New lease of life

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feb-bite-leaseDeciding whether to buy or rent premises requires plenty of research and financial advice. Kerryn Ramsey looks at both options.

You’ve found the right location with good prospects for growth, figured out the demographics, and forecast the numbers with your financial adviser. The only dilemma is deciding whether you should buy or rent the premises. The traditional vision of owning a practice has a certain charm, but alternatively, leasing premises can work in your favour as a long-time option.

The decision to buy or rent is often out of your hands, due to your choice of location. For city dentists, leasing is often the only option when the property is located in a larger commercial or retail centre. Leasing a practice in a shopping centre has real benefits including a secure location, high levels of passing traffic, and—the ‘golden nugget’—plenty of car parking. A similar situation takes place in practices located in medical centres; these centres appeal to customers as they can offer comprehensive services.

Drs Miriam and Danielle Matthews, who run Mordialloc Dental Group in a Melbourne bayside suburb, have found that leasing premises has made their life more manageable. For the past 13 years, they’ve been renting the space but owning the goodwill. “We both have young families and we realised that having all that money tied up in very expensive premises for many years was not the best position for us,” says Dr Miriam Matthews. “Even though our premises are not purpose-built—we’re upstairs and it’s quite small—it works. It’s in a really good location and we soon realised that staying put and investing in other things was going to be a better pathway for us.”

When setting up a rental agreement, it’s the length, duration and optionality that are key priorities to consider, explains Paul Freeman, chief executive officer of Medfin Finance, a division of National Australia Bank. In a nutshell, commercial rental yields are currently running at eight to 12 per cent, providing a positive cashflow result when purchasing your own premises. And it means that the loan repayments may actually be less than paying rent. “Owning the suite from which you practise provides a higher level of control and certainty not necessarily afforded when leasing,” says Phillip Apelbaum, director of Healthcare Real Estate. “You may also benefit from any increase in capital value. Ownership of the property also means you are having control should you wish to redevelop or refurbish in the future.”

According to Medfin, the purchase price of a practice is usually determined by a combination of equipment, goodwill proximity and stock. It’s possible to finance your goodwill separately to your equipment and take advantage of possible tax benefits. Also, many dentists find that if they purchase a practice from an established principal vendor, the same vendor may offer the purchasing dentist the premises as part of the sale transaction. That dentist could also be offered equity or part share of the practice. Overall, it’s vital to plan your business strategy in the long term.

Medfin’s Paul Freeman suggests that you ask yourself a key question. “Do you want to own the business premises yourself, or is it an asset worthy of putting into your self-managed super fund and have it form part of a longer term wealth creation strategy?” Likewise, you need to consider if renovations are necessary after purchase and incorporate those costs into your financial planning. There are various tax breaks when buying or renting a dental practice. Generally, tax deductions can be claimed for a portion of the loan payment as interest and for depreciation. When renting, a practitioner may claim the entire lease payment as a tax deduction. The equipment write-off is then tied to the lease term which can be shorter than the applicable depreciation schedules, resulting in larger tax deductions each year. Another positive aspect of leasing is the security of tenure. Dr Miriam Matthews is well aware of this as she has another 10-year lease with an “excellent landlord”. The premises is part of a heritage building, so there will be no redevelopment. “But we worry that if he passes down the property to his family in the future, they may not want to continue our lease. My feeling is that he would probably tell them that he has a good set-up with good tenants. If that problem arose then we would have to look at the possibility of purpose-built premises somewhere. However, it would never be as good a location—we’re near a railway and shops. It’s great.” Before signing on the dotted line, be aware that leases are usually negotiable. As Phillip Apelbaum explains, “The good thing about leasing is you’re not married to the property. It’s more transient, it gives you more flexibility, and it’s easy to move to a different property—perhaps a larger practice—at the end of the lease.” He also suggests it’s worth being frugal when any renovations are required. “It’s often not ideal spending a lot of money on somebody else’s property,” he says.

Buying the right property may, however, offer a more secure, long-term plan. This can range from expanding the practice to fitting it out to suit your requirements. It can also be treated as a building block towards retirement. Although, if a practitioner needs to sell, buyers aren’t drawn from the general public, but limited to dentists. Most practice premises acquisitions are complex. “I think the key thing is to think about your practice as more of a business,” says Freeman. “You have to draw a distinction between the physical premises and the business itself. You have to decide on the best location, logistically, to house your business. Think about what your customers will need and find attractive, and help you attract and retain your clientele over time. And most importantly, you need a long-term plan—of five years and then 10 years.” When you are ready to dive into the deep end of practice ownership, it is important to research, plan and get financial advice. And while the purely financial side of things are a priority, it is also worthwhile to consider the impact business ownership will have on your work/life balance and any other future plans. ?

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