How One Contract Could Derail Your Exit Strategy With Eric Pook

In this episode of Dental Wealth Multiplier, Jonathan Moffat is joined by lease strategy expert Eric Pook, President of Cirrus Consulting Group. Together, they dive deep into the risks, hidden traps, and wealth-building opportunities buried in dental office leases. Whether you’re leasing, expanding, or investing in your own building, it’s a must-listen for anyone who wants to protect their business, reduce overhead, and maximize long-term value.

Eric will also be speaking at this year’s Dental Wealth Mastermind. You won’t want to miss his session, or the rest of our powerhouse lineup. Reserve your seat now at dentalwealthmastermind.com

Find Jonathan at jonathanmoffat.com
Learn more about Aligned Advisors at alignedadvisors.com
Connect with Eric at cirrusconsultinggroup.com

Find Jonathan on LinkedIn: Jonathan Moffat
Find Eric on LinkedIn: Eric Pook

Subscribe for weekly episodes that help you align your practice, your money, and your life. Visit http://dentalwealthmultiplier.com/ for more!

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How One Contract Could Derail Your Exit Strategy With Eric Pook

I’ve got with me someone I’ve known for a very long time, Mr. Eric Pook. Eric and I have known each other for well over ten years. I know we originally met through, but I can’t remember. I think it was Henry Schein through the Dental Business Institute. Eric, I know you do a lot of speaking. I see you’re out there doing a lot of speaking, and we’ve referred a number of clients to you. You guys have helped a ton of our clients through lease negotiations. Eric, we haven’t given you some easy ones. Are there such things as easy ones? I suppose that’s a question we can explore, but I can think of two or three particularly challenging situations that you helped our clients navigate, and it was really great.

Eric is the President of Cirrus Consulting Group, a firm that specializes in lease negotiations and office-based strategy for dental practices across North America. Over the years, Eric and his team have worked with thousands of dentists, including some of our clients, to help them reduce their risk, protect their practices, and unlock value through real estate.

Eric Pook Of Cirrus Consulting Group

Whether working with solo owners or large DSOs, Eric is known for translating complex lease structures into strategic business decisions that can significantly impact the dentist long-term wealth and freedom. Eric, I still remember the first time I saw you guys present. It was in La Jolla at Torry Pines Country Club. I recall that you mentioned several points in your presentation. I was like, “I didn’t know this,” just stuff that’s buried into some leases and could really impact someone who wants to sell or transition. It could really have some big negative impacts. Tell us a little bit about yourself and how you got into dentistry. How’d you get into real estate lease negotiations?

It’s one of those hyper-specialized niche firms that you try to describe it to friends, families or people outside of dental and they say, “There’s a business for everything.” First of all, thanks so much, Jonathan. It’s been a privilege. I’m honored to be a part of the show. I’ve been looking forward to this for quite some time. It’s great because we’re literally from where it was, just up the road from where I used to live in La Jolla Shores and Santa Monica and whatnot. It’s great to connect and really look forward to our upcoming event.

Yeah, look forward to having you.

I’m sure many of your clients are coming to that here in September. We’re going to touch on a little bit of a high level of, of some of the content we’re going to share there, and a little bit of a deep dive and a little bit of a sneak peek for that. To answer your question, it’s unique. We’re literally screaming from the rooftops. We were both at Thrive Live in Las Vegas. As much as it was the lease was a problem ten years ago, it’s gotten even worse now.

Across the continent, you’re right, we have created the reputation over 31 years in business that when the proverbial crap hits the fan and there’s a huge lease issue, or a forced relocation, or like when we had a young doctor in his 40s, my age, pass away the same day, big 10 operatory clinic, $4 million worth of production. Your heart goes out to it because now what happens. It’s the emergency exit, and how do we sell it? Does a lease even allow us to transfer that lease? Is there any death and disability clauses?

As much as things were challenging years ago, landlords are fast and they’re the world’s oldest profession as the lord of the land. They’ve consistently made leases more landlord-friendly. Over 31 years in business, over 13,000 of these, we’ve been very proud of the fact that we’ve leveled it out. It’s not just a completely landlord-friendly lease, and the poor doctor feels like they’re up here on the teeter totter. We’re just here to now make sure that it’s a fair lease. That’s fair terms, not overpaying and rent, and has lots of great specific information to help minimize the doctor’s risks and to put a protective force field around those eventual practice sale proceeds.

About my history, it was unique. I grew up in a medical household. My mom was the office manager. My dad opened a medical GP clinic in 1974, sold it in ’94, and got out, realizing that there was a lot more to occupational and remote medicine. Interestingly, long before I was born, a group of suits walked through my dad’s clinic. His business partner at the time, also a young guy in his 20s, was running a GP medical clinic, and the building was set to be redeveloped.

