When Buying Commercial Property, Dentists Should Think Ahead

Special Lease Feature by Lewis Gelmon

Should you lease or buy? This debate often arises from the same question that motivates people to buy a residence: “Why am I paying rent and not paying down a mortgage instead?”

The realities that drive residential property values are very different from those that create or eliminate the value of owning commercial property. Consider this: banks (being risk-averse organizations) typically won’t lend money for the purchase of commercial real estate with less than a 40% down payment. Compare that to as little as 5% for residential purchases.

The main difference is that commercial property, unlike residential property, is valued primarily on a capitalization rate of its rent-producing tenants. Despite a strong revenue stream from a building’s tenancy, there are other social, geographic, and infrastructure issues that can greatly affect a commercial property. These include:

• construction of new roadways,
• changes in traffic patterns,
• opening of new commercial developments that shift retail markets,
• access restrictions or reduced visibility to the property, and
• changes in purchasing demographics.

There are three typical property ownership scenarios that dentists seem to purchase. They are:

• buying into the ownership group occupying space in the same building,
• purchasing an office condominium, or
• purchasing a free-standing building and converting it into a dental office.

Buying into the ownership group of an office building can be problematic. Due to the split ownership, you probably won’t be able to control your investment. As a result, it will be more difficult for you to liquidate your ownership or even borrow against it.

Ownership groups of medical buildings can also be fraught with politics of the tenants. As an example, consider the dentist who became a minority owner of the building he was in. This dentist was denied dividends (and even the right to sell) because the other majority owners, who happen to be orthodontists, felt that they did not receive enough referrals from the dentist over the years.

Purchasing a dental or medical office condominium is the most risky because it is unlikely you will be able to sell the property to anyone other than a dentist or other doctor. When you are ready to sell, the volume of your potential successors is lower compared to tenants looking to lease. The outcome is that your property could be at risk of devaluation.

Purchasing a free-standing building and converting into a health care practice is the least risky route. If you buy the building in the right location, you’ll be more able to sell it to others unrelated to medicine or dentistry. Stand-alone buildings also have much greater appeal to retailers and other businesses due to visibility and parking.

If you’re truly interested in purchasing revenue-generating property, you will probably do much better owning a residential apartment, duplex, triples etc. where you receive simultaneous benefit from revenue generation and property appreciation.

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Looking for more information on the topic? You can reach Lewis Gelmon at (760) 479-9704 or lewis@lewisgelmon.com. For only $495, he will personally review your lease. Plus, get a $200 discount until October 31 just for mentioning The Wealthy Dentist. All reviews are guaranteed. If you don’t feel you have received the value, he’ll give you a full refund, no questions asked.

Lewis Gelmon is a former landlord, lease negotiator, and shopping center manager. Now a dental tenant advocate, he regularly lectures for dental groups across North America and the UK. He is the most published author on the subject of dental lease negotiations. His Good Leasing Guidelines for Dentists have been critically acclaimed by numerous dental groups. His mission is to raise awareness among dentists on the risks hidden in their office leases.