When buying, financing or renting a facility, there are many options available and many challenges for a dentist to overcome. Understanding the financing tools available is a critical starting point.
Of course, your first step is to decide where you want to practice, which involves extensive demographic research and thorough evaluation.
One of the biggest issues you may face is financing your office or facility. There are two basic ways it can be done: purchase or lease. Both can involve a mix of alternatives.
The purchase of real estate allows you to build equity in your facility, but usually requires a significant amount of investment upfront. A real-estate purchase can be accomplished in a number of ways:
- The price can be paid in cash.
- The money can be borrowed from one of several sources such as a bank, mortgage company or the Small Business Administration.
- The money can be borrowed from private sources such as relatives.
- The seller may carry back all or some of the sales price in the form of a contract or some other means depending on local customs and laws in your state governing real-estate transactions.
The lease of a facility or office space will generally require less of a cash investment (possibly one or two months' rent in advance) and consists of a contract with monthly payments. These lease or rent payments are made over a term that may run for several years with options to renew the lease. The downfall is you will not be building equity in the facility, so each monthly payment will become an expense of doing business.
Additionally, you may not be able to cancel your building lease contract if your practice cannot generate sufficient cash flow to pay its obligations. However, for a dentist starting a new practice, leasing may make more sense because it keeps cash out-flow low in the first few years of business.
Rates are quoted on a per square foot basis, e.g., $12 per square foot, net. There may also be common area maintenance (CAM) charges, such as parking lot maintenance, common-use restrooms, etc., that may or may not be in the quoted lease/rental rate. The lease rate of $12 per square foot is an annualized rate, so if the rental area is 1,000 square feet, the annual rental would be $12,000 or $1,000 per month.
In some cases, you may look to a bank or someone else to finance leasehold improvements. In that case, the lender may want to take an assignment of the lease. In the case of equipment loans or leases, the lender/lessor may ask the owner/lessor of the real estate for a landlord or mortgagee’s waiver. This allows the lendor/lessor to enter the premises to repossess the equipment in the event the borrower/lessee does not make the scheduled payments.