Situation

An agreed upon asset purchase of a dental practice was stalled due to disagreement over the real estate purchase price.

• Seller perspective—Seller arrived at a purchase price using an appraisal he received along with additional subjective estimated value add.
• Buyer’s perspective—Buyer believed the seller was asking $125,000 too much for the real estate purchase due to “comps” prepared by his real estate agent.

Overview

We were contacted by a Seller to help mitigate a practice transition suffering an 8-month delay of a sale due to the practice’s real estate component.  The Seller had an appraisal done several years prior and was using this appraisal from the past as the current value. He also added additional estimated value he felt was reasonable to include for today’s purchase price offering.  The Buyer did not share the Seller’s valuation estimation and believed the Seller’s proposition was approximately $125,000 over market.   This issue stalled the agreed upon asset purchase of the practice for the current Associate from going forward with the Transition. 

The Seller asked if we could help review their differences to move the deal forward.   His hope was that in retaining our services, we could provide additional support substantiating equitable dental real estate values for both parties and get the deal back on track. 

Discovery

It is safe to assume we all have friends or family who are in real estate. This situation was no different. We soon learned the Buyer had a friend who was a real estate agent.  The agent pulled four dental offices of similar size and presented those to the Buyer as “market comparables” for the perspective of value. 

We quickly discovered that the Buyer’s comps were obsolete for several reasons.  First, each of those stand-alone dental offices were sold on the open market to non-dental users.  This meant that their existing interior build out value was not factored into the purchase price. 

Second, the comps were taken from locations 20 – 100 miles away.  While it is helpful to see what other like offices are selling at for a macro comparison, what matters most is the immediate market of the office you are buying.  You cannot purchase a practice and relocate much over five miles away and expect patients to follow.  We must consider the options if one were to purchase the charts and relocate, whether into a lease or purchased location, inclusive of the build out costs associated with the location. 

Finally, the comparables the Buyer was using to justify a lower cost, were no different than any other office building for sale.  Once you list an office for sale without the practice, any user would purchase the building and have to demolish the interior and build out to their specifications.

We reviewed those comparables with our own market study from a macro and micro perspective to identify the actual fair margin of value for the Seller.  It is important to keep in mind that both Buyers and Sellers may have preconceived ideas that are not necessarily founded on realistic expectations.   Identifying the objective fair market margin is the key to assure a Seller that their asking price is realistic, while simultaneously giving the Buyer confidence that they are not overpaying.

Resolution

The mistake the Buyer made was failing to adjust the values to include the interior build out component, less its depreciation.  If a Buyer of the practice also wishes to purchase the real estate, they must take into consideration the real estate is not being listed on the open market because of the ‘going-concern’ value.  The sale of the real estate is in conjunction with the sale of the practice.  The comparisons must account for a full build out with the surrounding market, against the build out less depreciation as one of the factors in reviewing the real estate options. 

We presented our scale of valuations and options available to the Seller whether selling the real estate to the Associate, leasing with option to purchase, or leasing and selling the real estate to a 3^rd party.  All had different real values. When the Seller provided the report and supporting documentation, the Buyer and Seller agreed to a purchase price and were signing purchase agreements within two days. 

The Buyer’s lender called us expressing sincere appreciation for the report we developed.   In fact, this healthcare lender shared a number of Practice Transition deals stalled at the final hour due to an appraisal short fall. 

This case study also speaks to the significance of proper delivery, communication and reporting to the Appraiser. It is a service benefitting both Buyer and Seller.  A broker must be proficient in justifying precisely how they arrived at a particular purchase price if they hope to edify the appraiser to mitigate an appraisal shortfall risk. 

To learn more about how KLAS Healthcare Realty can best serve you click here.

Clint Herrema is the Principal Broker with KLAS Healthcare Realty, LLC. His knowledge and experience regarding strategies and options available specific to the healthcare industry make him a powerful advocate for physicians and their real estate needs.  He can be reached at 616-238-7550.