Luckily, my dad’s good friend was very skilled at medical office leases, which was back in the ‘70s, and put a notice on the title that prevented the actual relocation from happening. You can’t do that anymore because landlords say, “Do not encumber the space,” and whatnot, but that was a big issue. Even my godfather down the hall, in his early 50s, went golfing, swung the divot the wrong way, and was in a lot of pain and was doing one of these when my dad was in the chair.

Long story short, there wasn’t enough cartilage. They went in for surgery and he had to sell the clinic. Ironically, the medical office lease, even prior to being born, became a significant issue to the family. I was always taught the secret to life is to be able to help people. Again, in my experience, physicians, dentists, vets, or anybody in the ancillary medical space, just, woefully, hasn’t had any real business of healthcare experience. It has been a true privilege for Cirrus to have been helping doctors become great doctors for over 31 years.

Stay chairside. Stay with your patients. Allow us to handle the landlord. Let us use the data from all the other deals we’ve done in San Diego or La Jolla or otherwise and across the continent, and to make sure the doctor’s not overpaying in rent because 54% of dentists are currently overpaying in rent. Even though they’re the best tenants on the planet, the highest build-out costs.

These days, San Diego, $450-plus per square foot. They’ve been in the same location for 26 and a half years. They’re COVID-proof. They can’t work from home, regardless of what the staff says. Default rates are less than 0.5%, yet restaurants, San Diego or otherwise, are easily over 90%. Yet why do so many doctors overpay in rent or have leases that can prevent them from selling? That’s our mission, and I appreciate you having us on to share the good word.

Why Dentists Are Sure Tenants

That actually leads me to my first question, and perhaps this is a silly question, as I do know that, at one point, this was the prevailing belief. However, are dentists still a highly desired tenant for landlords? Do landlords still want dentists in their space?

In short, yes, because it is as close to a sure thing as possible. First of all, the banks love them. As you know, they’re given 100% loans as the only occupation out there. If the banks see them as a sure thing, then by respect, the banks that are holding the mortgage of some of these strip malls also like that as well. The buildup costs are huge. Think about it. From day one, if the doctor hypothetically walks away day one, there’s $500,000 of construction, let alone gear, sitting there, which is affixed to the premises. That’s much more sought after, certainly, in my opinion, than a local coffee or sandwich shop that’s here now, potentially gone the next.

The other interesting piece, obviously, is the pandemic where you and I were back and forth doing a lot of the on-demand and DBI on-demand and those sorts of things, where, in many cases, the dentist was the only one continuing to pay their rent on time every month, even though they were shut down. Yes, we are still seeing landlords who love medical and dental-type tenants. They love the fact that they’re there for such a long-term and even after the single doctor sells, it’s such a huge complexity now to pick up and relocate a clinic.

Far more difficult than it was 5 years ago, 5 years prior to that. It does give a huge amount of certainty and continuation of that rental income, which helps to drive more income to all of your clients that we’ve worked with that own their own building, or may even have tenants themselves. It does give them as close to a sure thing as possible.

Let’s do this. I know we’re going to cover a lot. You’re obviously coming. You’re one of our guest speakers at our upcoming event, September 12th and 13th, 2024 in Newport Beach, California. Let’s break down this discussion into two parts. Let’s talk about the first part. If you’re a dentist and you either have a lease or are looking to lease, or you’re looking to get out of a lease but are still leasing the space, then let’s move on to part two. If you own your building, want to own your building, or want to just invest in these types of real estate, because you just said it yourself. As someone myself who loves investing in real estate, especially medical office space, dentists, like you said, are as close to the sure thing as you’re going to get.

Real Estate Leverage Of Dentists

The default rates are some of the lowest you have out there as far as tenants. They don’t tend to move. Let’s break it down like you on the investment side, let’s talk about that. Let’s start the leasing side. I’m sitting here reading to you and I know that we’re very highly desired by landlords because we don’t move. It’s expensive and costly for us to relocate and therefore, we don’t do it. We pay our rent on time, even during hard times like COVID. What leverage do I have as a dentist? If I’m going into a space wanting to construct a lease, how do I leverage that with a landlord in my favor?

Part of it is the delivery and who is working for the doctor. Is it the local broker that calls up the landlord’s agent and says, “I want my 2%, 4%, whatever, and by the way, I’ve got a dental tenant that’s interested in the space,” or is it the doctor doing it directly with a landlord to the owner or is there someone like us that’s only paid for by the doctor, helping to advise them and deal with that de novo new start or relocation expansion?

