Keeping All Your Options Open:
Buying an existing practice or doing a start-up are HUGE commitments, both financially and emotionally. Dentists keep all options open because it makes sense and provides for future leverage for their dental space.
In one case, the prospective buyer would be paying an additional amount of rent each month for the RIGHT to purchase the building at a fixed price at a future date. It’s INSURANCE for the future. It makes a lot of sense in this situation.
Three Salient Reasons for a Dental Space Lease with the Right to Buy, Keeping Options on the Table:
It frees up working capital while maturing the practice.
It allows time to learn the building – if it needs upgrades or has any deficiencies that were not recognizable at the beginning of occupation. It really gives the chance to get the ”feel” of the building and how it works with the practice dynamics.
It’s a win because if the seller agrees to the Right with little time constraints at a fixed price (although rare), the market can be gauged without committing to a mortgage for a building purchase.
In this case, it’s not a waste, in the big picture, if the decision is made NOT to buy the building. The prospective buyer would be spending much less by paying a “premium” for the Right to Buy versus BUYING the building and coming to the conclusion that a BIG, COSTLY mistake was made and is now stuck with building ownership that robbed him/her of leverage in making future practice decisions.
I’m a believer in “the more options, the better.”
I’ll say it again, real estate markets are cyclical. Because of market cycles, real estate value goes up or down. There are several predictors about market positioning relative to real estate value – but no one has a crystal ball. The bottom line is that building owners will not realize any equity until the sale of the building, and that’s only if the market indicates the building has risen in value.
On the flip side, if the market says the building has lost value due to demographic changes, neighborhood decline, functional obsolescence, etc., the building owner is in a world of hurt. No one wants to be upside down on a real estate mortgage. No one wants to own a building that is “unsellable”, in which one option is to cut his/her loss by selling at a low – just to get out from under the debt.
The other choice would be to hold onto the building, with the hope that the value will begin to appreciate – but that could take MANY years, if and only if the area gets redeveloped. All the while, making mortgage payments on a building that has seen its better days because the building owner has no leverage to make decisions that will alter the course of practice ownership.
Paying for the right to purchase, with the right conditions in place, is money well spent in the overall scheme of things.