Real estate considerations, particularly leasing, should be a top priority when dentists and dental support organizations (DSOs) enter negotiations. Many overlook this crucial aspect, potentially compromising their long-term success and financial stability. The complex legalities surrounding the real estate involved in a practice can dramatically change the contours of the practice's transition, so having a clear understanding of the real estate involved can lead to a more successful collaboration that will maximize profits and ensure a thriving practice between both parties.
DSO leasing
While some DSOs own the spaces in which they practice, the vast majority operate in leased spaces. DSOs need to be aware of the structure of property ownership in the building or the real estate in which the practice is located; the potential needs from future maintenance and repairs, as well as the contingencies and terms of existing leases, will have to be negotiated when transitioning a practice.
DSOs typically operate under leases, and when a dentist rents rather than owns their office space, the lease agreements can be complex and time-consuming to finalize. This is partly due to potential involvement from the landlord's lender.
Shopping center and strip mall leases frequently include restrictive clauses that may be easily overlooked. For instance, some leases may prohibit assignment to another party, potentially derailing a practice sale if the DSO can't take over the space. Alternatively, landlords might allow subleases or reassignments while demanding a share of the profits, making the space less attractive for transactions. Ideally, dentists would have considered these factors when originally signing, but this isn't always the case.
Engaging a real estate transaction attorney during the transition process is crucial to navigate these lease complexities. They can help buyers and sellers understand the lease agreement's implications, addressing potential issues early in the negotiation process to ensure a smoother and more viable practice transition.
Maintenance
Before lease negotiations start, a critical aspect to address in the letter of intent involves emergency and long-term property maintenance; unexpected issues like roof leaks or HVAC failures can severely disrupt operations and financial stability.
DSOs must carefully evaluate the property's age and overall condition, recognizing that deferred maintenance, necessary repairs, and overdue updates can lead to substantial upfront costs. This assessment helps DSOs accurately budget for potential expenses, allow for negotiation of maintenance responsibilities in the lease agreement, and protect the interests of all parties involved. By prioritizing this evaluation, DSOs can avoid future disputes and financial surprises, ensuring continuity of practice operations postacquisition and providing a clearer picture of the true cost of acquiring and operating the practice. This proactive approach is essential for a smooth transition and long-term success of the dental practice under DSO management. It also protects the dentist, the DSO, and the other tenants or co-owners of a property.
Understanding the structure of the property in which you operate is an important consideration for DSO owners as well. A condominium, for example, is subject to the leasing rules agreed upon by the building owners' association. While the dentist owns the space where the practice operates, condominium rules may stipulate that the building's association has first right of refusal to lease it should the operator of the DSO choose to sell the practice.
Similarly, the owner may own a building within a larger development with its own set of covenants, restrictions, conditions, and easements. This is vital information for both the dentist and the DSO to have when discussing whether they should include the real estate in which the organization operates within the sale of a practice. Those choosing to purchase the real estate must also consider that if they are not willing to sell that real estate, they must act as a landlord to the organization/dentist that is coming in and purchasing the practice.
In conclusion, operating a DSO requires significant understanding of the real estate in which the business is operating. By having an attorney to outline the lease agreements, dentists and organization owners can be sure that the property in which they operate will mitigate pitfalls and maximize profits. Understanding lease agreements will result in a smoother transition for all parties involved.
Editor's note: This article originally appeared in DE Weekend, the newsletter that will elevate your Sunday mornings with practical and innovative practice management and clinical content from experts across the field. Subscribe here.