Part of it really is in the delivery. There’s no simple answer. Over 31 years of this, 13,000 successful office lease negotiations, and there are no two that are unique. Part of it really is an element of having all the facts to start with. What do we know about the area? What do we know about the data? What are rental rates, vacancies, comp reports, and the proprietary piece? Especially in a leasing situation with the doctor buying, building, expanding, renovating, relocating, we have a cornucopia of data in our Salesforce system.

We’re just looking at some of the deals we’ve done over the past few years. Let it be anywhere through your hometown, my old hometown, Southern California and beyond of new deals, expansions, renovations, relocations, etc., across all of North America. The first piece is how much leverage. Have we dealt with the landlord before? What were the successes we had with the landlord before? What are the vacancies? That’s our own proprietary data. Now, what do we know about the area?

Right now, in San Diego, looking at ground floor retail above 1,500 square feet, there’s currently 911 properties for 1,299 spaces currently for lease that fit that ground floor retail-type piece that many doctors are looking for. Lots of natural light, etc. From that, again, sticking to the leasing perspective here, it gives us all sorts of abilities to look at. “Eric, I don’t want to be within a five-mile radius of a restricted covenant I have with my existing employer,” or, “I want to be within fifteen minutes of La Jolla shores.” God bless San Diego. It takes you half an hour to get from one place to another, which is unlike any other city I’ve ever lived in. In addition to that, what do we know about the area, the space?

What makes a good location? What makes not-so-great locations? Is it close to a shopping plaza? What do traffic counts look like as it pertains to that area? Sometimes, this data costs us an unbelievable amount, but it gives us this really granular approach that we can help to know from 10,000 feet exactly what we’re looking at, and even down to traffic patterns right in front of the doctor’s clinic, really helping to make sure that, is this the right space?

Here’s one Logan Avenue, Euclid Plaza. Here are the vacancies, here are the availabilities. Also, what else do we know about vacancy rates for the area? Maybe, “Eric, I want to do a lot of pediatric work, or I want to know where the next big high growth area is going to be.” Maybe, “I just want to be part of a highly dense area,” or, “You know what, I’m doing a lot more implants. I really want to focus on some of the Baby Boomers.” Now, simply by zooming in and out, we can literally pull up average data traffic patterns within a couple of clicks, which show and provide the doctor with data they may never have seen or known existed before, on the other side.

You’re looking at all these demographic areas around helping the doctors make the best choice for where to put a practice or buy, even if it’s not a de novo. Let’s say I’m looking at buying this office and I’m going to assume the lease. Here’s where it’s located. You guys could plug in that address and go, “We haven’t dealt with this landlord before, but two blocks away or a street away. We do have the data on that. Is that correct?

Bang on. The doctors who lease, own, or are thinking of building, expanding, renovating, or relocating start with the facts, gather the data, and yes, we’ll provide customized information for every single registrant and attendee as part of your registration fee. I’ll be doing an individual one of these. We’ll have an opportunity to book individual time, and I’ll run through this. I’m happy to send you the PDFs for those who attend or register for the course.

Again, back to the data, what do taxes look like? What do rental rates look like? Only 36% of this building is actually leased out now. Landlord’s probably pretty motivated, considering three-quarters of the building is currently sitting vacant. What are the common area maintenance fees? Most doctors don’t realize common area maintenance is negotiable. All sorts of ways we can do it.

What about TIs? How would you use that information to go negotiate tenant improvement to help improve the space?

Great pieces. I’m looking at some specific videos that we have through the companies that actually go out and do some of this. To answer your question, there’s really 7 or 8 major lease variables and negotiables. There’s base rent, there’s annual increases, there’s common area maintenance, fixturing free rent, tenant improvement allowance, and landlord work.

TI, I am always very cautious of. Doctor, did you suggest TI, or was it the landlord or the real estate broker? If the landlord can find a way to increase the face value of rent, the face rent and the face rate of the rent, then it becomes a significant challenge. The landlord’s not in the lending business if they’re typically giving $20 or $30 per square foot.

Why? More importantly, hypothetically, if we didn’t take $20, what if we took $10? What if we took zero? I’ve seen lots of recent examples where taking less upfront we’re able to save $50,000 or $100,000 over that next 10 to 15 years. It creates a ton of components. One other quick one to share, Jonathan, is looking through the data and the financial components of it.

When we look at this, it is the financial analysis. It’s interesting, a lot of the multi-site, especially the larger ones, don’t want to invest in real estate. Everything’s a component and we work with both, obviously, but just looking at it from a cashflow perspective, really interesting tools we do with our clients as part of the lease review, rental rate analysis, which I’m happy to do for your readers as well, is we can now look at it from a proforma financial analysis.

