “Hey, Tanner, I own this free standing building at 123 main street.” We would look at it and say, “Okay, you’re in 4,000 square feet. Here’s the market rent. Here’s the market range. Based on that, here’s our offer a 1,850,000 And you could sell us the building before you sold the practice and then you go and the… Because this happens every day where if you were in a grocery anchor shopping center, the DSO would just be assuming the lease. And I feel like I’m focusing all this over on DSOs. That’s not…

Ryan Isaac:
Yeah.

Tanner Milne:
Whether it’s a private practice or DSO, but you in essence lock in and optimize the exit on the building by doing that. And I don’t know that it… My preference isn’t to buy before the DSO buys, but I will say if I talk to almost… I mean, maybe there’s one exception out there that I haven’t talked to, but every basically director of acquisitions or M&A person at any DSO, they would rather them negotiate their deal before someone like me…

Ryan Isaac:
Yeah. So I’m just assuming.

Tanner Milne:
Yeah. Before somebody like me gets in the middle of it ’cause once again, flat rent, shorter leases. And they want…

Ryan Isaac:
Yeah. [chuckle]

Tanner Milne:
They wanna work that deal. They don’t want me to get in the middle of it and say, “No, no, we need increases and we need a longer term lease.” ‘Cause in the end, they’ll take that. They’ll take that deal. They’re not gonna walk away from the practice because…

Ryan Isaac:
I was just gonna say, have you seen a kill deals? Yeah, I was just gonna ask that.

Tanner Milne:
Never, never.

Ryan Isaac:
I think that’s what people are wondering. Again, it goes back to why does a seller start giving so many concessions without saying no or giving any pushback? It’s because the sellers are kind of just… You just wanna offload that. Once you’ve made your mind up, you’re gonna move, you’re gonna sell, you wanna offload it. Like you’ll do anything to just get it off your hands.

Tanner Milne:
And I would. And look, I would say generally right now in the market, most are not evaluating the building at the same time as the practice.

Ryan Isaac:
Right. Yeah, that’s true.

Tanner Milne:
They’re not. It’s not naturally like I’m looking at total… At total asset sale and total asset value at the same time ’cause they’re two separate transactions, and whether it’s 5 million for the practice and 2 million for… 2 million for the building. And so, it’s a $7 million deal, even though they’re separate parties. They’re not even considering that. They’re like, “Okay, I’m gonna focus on the practice first and get that dialed and that done and… ” I mean, and this is where then… It’s not every case but if all of a sudden that same scenario where they’re like, “Well I got 5 million for the practice, but now you just got a million and three for the building. You’re like… ”

Ryan Isaac:
So two. Yeah.

Tanner Milne:
Yeah. You could’ve got two if you just would’ve like brought them alongside each other and…

Ryan Isaac:
Treated it like a business.

Tanner Milne:
Negotiated those terms.

Ryan Isaac:
Yeah.

Tanner Milne:
Right.

Ryan Isaac:
That’s what’s been in head listening to this. It’s just… The buildings are ancillary things that just come along with the territory of being a dentist owner sometimes. And it’s not treated like a business, but you are in the business of real estate. You have been your whole career. And that’s what you spend all your time with and it’s a business, and there’s professional metrics that should be used to evaluate all this stuff. And it’s just… It’s skipped over and bypassed in the industry, especially with DSO offers on the table. ‘Cause you’ve got millions of dollars for this practice. And so it almost feels like, “Yeah, let’s just like chuck the building. Whatever you’re gonna do to get out of it.” But it’s, you’re leaving money on the table unless you treat it like a business and like an actual investor would treat it. Hello, Dentist Money Show Listeners and friends, I would like to invite you to join us for something new and exciting. It’s something we’ve never done before but we’re all very excited about this, on June 22nd.

Ryan Isaac:
June 22nd, we are going to do an episode of the podcast, the Dentist Money Show, but we’re gonna do it live, which we’ve never done before. And again, that’s June 22nd, 2022, which is a Wednesday by the way. You will be able to tune into the episode as it happens as we record in the studio at 5:00 PM mountain standard time, June 22nd. And we’ll be taking questions on air. You can join the conversation, submit questions live, up vote the questions from others that you’d like to hear answered. We will also be announcing the release of a brand new dentist money service that we have had in the works for years and have been excited about and have feedback from many, many listeners and clients and dentists around the country for years about this. And we’ve been waiting for it for a long time. So, we’ll have more info about that on our live podcast episode which again is Wednesday, June 22nd, 5:00 PM mountain time. And to register for the live show, and to get the zoom login instructions go to dentistadvisors.com/live. That’s dentistadvisors.com/live. It’s gonna be awesome. We’re super excited. We love to see you there. Thanks again for joining us. Enjoy the rest of the show.

