Orthotown March 2023 - 48

OFFICE VISIT
of $5,000/month, which comes to
about $1.4 million in rent paid. Zero
equity to show other than what my
practice is worth. Before the DSO/OSO
movement, there was little chance
of creating generational wealth from
selling practices. Even today, the value
of practices is often calculated around
80%-100% of gross receipts averaged
over five years.
As a frame of reference with
wealth generation, I purchased my
3,300-square-foot space for $900 a
square foot six years ago. As part of
my SBA loan requirements of getting a
reappraisal every few years, I recently
had my building value increase to
$1,840 a square foot. I have effectively
doubled my equity in this purchase.
My point in sharing these numbers
is to offer another option to renting. I
didn't enter into this purchase because
I expected or thought my value would
double in six years; I bought because I
was over having someone dictate my
lease terms and the real possibility of
losing my lease in the future. There's
also the added benefit that when
building out the tenant improvements,
a return on a higher level of finish will
help when appraised.
Purchasing office space is a personal
choice and not always possible.
Restrictions in every town on medical/
dental zoning can limit availability.
There is also the cost factor! Many
young orthodontists are strapped with
student loans that prevent this as a
practical option.
What are some tax benefits
you've found that might interest
other potential buyers?
I purchased three of the five commercial
spaces available in my building.
My accountant has set up a monthly
rent of $21,000 the corporation gets to
write off each month. While I am not
an accountant, it's been explained to
me that the IRS allows me to depreciate
my rental property each year.
For commercial properties, I get to
divide the purchase price of the building
by 39, which allows me to write
off every year against my income as a
way of compensating for the building
getting older.
There are other tax benefits, such
as property taxes, operating expenses
and, of course, mortgage interest.
Because I own the building, I can set
up " reasonable " lease terms that favor
my tax base. (Please consult your
accountant for more details.)
What are a few things docs
should look for in a potentially
shady lease?
Read your lease! My San Jose office
building was recently sold to a large
commercial private equity firm for
$13 million. Unknown to any of the
tenants, there was a clause in the lease
that had been never been realized
that allowed the owners to charge for
common-area maintenance.
Because the previous LLP owners
had never acted on this clause in the
lease, the property purchase price was
justified through this line item in the
lease. The day the escrow closed, all
the tenants received a change-inownership
letter stating the new
owners would be adding $610 a month
for this maintenance. You can imagine
how this went down. Threats and
mistrust are not good ways to start a
relationship.
I would also make sure to have at
least 10 years left in a signed lease
MARCH 2023 | 48 | ORTHOTOWN.COM
with the option for one or two more
renewals. If you are considering selling
your office to a single doctor or a
large group like DSO/OSO, having an
extended lease makes your practice
more desirable. (With all this said,
ownership takes many of these rental
pain points away.)
You've navigated SBA loans.
What should docs know?
I'm not sure I'm a loan expert, but I
do have some thoughts. First, have
a trusted person in your office or
an accountant who can help with
all the paperwork and correspondence.
Nicole was that person for me:
She researched private banks that
would quarterback the negotiations
and lengthy paperwork. We ended
up switching our banking to City
National Bank, which took over the
SBA loan process.
For those who are not familiar with
SBA loans, it's a government-backed
long-term loan program that is
designed for small businesses like
orthodontic offices. The key benefits
are funding up to $5 million, terms
up to 25 years, and fully amortized
(no balloon payments). This program
was designed to allow for owner-user
commercial real estate purchases and
for-profit businesses.
You're big into investing now.
What are you involved in and
where do you see it going? How
can other docs enter this world?
Practicing and living in the center
of Silicon Valley, I routinely have
patients and friends who are part of
the startup world. A wide variety of
technology is constantly created and
funded every day in this area.
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Orthotown March 2023

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