As you and your brother and your team provide key advice to the client, we can help you see, “This is a check that this doctor’s about to sign for $1.7 million over the next 10 years.” It’s $2 a square foot as most of the time the landlords or the brokers will say. Our piece is, no, this is $1.7 million in terms of base rent, annual increases, and common area maintenance. We can now look at it both from the tenant side and the owner side. It doesn’t take much now to adjust to make sure that we might be born at night, just not last night. What are all the different variables we can adjust to add some months of free rent or reduce the annual increases and base rents and triple nets and TI costs.

Very helpful that, again, leveraging your financial planner, Jonathan, yourself, having us to give the data to say what’s the best deal to stay. What’s the best deal to expand or what’s the best deal to potentially pick up and relocate down the street? Tons of key information there to help really make sure that we’re going through.

The last piece I’ll share is we’ve got terms of some of the licensed data. We’ve got access to over 1,118 dental clinics under their SIC code when the business is registered that we can get all sorts of great background information on how long they’ve been there and how many dentists are close by. It does give a great level of data, as we’re looking at goals, locations, etc., if we’re looking here at College East or otherwise, well great, here’s the 5 or 6 clinics and here’s what we know about how long they’ve been there or when they’ve built out and beyond. All of that really helps to make sure that we’re going in with our eyes wide open and helping to leverage the leverage, due to lack of a better word.

Now, obviously, you’re showing Southern California there, but you can do this across the entire country. You have this data, these data points for all counties, states, and cities across the country, right?

Correct. Yeah, it’s not perfect data, but for the amount we spend, there is no better substitute and we can actually get it all across the continent. We’ve seen lots of doctors move from up North, down South, and yes, we can actually pull it from anywhere from Anchorage to Honolulu to Key West to Newfoundland and everything in between.

Rising Trends To Monitor

What are some of the trends you’re seeing with going right now with these leases that doctors should be aware of where you’re like, “We’re starting to see this pop up in a lot of leases? If you’re looking at negotiating either a new lease or renewing a lease, you need to look out for this?”

I’ll start with the multi-site and work down because I know a lot of your clients and readers are owning multiple different locations. What we do see is a rising awareness, but still a significant gap. If we ask a group that’s 5 or 10 or 15 or 20, who’s managing your lease portfolio now? Nine times out of ten, it’s the doctor themselves or perhaps someone on the accounting side who has an Excel spreadsheet that no one has really updated in quite some time.

The second question we ask of the group or multi-site is, ‘How many leases are coming up for renewal in the next two years?’ The third is, what’s your plan to renegotiate and help to reduce some of those overhead expenses? Unfortunately, all too often we get a, “We don’t really have a process. We wait for the landlord.” Trends are, most doctors and groups, are waiting far too long to reengage in the renewal negotiation. They fall into the old landlord trap that the landlord increases their profit just by running out the clock. “I’m busy. I’m golfing. Tory Pines. We’ve got this, we’ve got that.” They will do everything possible to delay that renewal negotiation.

Most doctors, in terms of trends, don’t realize that there is an option to renew deadline. Meaning they’ll think, “Jonathan, I’ve got seven years left on my lease.” In most cases, they don’t. They have a 2-year term left and one 5-year option. That is not the same. Most landlords will put language in that states that they must exercise that option at least 6 months or 12 months prior to that lease expiry.

If they miss that, those remaining two five-year options, null and void, and every single day, we run into a scenario where the doctor says, “I forgot to renew my lease. I didn’t send it via registered mail on USPS. Now the landlord says they want to put a for lease sign up in my window. Now I’ve lost all the leverage because I have no ability to stay in the space, and now the landlord can double my rent.”

In terms of trends, yes, we’re consistently seeing a lack of recognition of the two key critical dates. Number one is when does the lease expires? Number two is, when is that option to renew deadline? Number three is what is my strategy to renegotiate the lease? God knows overhead is increasing. The second biggest issue on the ADA recent survey is rising overhead costs. Yet, what’s your second biggest expense to overhead beyond salary is your tenancy expense or mortgage, etc.

Really now positioning that to start the lease process, renewal process two years prior to lease expiry and to the readers, don’t just pick up the phone and call the landlord and say, “I want to renegotiate.” You really want to have all the facts. Do you want to have the lease analyzed and really understand where are we at now? What’s our current status? What’s our desired status for how long we want to be practicing for? How do we help design a lease renewal negotiation treatment plan, if you will, to help make sure that we’ve got a great long-term lease aligned to the long-term goals of the clinic?

That’s one big trend of awareness. The other big one is the change. A lot of doctors that have not gone through a buy, sell or talked to some of the banks recently do not realize that the lease is one of the biggest barriers to facilitating a practice sale. You and I were both with Greg Auerbach and some of the Henry Schein dental practice transitions team, etc.

I did a webinar not too long ago with Dr. Tom Schneider, who’s a big piece and one of the big speakers for Henry Schein. He referenced four recent deals that died on the vine, all because of the lease. The landlord either wanted to keep the selling doctor personally and continually liable post-sale. The doctor said, “No way.”

