7 Mistakes to Avoid When Selling Your Animal Hospital Real Estate

Many animal hospital owners also own their real estate and may not realize how valuable that property has become. Due to the long-term success and profitability of animal hospitals (AHs), excellent credit history and rent coverage, and the likelihood that the AH will remain in the same location for many years to come, AH real estate has become increasingly attractive to real estate investors. This is reflected in the current competition to buy and leaseback AH real estate and the high prices being offered. Today, buyers are offering prices that equate to multiples of 14X or more for AH real estate. Sellers can realize high selling prices, no change in rent, and retention of control through NNN leases.

Here are 7 common mistakes made by sellers of AH/clinic real estate and some tips for maximizing your real estate’s value.

1: The rent is too low.

AH owners often charge themselves below market rent in order to maximize the EBITDA of the AH business. Rent is a primary factor in determining the value of AH real estate. Fair market NNN rent for AHs averages $20 to $30 per square foot, depending on location. The multiples for the sale of real estate are significantly higher than the multiples for the sale of the AH business. With a CAP rate of 7% the buyer is paying a 14X multiple. Increasing the rent to fair market value will result in an increase in total value of AH assets.

2: Selling your animal hospital before improving your lease.

AH owners should increase the rent and term of the lease prior to soliciting offers to sell a controlling interest in their AH business, as they may not be able to alter the terms of the lease after the sale. Prior to marketing their AH business, the owners should ensure that the rent and lease terms are going to maximize the total value of their AH assets. Lease terms should be 10 to 15 years plus renewal options, and be triple-net (NNN) to get the best price and most offers.

3: Using a local broker.

Local brokers usually market to local buyers, and most often there are few local buyers who are educated on the value that AH real estate represents. Brokers who have a network of national buyers with the funds available to acquire AH real estate will bring in higher offers in less time. Sellers should engage a broker who already has buyers for their AH property and a proven track record, not just any local commercial broker.

4: Not obtaining competitive bids.

Brokers with national buyers will solicit and leverage competitive offers to get the sellers the highest price. Sellers will always get a better price and terms when multiple buyers are submitting competing bids. Sales should be made when there are multiple buyers seeking to buy AH/clinic real estate, which is currently the case.

5: Partnering with a consolidator that will allow only short-term leases.

Real estate investors want at least a 7-year, but preferably a 10-year or higher, lease. Some AH consolidators will not allow lease renewals of more than 5 or 7 years. This will greatly reduce the number of buyers interested in the AH real estate and will lower the real estate’s value. In extreme cases, the AH real estate may not be saleable.

6: Not reading or understanding the sales contract.

Often, there will be onerous terms in the sales contract that create significant difficulties for the sellers after the sale, such as personal guarantees, or conditions for modifying or creating a new lease. Or, frequent reporting requirements, restrictions on how distributions are made, or controls on what benefits and expenses the sellers may incur. It is important that the sellers utilize a broker who will advise them on terms of the sales contract that should be removed or negotiated.

 7: Waiting until too late to sell the real estate.

Timing of the sale of both the AH business and the AH real estate is critically important. The sales should be made when the owners are still young enough to have 10-15 years left to practice. Otherwise, the buyers will discount the value of the business and the real estate as the vet practice owner approaches retirement. At a certain point, unless there is an active and successful recruiting plan in place, the value of both the AH business and the AH real estate will decline.

Notes:

• CAP rates vary between 6% and 8% depending on location and lease terms.
• Sellers may use a 1031 exchange to defer capital gains taxes and use the sales proceeds to reinvest in one or more income generating properties.

Animal hospital owners can obtain fair market value rents, current cap rates, and a valuation for their animal hospital real estate by contacting Vet Asset Advisors, Inc. at 760-751-0250 or 914-997-9200.

Since 1998, we have advised owners of over 250 healthcare facilities on business and real estate sales and leasebacks and property valuations. More information can be obtained at: www.vetadvisorsinc.com.