Many principal dentists own the freehold building which houses their dental practice. So, at the point at which a sale is being considered, what are their options in respect of the freehold building? What should a principal take into account when deciding whether to sell or hold and why does property always seem to take second place to the sale of the business?
It’s very easy, when considering a range of offers for a dental practice, to focus exclusively on the goodwill (business) value being offered. After all, this is where the majority of the value lies. For freehold owners though, there
is added value to be gleaned through careful negotiation of lease terms from
which an investment is created.
When a freeholder sells a dental practice (or indeed any business) and creates a new lease in favour of an incoming tenant, he becomes a landlord. The rent that he then receives can itself be sold as an investment at any point in the future. This value is determined by a number of factors including:
? The ‘covenant’ - the financial worth of the tenant itself
? The length of lease; typically at least 15 years
? Rent
? Rent review frequency
? Repair and other liabilities within the lease
Clearly, professional advice from a suitably qualified property surveyor should be taken when negotiating lease terms with any party to ensure that value is maximised. The difference in investment value between a corporate tenant and private individual can be very substantial and this is simply down to the risk profile of the two tenant types. This is often missed at the point when sale price is negotiated.
Many property sectors have defined a clear formulae for accurately calculating rent. Not so in the dental sector unfortunately, where the majority of property is either converted from residential property or more institutional settings such as shopping centres.
As such, dental rents tend to be fairly arbitrary and arrived at through negotiation, although they should be benchmarked against residential values, allowing of course for the cost of converting back to this use.
Alternatively, office rents can be taken as the comparable rents, plus a premium for D1 (medical) use.
Unlike many other property sectors, buyers of dental practices tend not to want to acquire the freehold property when acquiring a practice. Why is this?
Very simply it is because capital can much more efficiently be invested in
goodwill than tied up in a property where value will generally only increase in line with an increase in rent.
Whether buying or selling a practice, knowing what to do with the freehold can prove as complicated as the practice transaction itself. It is therefore
imperative to seek advice from suitable, accredited valuers who will be able to advise on the strongest course of action that suits your specific situation.