Can we stop there, Eric? We saw that with our practices that we owned when we had several tenants that wanted us keep us on. That’s a scary position to be put into because you’re like, “I have nothing to do with this practice anymore.” Is that something you’ve had a lot of success negotiating, to the point where the doctor doesn’t have to personally guarantee the lease post-sale?

Yes. You’re referring to, as we do in a lot of the CE courses, and we’ll do in September, the assignment provision, that’s the section, for those following along, in your lease will dictate if you can sell your practice to whom you can sell your practice to, etc., because typically, when the buy-sell occurs, it’s either, one, going to be predicated on the buyer getting financing and it’ll be conditional on the successful assignment of the lease.

That assignment of the lease now gives the landlord, in some cases, complete control to say, “Yes, Dr. Moffat, fantastic guy, approved,” “No, I don’t like Dr. Moffat’s shirt. It’s a little out there,” or, in some cases, they can say not only no, but they can actually terminate the lease on the date that you were due to close.

Within that, a little further along in that assignment clause, is a language that basically states, which is probably in over 95% of your readers leases that states that even after you sell your clinic, you will still remain as personally and corporately liable as you are now. Meaning that the assignment will not relieve the seller of the obligations not only for rent, but the whole performance of the lease.

From a broad perspective, yes, helping is almost always possible; we’re either able to get it removed, limited, or implement a variety of different improvements, which we call step-downs. As long as that lease continues to renew, that doctor may be continually liable indefinitely as that lease continues to renew. Yes, either getting it removed or removing it upon sale, relieved of that after maybe a year, or with a limited burn-down rate or different security deposits.

However, yes, that is very negotiable, just like personal guarantees. So many doctors think, “I had a friend help me with this fifteen years ago and they said it was fine. I haven’t really looked at it since. I haven’t looked at market rent since.” We see that as a huge trend. Our only competition really is apathy. Doctors walking out of their operatory, the office manager says, “We forgot to renew our lease. We’ve got to sign this or else,” and doctors re-signing these leases without really understanding it, in some cases, not even reading it.

I think, too, an important thing to note is the timing of negotiating that. You’re the expert here, so correct me if I’m wrong, but I’m going to guess that approaching your landlord and saying, “I have a buyer for my practice. We want to close in 30 days. I don’t want to be liable for this lease post-close,” is probably not the time to have that conversation with the landlord because they’re going to go, “I’ve got you right where I want you. You want to sell, and you’ve been a long-term tenant of mine who’s never missed a lease payment. I don’t know this young other doctor here.” Am I correct in assuming that the time to negotiate all of that stuff is not 30 days prior to closing on the sale of your practice?

Yes. Of course, a lot of doctors think, “Jon, I’m just going to wind things down. I don’t want to be beholden to the lease. Maybe I just want to go month to month.” We have a doctor in Woodland Hills, close to my old office, where the doctor’s friend owned the building and was also a golfing buddy. Owned the building, everything was fine, then suddenly, without even telling them, sold the building. He left with a month-to-month lease. New landlord comes in, wants personal guarantees, inability to sell, all this stuff.

Yes, the best thing to do, first of all, is to negotiate with the devil you know, rather than the devil you don’t know, because if the landlord passes away and the property passes to the kids, they will likely fight over it, which creates a big issue. It sells, and then God knows who the next multinational landlord is going to be. The second piece is wanting to make sure that it’s done while there’s enough runway. It’s far easier to achieve a lot more wins when there are 5 or 10 years prior to the doctor selling. You’ve always been a huge advocate, Jonathan, for getting your tax planning done well in advance, getting the corporate structures done, having a solid transition plan.

You’ve got to have a plan. We talk about it all the time. A part of that plan is obviously a big piece to your point, which I think often gets overlooked for a lot of different reasons. By the way, to just add another one on top of the example, I’ve seen deals blow up, sales not being able to get completed because of the landlord. I’ve seen it happen multiple times. It does happen.

Part of it is the banks. If you’re going to sell your clinic for $2 million, the banks won’t give the buyer $2 million if there’s an insufficient term on the lease. Doctor’s got two years left.

They want at least as much term as on the load, right?

Exactly. That’s what we’re seeing more banks do, is to say, “If you want 12 years of amortization schedule for the $2 million, okay, but we want to make sure that you’re not going to have to pick up and relocate and you’re going to need an extra $400 per square foot to build that across the street.

Top Red Flags In Leasing

Before we shift gears over to the investment ownership side, are there any other red flags, anything else you want to mention on the leasing side before we jump over to the investment side?

