By John Shirts, CVA, CPA, CFA, Vice President of Appraisals and Data Analytics
Some dental practice owners also own their real estate. Building ownership has many advantages, such as appreciation, rental income and equity. The question we are often asked is, does building ownership affect your dental practice’s value?
The answer? It depends.
Practice value is primarily determined by revenue generation and cash flow. Ownership of your dental office doesn’t affect your revenue.
So what about cash flow?
The cash flow that matters to your practice appraisal is what we call “adjusted cash flow.” When conducting a valuation, the appraiser will take the dentist’s current rent and adjust it to a market rate. It is assumed a hypothetical buyer will pay a market-based rent.
As a certified practice appraiser, I have seen many different philosophies for the rent that owners pay themselves. Sometimes the rent amount is very high, and other times it is non-existent.
Because the appraiser adjusts rent to a market rate, the actual rent you pay yourself for tax purposes does not affect the appraised value. After the adjustment, both the practice that owns and the one that rents are on equal footing (assuming the renter is paying a market rate).
What really sets practices apart is how well the space contributes to their success. Are there operatories lying unused? Is the location optimal for the practice’s target demographic? Does the layout support an efficient operation and a great patient experience? In other words, are you getting your bang for the buck? For example, if you own an office with 5 ops, but you only use 3 of them, you bought too much building and the adjusted cash flow will reflect that.
Practice appraisals are complicated whether you own your building or not. The advantage of choosing a Menlo Certified Valuation Analyst™ to complete your appraisal is we know dental real estate. We will make sure your practice value is as much as the market will justify. Contact us to get started.