Financing dental practice real estate

Two businesses, kept separate

A dental practice is an operating business. A building is a property investment that happens to have your practice as its tenant. They earn money differently, carry different risks, are financed on different terms and are usually sold to different buyers.

Blending them makes both harder to understand. A practice that looks highly profitable because it pays no rent to the owner-landlord is not more profitable, it is subsidised by an unpriced asset. A building that looks like a bargain because the practice can cover the payment is not necessarily a good property. Price the rent at market on both sides of the line and the two decisions become answerable.

This matters most at exit. If you sell the practice and keep the building, the practice must be able to pay a market rent to the new owner and still work. If the lease you wrote yourself is above market, you have reduced what the practice is worth; if it is below market, you have reduced what the building is worth.

Initial cash and monthly cost are different questions

Up front, the property needs a down payment, closing costs paid separately (appraisal, environmental report, survey, title, legal, lender fees) and whatever initial improvements the space needs. Those three together are the property's initial cash requirement, and it is not the same as the down payment alone.

Each year, the property costs its scheduled debt service plus its operating cash costs: property taxes, insurance, maintenance, association charges, utilities you did not previously pay as a tenant.

The real estate calculator separates these, and shows the practice loan alongside the property loan so the combined debt service is visible in one place. One caution it makes explicit: the "cash occupancy share" it reports includes loan principal, so it is not comparable to an occupancy-expense percentage in a profit and loss statement. Principal repayment is not an expense.

A payment lower than your rent does not settle it

It is the most common comparison and the least informative one, because it ignores the down payment, the cost of having that cash tied up, the property's operating costs, the exit value and the selling expenses at exit.

Buy or lease your dental office? does the comparison properly: a pre-tax, nominal-dollar discounted comparison over a horizon you choose, including the sale proceeds net of selling expenses and the loan balance remaining at exit. It reports a modeled cost advantage under your assumptions and states the sign in both directions. It does not say you should buy, because it cannot know your horizon, your tax position or your tolerance for concentration.

If you are leasing instead, the lease is the asset

For most practices the lease is worth more than the equipment. A buyer's lender will look at it closely, and a short or fragile lease can reduce what the practice sells for or stop a sale outright.

• Remaining term and renewal options, and who controls them.
• Whether the lease can be assigned to a buyer, and on what conditions.
• Rent, escalations, and what is passed through on top of base rent.
• Who owns the buildout, and what happens to it at the end of the term.
• Relocation, demolition and exclusivity clauses.
• Restoration obligations at the end, which can be expensive and are routinely forgotten.

These are questions to raise with your own lawyer about your own lease. Nothing on this site is individualised lease, title, zoning or tax advice, and it should not be treated as any of those.

Property diligence is not practice diligence

A dental office is a mechanically demanding tenant, and a building that suits a general office use may not suit this one. Environmental history matters and lenders will require a report. Beyond that: electrical capacity, plumbing, vacuum and compressed air, ventilation, ADA compliance, parking ratios and visibility, zoning for the use, roof and HVAC age, and whether the space can be reconfigured if you add operatories later.

Ask what the building needs over the next ten years and budget it. A roof, a parking lot or an HVAC system is a capital cost that arrives on the property's schedule, not yours.

When practice and property close together

Two transactions with two lenders, two sets of diligence and two sets of conditions, each of which wants to close only if the other does. Practically:

• The property timeline is usually the longer one. An appraisal and an environmental report take weeks and cannot be compressed by wanting them faster.
• The lender on the practice loan may care about the lease or the property entity, and the property lender may care about the practice's ability to pay rent. Neither gets comfortable in isolation.
• Write the interdependence into the purchase agreements. What happens if the property financing is declined and the practice financing is approved? That question should have a contractual answer before it has a practical one.
• Buying the practice first and the building later is a legitimate sequence, and often a calmer one. Secure the right to buy the property, an option or a right of first refusal in the lease, rather than doing both at once because both are available.

For total buyer cash across both, remember that the property calculator reports the property's initial cash only. The practice's own equity, transaction expenses and working capital reserve belong in the acquisition calculator.