They’re both applicable. You’re either the landlord and you’re looking at it from how do I protect my investment, especially after I sell, and who’s the incoming buyer, corporate or otherwise, and then the second is, obviously, for the existing tenants, I think the top red flags we see that doctors may not really appreciate or even know that are there, even on the very first page of the first lease, most doctors don’t realize the difference between signing it personally versus in their professional corporation.

Most doctors don’t realize that hidden in Appendix C, there’s a personal guarantee or indemnification, which has the doctor and their social security number and whatnot all there as an extra hook that the landlord has if something were to go wrong. Personal guarantees are key. The other one is the long-term value. Many of California leases and doctors don’t realize that the options to renew are personal to them.

Meaning, great, Dr. Moffat, swell guy, he has two five-year options to renew. If Dr. Moffat sells it to Eric, suddenly, now Eric doesn’t have that ability to renew. They were only good for you, which makes a big issue around the time of sale. A lot of doctors that are building or adding a 2nd or 3rd location don’t realize that every dollar they put in from a build out cost, most landlords either want the ability for you to keep everything the way it is and walk out, including whatever is affixed to the premises.

In some cases, there’s equipment that is affixed that might not be deemed a trade fixture. If a doctor just wants to move in ten years and bring all the new A-dec gear with them, that can be a big challenge.

I’ve seen it both ways. I’ve seen it on one hand where the landlord’s like, “You have to leave it exactly how you found it,” which was an empty shell, and now you’ve got to go demo this whole office. I’ve also seen it literally where the landlord’s arguing with the doctor, “I own that equipment. When you’re leaving my space, that equipment’s mine because it’s affixed to the practice.” The doctor’s like, “What are you talking about? I’m still paying the loan on this thing. What are you talking about?” The landlord’s like, “No. Read the lease. It’s my equipment.” I’ve seen it.

Yeah. We had one on the flip side of that, as you mentioned, where the doctor was required to pay roughly $25 per square foot and return it to its pre-dental condition. What does that look like? Is that plumbing, electrical? Am I drilling up the concrete? It’s nuts. Yeah, those are just some, the salability of the clinic. A lot of doctors don’t realize that they should have some a death and disability clause, just like my godfather. Heaven forbid, if something were to happen and you had to sell fast, you’re the sole breadwinner. Most doctors don’t realize that what is my clinic worth without my keys?

Having a long-term lease with options that are transferable, that’s what the buyers are buying. It’s the predictability and continuity of cashflow and that the patients hopefully come in the next day after they buy the clinic, and suddenly, if the keys don’t work, suddenly now, what are we selling? We’re selling our charts and maybe some equipment that’s depreciated. I think it’s really important to appreciate the importance of the lease and have it reviewed long before signing anything, such as a letter of intent or proposal with the landlord, something that’s binding, or definitely long before putting the practice up for sale.

Finding The Best Opportunities Off-Market

Firsthand, I’ve seen it all. You’ve seen it all. I’ve seen a lot, but a lot of the things you’re talking about, we’ve ran into with clients over the years. From an investment standpoint, obviously the event in September we’re holding is called the Wealth Mastermind. A big piece of wealth and building wealth and income and income outside of the practice is real estate. We talk a lot about a lot of our clients own real estate. I own real estate. We talk a lot about rolling real estate.

How could someone engage you guys or help use your services to say, “Help me find a really good investment property. Once I do find it, structure the leases in a way where I’m protected as the landlord so that my investment’s protected.” First of all, how do we find these great opportunities that maybe are off market or maybe haven’t hit the market? What data points you guys could, could they use or could you guys help in identifying those opportunities?

What I’m showing now is just some of these. In this case, central San Diego.

Again, Eric will be presenting at our event. Eric and I are working together and making sure there’s going to be some great nuggets. You’ll get to see firsthand and even have him run some of these customized reports specifically for you there. Eric, go ahead.

We can get all of this great data. Let it be leasing. We’re looking to purchase. Again, it doesn’t matter to us. We’re always paid directly by the doctor as their advisor. It doesn’t matter if the doctor does a de novo new start, it doesn’t matter if they acquire a clinic. It doesn’t matter if they buy the building and build it from scratch. We’re here to help find out the data to make the right decision. If we’re doing a de novo, what’s the best amount to either stay if we’re renewing, or what’s the best deal that that landlord would be enticing that doctor to build out a new space? An acquisition. What does the market look like? Same thing. If we’re looking to acquire real estate, to your point, what are the trends?

We can now see, in central San Diego, that single-tenant buildings have fallen below 1% and multi-tenant buildings have fallen below 5%. Now we’re getting some of the trends. We’re looking at rent growth. Rent growth is down 0.03% year over year. Yes, we can do this across the country, and it has grown by 13.6% over the past five years. An interesting trend.

