expanding an existing practice versus constructing a new building is that it does not necessarily have to disrupt your patient base — patients will continue to find you at the same location where you have always been. However, you will need to carefully plan for the down time your practice may experience while under remodel. This can ultimately be a costly undertaking if your project is not properly managed and runs beyond schedule.
Investment Benefits for Ground-Up Projects
While designing and building a practice from the ground up can require a larger financing package, you can realize a significant investment advantage with this approach — particularly if you purchase the commercial real estate that underlies your practice.
A key benefit of remodeling or expanding an existing practice versus constructing a new building is that it does not necessarily have to disrupt your patient base — patients will continue to find you at the same location where you have always been.
Five Good Reasons For Building Your Dental Practice:
Here are five good reasons for building your dental practice from the ground up:
1. Favorable trends in commercial property values. Commercial property values have been rising over the past few years, but may now be stabilized or heading back downward, according to the Wall Street Journal.1 This trend can potentially give you more office space for your investment.
2. Preferential tax treatment. Just as with your home mortgage, you can deduct 100 percent of commercial mortgage interest right off the top of your business income. You can also write off depreciation expenses for the office building over a 39-year period using straight line depreciation (that is, depreciated by equal amounts each year over the property’s useful life). The mortgage deduction and building depreciation write-off reduce your taxable income, increasing your profit for the year.
3. Long-term appreciation. History has shown that real estate appreciates over time, and this will likely continue. When you own both your practice and underlying commercial real estate, you’re making two investments in one — in the value of your practice, and in the long-term appreciation of your property. Together they provide more options for generating profit and cash flow as you build your practice and approach retirement.
4. Retirement funding. When it comes time to retire, some doctors choose to sell both the practice and commercial real estate, maximizing profits and investing net cash to fund their retirement. Others sell the practice only and retain the real estate, leasing the property back to the new practice owner to generate ongoing monthly income. Whichever model you choose, with ownership of both the practice and commercial real estate you have more options for meeting your financial needs.
5. Favorable rates. While interest rates may change at any time, the Federal Reserve has continued to keep its benchmark interest rate close to zero, allowing loan rates to remain at historic lows for both commercial and residential real estate. Today it’s not uncommon for monthly payments on a 25-year commercial mortgage to be the same or lower than rental payments for a similar space. Plus, only a 10 percent down payment is required when you borrow money under the SBA loan program.
Factor Growth into Your Decision
Whichever option you choose, be sure to factor growth into your office design. Over the years, your patient base, office functions and dental technology will evolve and grow. Plan to accommodate this long-term growth with a design plan and budget that factor in additional staff and equipment — even an additional operatory or two — that your practice can grow into. Remember that you will make payments on your financing package for 10 or more years, and building growth into your design will help maximize your investment.
To help determine how much growth to build into your project, conduct market research on projected growth for your area over the next decade. Look at summaries of the most recent census data as well as professionally compiled market data reports. Some market data reports are available online, or even through your practice lender.
Can I Afford a Practice Expansion or Remodel?
The best way to determine whether your project is affordable is to develop a cost projection covering all purchases and improvements and broken down into monthly payments. An initial cost projection is designed to give you a general idea of where your funds will be spent, whether you can truly afford your project as planned, and where you might make modifications to your plan to make it more realistic for your budget if necessary. Once you have a cost projection that is feasible for your budget, you can finalize your design plans.
Figure 2.3 is a simplified cost projection for building a four-operatory, 2,000 square foot expansion. (Your project may be larger or smaller, and actual costs will vary accordingly.)
FIGURE 2.3: SAMPLE COST PROJECTION — PRACTICE EXPANSION (LEASEHOLD)
An initial cost projection is designed to give you a general idea of where your funds will be spent, whether you can truly afford your project as planned, and where you might make modifications to your plan to make it more realistic for your budget if necessary.
To be of maximum value to you and your lender, eventually you will need to generate a more detailed projection that includes project estimates from your architect, designer and contractor, as well as equipment costs, supply allowance, working capital, moving expenses, signage costs, telephone and computer expenses, and furnishings. Have your accountant review all costs before submitting your projections to your lender for a final loan commitment.
Now that you have an idea of what your project will cost per month, how do you determine whether your practice can absorb this amount of debt? For this you need to generate a debt service calculation, outlined in Figure 2.4:
FIGURE 2.4: SAMPLE DEBT SERVICE CALCULATION
If your debt service ratio is 1.25:1.00 or higher, your practice should be able to generate adequate cash flow to cover your new practice debt. However, be sure to speak with your financial advisor to determine whether your particular circumstances allow you to safely take on the amount of debt your project would require.
Understand Your Financing Options
Before approaching your lender for project financing, understand your financing options so you can make an informed decision about the type of package that will work best for you.
Loan options are based on the type of project you pursue. When it comes to dental practices, whether you are purchasing, starting, expanding or remodeling a practice, your loan is considered “practice financing” and can be structured as either a conventional practice loan, or a Small Business Administration (SBA) loan.
Conventional Financing
Most conventional practice loans are financed over five to 10 years. They can range from variable and fixed-rate loan packages with down payment requirements up to 30 percent and standard repayment terms, to personalized fixed-rate loans with up to 100 percent financing and flexible terms. Flexibility in the repayment schedule allows you to start with lower payments as you are getting your practice off the ground, and increase the size of payments as your business grows.
Small Business Administration (SBA) Loans
SBA loans are guaranteed in part by the government and designed to help new businesses get started. Their many benefits include a lower down payment (as low as 10 percent), longer repayment terms (20-25 years), and competitive fixed and variable rates. The key to an expedited loan process is to work with a Preferred SBA Lender who has been given the authority to make