Managing your dental lease

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dental lease
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The value of a dental practice can be linked to the length of its lease. Here’s how to manage this important asset. By Lynne Testoni

Running a successful dental practice is more than just servicing patients—it’s also about running a small business. And, while dentists are trained in many aspects of clinical care, they often struggle with the business side of a clinical practice.

Tax, equipment and leasing can all be confusing and intimidating, especially when your heart and focus is on the patients, not the business.

One confusing issue is that of time decay with commercial leases, which is important for dentists who lease their premises (as opposed to owning their premises outright). 

This is because the value of a dental practice is based, in part, on the length of its lease. As the term of the lease progresses, the value decreases, which is known as time decay, or lease decay.

Leasing lawyer Peter Panagiotopoulos from leasable.net.au says that many small businesses and professionals are unaware of the issue of lease decay and fail to negotiate the best terms and deals when signing the lease.

“Every lease has a best-before date,” he explains. “And it’s very early on. Some people sign a 15-year lease and think, ‘Great, I can practise for the next 10 years now’, but that’s not the way it works because of the capital involved.

“People can spend a million dollars to set up a practice and if you’re going to invest that sort of money, you need a capital return. And unless you secure that capital return, what you’ve got is essentially a wasting investment.” 

Panagiotopoulos compares investing in a lease to investing in the property market. “Over 10 years, if you look at the property market, it’s a safe bet that your investment will double,” he says, adding that it is also reasonable to expect a capital return from a dental practice, which is why lease negotiation is so important. “Look at what it takes to run a practice,” he says. “Look at the risk, look at the moving parts. For the risk that you’re taking on, you’d want a significant return—something like to double or triple your money.”

A longer lease provides more certainty and will allow you to build up goodwill in a practice and hopefully give you the chance to sell or renegotiate before the lease decays too much.

This is why you need to look at your profit expectations, he explains. “You need to ask yourself about the kind of KPIs you need to achieve; what are the value drivers that are going to unlock the necessary amount of goodwill. That’s the conversation that dentists need to have before they sign their lease.”

Dentists need to ask themselves what stage they are at in their career, what their family goals are or what their business and personal goals are, along with their appetite for risk. They can ask, how much are they investing in this particular site to establish this clinic? Do they want a capital return on investment? If so, what kind of capital return do they want?

Peter Panagiotopoulos, leasing lawyer

Leases can be a wealth creation tool if done properly, he adds, but they require an exit plan to combat time decay. Panagiotopoulos recommends dentists think about what they hope to achieve—perhaps growing the business by adding chairs and other professionals, perhaps selling it to another dentist—to make the right decision.

He adds that as a tenant, you have an incredible amount of power before the lease is signed. His advice is that you should only negotiate once—at the beginning of the leasing period and before you sign. This is the time when you need to ask yourself the tough questions about your practice’s future.

“Landlords are landlords,” says Panagiotopoulos. “They have their realities too. They need a return on that particular asset. They need to maintain the book value of the centre or the property. They can’t have a rental in there that’s returning less than a set amount.

“Dentists need to ask themselves what stage they are at in their career, what their family goals are or what their business and personal goals are, along with their appetite for risk. They can ask, how much are they investing in this particular site to establish this clinic? Do they want a capital return on investment? If so, what kind of capital return do they want? It’s important that a professional plans their exit and understands what drives value in the practice resale market. 

“This has nothing to do with the landlord. This is purely a tenant issue.”

It’s important to remain focused on your business goals and not be swayed by emotion, he adds.

“The questions tenants should be asking need to speak to the business case for the site. Is there a compelling business case for the tenant to take the lease? Once they’ve understood that business case, they understand what the lease needs to look like. The more the dentist thinks about the business case, the better prepared they are, and the better the leasing outcome because before signing, the tenant can always say no.” 

Panagiotopoulos says that by focusing on the business case, you won’t be diverted by things such as landlord incentives or being “close to home”. Instead, you can use the lease to create capital wealth.

“Either the lease supports the business case, or it doesn’t,” he says. “If you compromise on the lease, you’ve compromised on everything.”  

This article is not legal advice and is not a substitute for consultation with legal advisers. Parties to a lease must rely on independent legal, financial and business advice from suitably qualified professionals.

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