In many cases right now, there are great opportunities. There are landlords that are struggling with large vacancies, like the example we pulled up before. That landlord may be willing to jump through hoops to secure a new tenant. If it’s a young doctor without necessarily all of the ability or the desire to purchase, it could be a great opportunity to do a lease to own or a right of first refusal or right to purchase.

There also is the scenario where the doctor who owns wants the ability to, maybe for tax reasons, keep the real estate and then lease out their clinic that they own now and they’re paying from one pocket to the other. It all starts with the data. What does it look like from the property perspective, both the leasing and the ownership data? How many buildings have sold in the area? What is the market price per square foot? What is the average sale price?

We have all sorts of these really neat key performance indicators. For those of you reading, we can look at all sorts of vacancies and all these sliding scales and historical rates over 10 years, 5 years. We can adjust for inflation an amazing amount of data to help make sure that you’ve got the information before you’re striking the big check. If your current team is not helping you with this, then it’s a great opportunity to look at a company such as ours, a dental-specific firm, to help advise you on what data to consider to make the right decisions. Jonathan, in the essence of time, there’s literally data for days and days on the purchase and sale and vacancy rates, absorptions, etc.

How would someone use that data to determine, “I know this is a great location or a great area, a great city. Now I want to go find a building or invest in a building.” How would they use that to help them actually locate the right building for them?

The last piece of that is some of the demographics, which again, I’m showing here about growth rates and kids. How much pedo work are we doing? There’s going to be another 10,000 kids from 2024 to 2029 in central San Diego specifically for this building. All the way down into market size. Yes, once we know, is this the right fit? Just like a good business plan so many doctors talk about trends, they don’t actually take the time to create a business plan.

Within 2 or 3 clicks, we can then come back to your clients and say, “Good news. Within 2 miles, it’s a $79 million market right now. Within 5 miles, it’s $322 million. In 2029, that increase is now to $89 million and $362 million within a 5-mile radius. Again, back to the data, how do we help to understand what the trends are, what the demographics look like, and then in terms of looking for spaces, back to this example I was doing before, we can easily search for and insert one of our local broker partners to say, “Here are all the spaces currently for lease, 821, close to the airport here.’

It’ll give a second, and it’ll then pull for what’s for sale. That now gives us something very different. It’s nineteen, so a huge difference in terms of what’s for sale. Is it a condo? Is it a standalone building? Obviously, that has declined dramatically, but we can now get a perspective to say, “There’s not a lot of opportunities for owning. There’s a lot more competition. Yes, in some cases ,a lot of the larger multi-sites don’t want to tie up that capital. It’s the arbitrage game. There are multiples of EBITDA. More valuable if it’s a 5 to a 6, to a 10 to a 20.

We are seeing a bit of a trend that the doctors that own now want to continue to own. In some cases, as they’re growing, they love to keep that extra flexibility because you and I can buy the real estate. Obviously, we run into scenarios where we, without a DDS, we may not be able to have the same success across the country owning. It’s a supply and demand.

We’ll point out, too, that you’ve picked Southern San Diego. Probably a pretty tough market to look at versus Missouri, Iowa, Illinois, or Ohio, or somewhere else. It’s a pretty competitive, expensive area to own real estate

With only 64 currently listed for selling. Yeah, real estate is great as long as you live long enough and it doesn’t matter to us, but the data is key. Most doctors say, “I’d love to own,” or, “I’d love to relocate and buy my own building.” Absolutely fantastic. The first thing I would say, though, is that in order to make that decision, your accountants would probably also suggest, “What’s the best deal to stay?”

Before we pick up and move, let’s see what they’re willing to just throw the kitchen sink at us to potentially stay. For those looking to own, yes, you’re bang on. The lease is still just as important. You want to have a clear lease and work with your accountant and Jonathan’s team to create one that clarifies our role in advising the doctor to create a lease that separates a real estate corporation from the practice corporation.

We defer back to the doctor’s CPAs to describe and we can help justify whatever the best tax strategy is for the doctor. Do we want it to be as high as possible? Do we want it to be as low as possible? Is it at least aligned with market rent or can it be justified in some tax and audit? The data I just showed really helps substantiate what the comparables are for rent in the area. The other piece too, to be aware of is, if you’re downloaded something from the internet, does it describe and separate some of the liabilities slips and falls. Let it be any repair or across the country, if it’s salting, sanding, etc., who’s responsible is you’re building or your practice?

It’s you, because obviously, as a doctor, you’re walking in and you’re the one shoveling in the morning, putting down salt, and dealing with these issues. Ultimately, you are now representing two different entities. The other piece that most doctors don’t realize is that the bank will need a document signed between you or your spouse and the building and the practice. That’s a key one. Don’t just download something from the internet.

