My lease is expiring next year and I only want to practice three more years. What are my options?
If your landlord is flexible and you can lease on a month to month basis, you may wish to allow your lease to expire and continue with a monthly rent until the practice is ready to transition. Once you have identified a purchaser, they will need to negotiate a new lease, leaving you free and clear from future responsibility. The risk here would be if for some reason when you are ready to transition the landlord is not willing to offer lease terms that will satisfy your purchaser or lender. Also, if it is cost prohibitive or your landlord does not wish to give you a month to month lease you may need to look at some other options.
In most cases, you will have the ability to assign the lease to your purchaser as long as they are creditworthy…but not always. Read your contract to see if it has language indicating it cannot be unreasonably withheld from assigning to someone else. If the lease is assignable, you will need to determine what the best course of action is for an outcome that will affect you the least in your future sale but also will work favorably for your prospective purchaser. Most purchasers will require conventional lending which means that they will need to have a lease with terms that continue for the life of their loan. Depending on the size of your practice and the purchaser this could mean that they will need a lease with options to renew for somewhere between 7 and ten years.
For general and some specialty practices, an average new purchaser will want to have somewhere between 4 and five treatment rooms. If you have three treatment rooms with extra space to expand, it will enlarge the pool of candidates when it comes time to transition. If you do not have room to add a treatment room they may not want to be involved in a long-term lease, as they may wish to move the practice to a larger space eventually. In this scenario, you may want to negotiate with your landlord to have a two-year lease with two-year options to renew for up to 12 years. This way, your future purchaser can move the practice to a larger facility in reasonably short order. Bear in mind that the longer the lease term usually equates to lower and better lease rates.
If you have plenty of space and an excellent location, the increments of the lease terms may not be so much to consider for your purchaser. However, it could affect you in how you are released from responsibility of the lease. Most landlords will not novate the contract, meaning replace you with someone else leaving you free and clear of liability. In most case leases are assigned and depending on the landlord they may choose to keep you “on the hook” until the end of the first increment. If your lease increments are longer, you could be on the hook for a longer period. We have had great success in negotiating with the landlord to let the selling doctor off the hook after 12 to 18 months of good standing by the new tenant. But if the landlord wants to, they may keep you on the lease throughout the first term or until a new contract is negotiated. I have only experienced that on one occasion, and it involved property managed commercial space. In most cases, the landlord wants to be assured that the new dentist will maintain timely payments of the lease.
The bottom line is to find a solution impacts you the least but also doesn’t inhibit the future sale!
This article was written by Lynne Nelson co-founder of Practice Management Associates, LLC (206) 455-5388. For a no-obligation consultation or questions regarding study club presentations, please call us! Copyright © 2017