Ryan Isaac:
I think there’s some questions also about… And maybe you kind of covered this in your forming points, but people wonder like how is my building actually valued? Like how do I even begin to know what it should be? And I know that you probably don’t wanna go into all the mathematical equations.

Tanner Milne:
No. I’ll give a few things.

Ryan Isaac:
Yeah.

Tanner Milne:
So, the one is annual rent, right? And so in some cases, what everyone should look at is back into. I mean, it’s probably pretty easy and doesn’t matter where the market is. Whether you’re in a small town in Tennessee or you’re in Salt Lake city or DFW. The range of the market, so you’re gonna look at market rent and it’s always looked at an annual basis. So it’s not… And most… Whenever I have conversations with dentists, they’ll always say, “Oh, we pay ourselves five grand a month in rent.” And so, looking at that and saying… I feel like I can’t do any math without using a calculator. Was that 60,000 a year?

Ryan Isaac:
Get the calculator though. Let’s go.

Tanner Milne:
Yeah. So that’s 60,000 a year and this is where… Just ’cause that’s what they’ve been doing doesn’t necessarily mean that’s what the market is.

Ryan Isaac:
Right.

Tanner Milne:
And what they should be trading their building on. So one is making sure whatever that number is, how is that in as a function of the percentage of revenue, right? And so we look at… One, we look at… And banks look at like… Or private equity. We’re looking at EBITDA coverage, which nobody wants to really talk about that, but just a rent-to revenue ratio, or lenders are looking at like fixed cost coverage ratio, but what we’re looking at is that practice do $500,000 a year, or does it do a million? Five a year at that $60,000 rent. We’re looking at that just in terms of health…

Ryan Isaac:
Interesting.

Tanner Milne:
And they should look at the same way that let’s just peg 5% just for the sake of 5%, but then you really wanna be in the range of the market, so if I look, if that’s in… It’s in Melissa, Texas, or it’s in Plano, Texas, since I used DFW, I’m thinking. Okay, so it’s a great building in Plano is $60,000 a year for that building in line, and if it’s $80,000, you don’t wanna use that $60,000 because that same… In that marketplace, that same building with the market capitalization rate, let’s just say, if you kept your rent at $60,000, you’d be talking an $850,000 sale versus if your rent was at $80,000, you’re a 1,150,000. That extra 20,000…

Ryan Isaac:
Tell us the equation. What’s the cap rate equation?

Tanner Milne:
So it’s the rent, the annual rent divided by whatever the cap rate is, and the cap rates can be anywhere from… Dental buildings are not trading in the forex, but call it like in some markets, your individual deals listed property, and I always leave the caveat of listed plus fees, so your net net, you’re probably like a 6%, and so anywhere from 6% to 8%, depending on rural, urban, new building, old, your vintage is important, but looking at all those things, even if you took the $80,000 and divided it by an 8% cap rate, which is… That’s what the market was three years ago, for these types of buildings, that’s a $1 million.

Ryan Isaac:
Yeah, so you’re saying… So I understand this correctly, let’s say you have a dentist with a paid off building and they’re maybe underpaying them, they have their practice entity, it’s an S corp or something, and then they’ve got the building entity, some LLC, their S corp, their practice entity is underpaying their business, their building LLC, they’re underpaying the market rent, market rate might be $7,000 a month, and they’re paying like 3,500 bucks, so they’re like, “I paid it off, I’m gonna pay a small rent.” But when investors, professional investors come in to evaluate the price of the building, they’re using formulas where that would be detrimental to them to have an underpaid lower rent than the market rate rent should be.

Tanner Milne:
That would be… Let’s just use your example, at like a really high cap rate.

Ryan Isaac:
Okay.

Tanner Milne:
So your $3,500 a month would put that building at $525,000, and that’s when, to your point, I’ve had these conversations where they’re like, “No, my building is worth way more than that.” Absolutely. Well, you’re paying yourself too low.

Ryan Isaac:
Yeah. You’re the tenant that they’re basing the math on.

Tanner Milne:
Right, so then if you take that $8,000 a month in rent, did you say $8,000 a month?

Ryan Isaac:
I said $7,000.

Tanner Milne:
Let’s see, $7,000, okay.

Ryan Isaac:
Yeah.

Tanner Milne:
Sorry, sorry, $7,000.

Ryan Isaac:
Yeah, should double.

Tanner Milne:
Oh yeah, there you go, so $1,050,000.

Ryan Isaac:
Yeah.

Tanner Milne:
Why would you leave that much money on the table by not…

Ryan Isaac:
And that’s what you’re saying, by leaving it on the table. And that’s what you’re saying by leaving it on the table when you sell your building to a DSO and you don’t actually negotiate a real lease that investor is gonna wanna buy, you negotiate one the DSO is really excited about, has no increases and all that kind of stuff, lets them off a hook, that’s what decreases the potential value of your building when you’re dealing with that.

