Tips for Maximizing Your Animal Hospital Real Estate Value
Many owners of animal hospital (AH) real estate do not realize how valuable that property has become. Due to the long-term success, profitability, excellent credit history, rent coverage, and likelihood that the businesses 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. In addition, due to the COVID-19 pandemic and the closing of many retail businesses, healthcare real estate is seen as the best choice for real estate investors.
Frequently Asked Questions About Selling Veterinary Practice Real Estate
Here are some answers to commonly asked questions regarding how to obtain the highest possible competitive offers and maximize the value of your AH real estate.
AH property values are high and you are paying ordinary income tax on the rent you are receiving, so your effective ROI is likely in the low single-digits and is not likely to increase with small 2% to 3% annual increases in rent. There are now much better investments than holding onto your real estate.
Why sell now?
Animal hospital property values are high. The current low interest rate environment allows real estate investors to borrow funds at a lower cost and to increase the price they are offering for your property. Low interest rates lower the “CAP rate,” which increases property values.
When to sell?
You will receive the highest-priced purchase proposals when your animal hospital business is generating solid profits, and the average age of the veterinarian-partners promises long-term continuation of your business.
How to sell?
Engage a brokerage firm that has experience in advising owners of animal hospital properties on lease terms that are attractive to buyers, can market to a large number of national buyers, negotiate among the buyers to arrive at the highest offering price, and advise on how to minimize personal guarantees of the lease. In addition, the broker should be able to advise the sellers on how to maximize the total value of the business and the real estate.
Tips for sellers of animal hospital real estate to maximize value:
- Owners should optimize the lease terms and adjust the rent prior to selling a controlling interest in their business to a corporate buyer, and sell the real estate while they still have majority control of the business. After a sale, you may not be able to modify the lease terms to benefit the sellers.
- If you have sold a controlling interest, it is still possible to negotiate an attractive sale-leaseback, but you should select a brokerage firm that has experience in negotiating lease terms with corporate buyers to provide incentives that make the corporation want to renegotiate the lease. Real estate buyers usually do not require personal guarantees of the lease if the animal hospital has a corporate partner.
- Rent should be market rate, which typically is $20/sf to $30/sf NNN, and higher in some markets. The higher the rent, the greater the selling price.
- Lease terms should be 10 – 15 years plus renewal options, and be triple-net (NNN) to get the best price and most offers, and leave control in the hands of the sellers.
- Sales should be made when interest rates are low and there are multiple buyers competing to buy AH real estate, which is currently the case.
- Sellers should engage a broker who has national buyers for the property. National buyers tend to have funds available that they need to deploy, and tend to leave more control in the hands of the sellers.
- Obtain competing purchase proposals: Sellers will always get a better price and terms when multiple buyers are submitting competing bids.
- Sellers can take advantage of a 1031 exchange to defer taxes and provide tax-free use of the sales proceeds to reinvest in one or more income-generating properties. Ask your broker if they have 1031 exchange properties available for you to consider, and if they have a track record of advising on 1031 exchanges.
Animal Hospital owners can obtain fair market value rents, current cap rates, and valuations for their real estate by contacting Vet Asset Advisors, Inc. at 760-751-0250 (CA) or 914-997-9200 (NY)
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.
The Vet Asset Advisors team has decades of experience helping the owners of medical and health care properties value their real estate before putting it on the market, and get the best results out of their sale or sale-leaseback transaction. We can provide you with greater exposure, a wider pool of qualified local and national buyers, and, most important, a much higher value on your property.