There are many things to consider when selling your veterinary practice, including whether to sell the real estate along with the practice. Many owners do not think they should sell or can sell the real estate too. We hear the following reasons for this doubt.
The sellers want the rental income. This may be a valid reason to hold onto the real estate, but there are likely better choices to accomplish the same goal. A veterinary hospital is usually a special-use building, meaning its highest value is its operation as a veterinary practice. That is not always true, especially in some markets where real estate values are skyrocketing. Those special-use rental properties carry significant risk. We could tell several horror stories about owners who refused to sell the real estate simultaneously to the practice but instead chose to lease to the practice buyer. In one such instance, after the first lease period, the buyers vacated the building. They moved into a freestanding location, leaving the original owners with empty buildings that required extensive remodeling. Leasing to another veterinarian is usually not possible in those situations because the previous tenant has opened a new facility nearby.
Another reason for separating the sales is because owners see the real estate as a future investment to sell later at a higher price. As to future investment, veterinary practice real estate has limited use and is probably not as profitable an investment as would be a sister piece of property nearby with a broader use. Moreover, the gain on the real estate sale is taxed as a capital gain. Unless there is a change in the tax structure, the capital gain tax will continue to be enacted and maybe even higher.
Why not take a 1031 exchange and roll over the real estate ownership into a more desirable property? This would defer the taxes and more effectively achieve the same investment goal. If you were unable to accomplish a 1031 exchange and you financed the real estate sale, you would pay a capital gain tax on the principal as you receive it over time. Rent is taxed at the higher ordinary income tax rate.
Veterinary practice owners also prefer to sell their real estate later once they are sure the practice is secure under the new owner. One of the reasons commercial lenders are so eager to draft practice loans for veterinarians is that the loans “simply do not go bad,” as one lender reported. In our experience, the great majority of practices enjoy a healthy double-digit revenue jump during the first 12 months after purchase. Additionally, we have seen only two sales nationwide go into foreclosure after the sale. Combine these favorable statistics with the seller’s intuition about whether the buyer can follow in the seller’s footsteps and be well-received by staff and clientele. The long-term results following the sale, in this case, are excellent. So after-sale security is not necessarily a valid reason to hold onto the real estate.
Many veterinary practice owners doubt that buyers could afford to purchase the practice and the real estate together. While this used to be accurate, it is not true today. Many commercial lenders are very aggressive in our profession, so loan funds are readily available for buyers to purchase the real estate and the practice, usually with a very small or token down payment. Moreover, with the current interest rates and favorable terms available today, the real estate mortgage payment is typically about the same as a rent payment.
A significant reason to consider selling the real estate with the practice is simply to accomplish the sale. Most buyers interested in purchasing the practice will insist on buying the real estate to avoid rent payments and begin building equity from day one. We have seen several transactions fall through when the seller refused to sell the real estate.
How to Decide What’s Right For You
Ultimately the decision to sell or hold onto your real estate depends on many personal factors, including your retirement plans and personal finances. Honestly, evaluate whether you want ongoing involvement as a property manager after the sale and consider the current real estate market in your area. Finally, evaluate your personal finances and long-term objectives for retirement to make the best decision for your unique situation.