Tanner Milne:
What’s kind of silly if we wanna go one step deeper is if for every dollar of EBITDA, so if your rent goes up, your EBITDA goes down, right?

Ryan Isaac:
Yeah.

Tanner Milne:
So what most guys want to do is shove more on, so lower their rent, so their EBITDA is higher.

Ryan Isaac:
Yeah, for the practice. Yeah, you’re talking about for the practice.

Tanner Milne:
For the practice.

Ryan Isaac:
Yeah, for evaluations.

Tanner Milne:
We’re talking five, six, seven times EBITDA using that same math with cap rates, it’s like 13 to 15. So I’m kinda like when you see the math, it’s like, “What am I missing?”

Ryan Isaac:
You’re severely short changing the value of the building in order to slightly increase the value of the practice.

Tanner Milne:
Right.

Ryan Isaac:
Yeah, crazy, man. For people who are listening and feel overwhelmed by all of this…

[laughter]

Tanner Milne:
Right, yeah.

Ryan Isaac:
Who don’t like calculations and who are like, “Look the building is secondary to the rest of my life.” How does a typical… And maybe we can just kind of wrap things up on this note, how does a typical process look when someone’s like, “I think I might be a good candidate for this. I think I might be the person that is a good fit.” How does the process work?

Tanner Milne:
If they just wanna have a conversation and understand the process, and what that looks like, the same way, I’m happy to have a conversation and walk through the same information and say, “Here’s what the number is gonna look like.” And so then we’re gonna go through and have the conversation and look, it’s not… Even if we turned an instant offer, it’s not that that’s the only way to look at because there’s a lot of varying factors that we haven’t taken into consideration, right?

Ryan Isaac:
Yeah. Yeah.

Tanner Milne:
Turning something in four hours is a efficient way to get… We would give… We call it a term sheet instead of a letter of intent, but we give a term sheet same day with that basic information, and it really gives a great benchmark for where to start.

Ryan Isaac:
Any advice for people, maybe on the other side of things, looking to acquire real estate, just from your experience in such a weird time that we’re in right now with prices and inventory and rates, any advice that you’d give to people right now?

Tanner Milne:
I would say if you’re… And it’s hard to know, like seeing the end from the beginning, but if you’re a solo practitioner with intent of being a solo practitioner for the next 15 to 20 years, I would say if you have the opportunity to buy your real estate, yes.

Ryan Isaac:
Don’t wait.

Tanner Milne:
Yeah, don’t. Even if your particular market is hyper-inflated over 15 or 20 years, it won’t really matter, and in my mind, if you buy it for $2 million and 20 years later, it’s still only worth $2 million and you paid it off, so what?

Ryan Isaac:
You at least get your money back, yeah.

Tanner Milne:
Yeah, yeah, anywhere and anyone else, owning is not for everyone, and you gotta make a business decision and decide what’s the best location for the business, and I think all too often, and I’ve watched it for almost 20 years, they’re letting the real estate guide the business decision, and that’s… I personally don’t think that’s the best one. I think you need to make a business decision first, and if it makes sense… People all the time, will say, “Well, this is a great deal.” I’m like, “It was a bad location, it’s not the right location.”

Ryan Isaac:
Crappy parking, no visibility, it’s like it doesn’t fit all the opposite you wanna have eventually, and you can’t have three doctors, you can only have two. Oh yeah, but I can buy it.

Tanner Milne:
Yeah, it’s a great deal. It’s a great… I’m like, “Well, then put somebody else in it. Don’t put yourself in it.” the Business operator and real estate investor don’t always align, but I watched that a lot with operators, and this is even outside of dentistry, it’s like you can be a great real estate investor, invest in other deals, but it’s like, “Well, then go buy a McDonalds or go buy an apartment complex, you don’t have to buy your building.” And that’s where return on equity, you need to start making more business decisions than just a real estate decision, I guess.

Ryan Isaac:
Tanner, thanks for spending some time, man, I’d love to have you come back do this. We should do a webinar on this actually too, it’d be kind of cool. Do one of our monthly partner webinars, but Tanner Milne, Nevada, thanks for doing this, man. And thanks to everyone for listening and tuning in, if you have any questions, go to dentistadvisors.com Tanner, have a good week, and all of you listening, thanks for tuning in…

Tanner Milne:
Thank you, too, buddy.

Ryan Isaac:
Yeah, we’ll catch you next time…

Tanner Milne:
Sounds great.

Ryan Isaac:
On another episode. Bye, guys. Take care, everyone. Bye, bye.

Real Estate

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