The biggest trend we see for doctors that owned is, if heaven forbid, doctor you were to pass away tomorrow, is your spouse, is your executor with how quickly can your professional team turn around and sell that clinic? Could they sell the real estate separately from the practice? Unfortunately, through COVID, we saw way too many examples where the doctor may not have even created a lease or created a lease fifteen years ago and put it in a drawer and was only paying themselves $5,000 a month all in, yet market price now would’ve been closer to $9,000.

Now suddenly, we need to sell it. The doctor’s passed away. There’s no lease in place. Now we’ve got to create a lease. That’s just music to the ears of anybody representing the buyer, negotiating that deal. Now, does the doctor or their estate have to sell the building and the practice together for less versus giving the ability to just sell it separately. If you’ve got a lease that you’ve been paying yourself as a landlord-friendly lease that is designed now as if you’ve got someone else or a DSO as your tenant, that’s one of the best pieces of guidance we’ll touch on in the course and really going into some granularity.

Doctor, ask yourself, is your lease now designed for sale? If you, heaven forbid, got in a car accident on the 405, does your estate have the ability to just simply assign that lease to the future buyer and maximize those practice sale proceeds? As we saw in Vegas and in Nashville, the emergency exit is one of the biggest pieces the practice brokers are discussing because they see all too often just the erosion of value.

Episode Wrap-up And Closing Words

There’s not a plan. Unfortunately, we’ve gone through that with clients and it’s never easy, but you want to talk about making it extremely hard and painful for your surviving loved ones. Don’t have that plan in place and you’ve just created a massive amount of work for them. A lot of times, they don’t know where to start. That’s one of the key things we review frequently with our clients is the succession plan, and putting that in place, making sure we review it with them. Eric, before we wrap up here, my brain’s firing with all this great information. If you were an investor, one thing you may want to do is, “Eric, let’s look at some of these areas. I’m interested in this area and this here.”

Pull some demographic information, look at some buildings that might be good investments, and then create a profile that’s out there, attracting dentists to that space and saying, “Are you a pediatric dentist? This is an amazing spot for you to come and move your practice or come partner with us. Here’s all the demographic research that I know you’re not going to do that I have done.” I just was sitting there thinking like, from an investor standpoint, how would I partner with Cirrus on that?

I’m sitting there thinking you guys have all this amazing data, these data points. Go use those, buy a building and then go find the doctor to come in and either partner with you on the real estate and reduce your risk or come in as a tenant and create some cashflow. Again, I know in our event, we’ll have a lot more time to get into there specifically. Eric, we’ll even put together a couple case studies like, “We went and tested this out and here and here, and this was the results of that test,” so they can see firsthand how to use those data points and all the tools you guys have put together from an investment standpoint.

To that point, we get clients that hire us on an hourly basis if it’s from an advisory side, let it be landlords, tenants, or things on a flat rate, depending on scope of work. Ultimately, yes, it’s important to know that companies like yours and mine are there that are dental-specific that lecture across the country and have a whole team of people helping dentists in these exact types of situations. Everything’s a little unique, but knock on wood, dare to say, we’ve seen it all. There’s always some extra.

You never cease to amaze. You’re like, “All right, here we go. I never thought of that.”

Never heard of a landlord doing that before.

Eric, thank you so much for being on here. Again, super fun to be with you in Vegas. I think I’m going to see you here in Seattle. I always enjoy spending time with you. Thanks for coming onto the show again. You said it earlier, more than likely, this is your second largest expense in your practice. More than likely, it’s a document that you signed because you had to sign it. It doesn’t very often get looked at and look after post-sale or post-acquisition or post-lease. We even had a client reach out to us and said, “Jonathan, you know what would be really valuable if you guys actually tracked our leases for us and actually gave us a heads up when they’re coming due to when is that magic time to start negotiating those leases.”

I was like, “A hundred percent.” We are going to be adding that as a deliverable checkpoint for our teams, and that’ll be something that we definitely engage you guys in helping us create those checkpoints there to make sure that those things aren’t being missed because it’s interesting. It’s one of those things that’s an asset to the practice, but also puts a large potential liability. A lot of people don’t think of it that way. Eric, thank you so much for being on here. As I said, it’s always great to be with you. You mentioned my shirt. I picked the shirt out specifically for you. I was like, “Eric’s going to like this shirt. It’s orange.”

I did the same. I did San Diego pink.

You’re knocking the shirt. I don’t know.

No, you’ve always got the best shirts and I won’t let any cats out of the bag, but I’m excited to see some of the secret things we’ve got planned for some of the attendees.

We’ve got some awesome stuff planned for September. Eric, always fun. Always great. If people want to reach out to you, how should they do that?

I’ve got our website up, CirrusConsultingGroup.com. We got a 1-800-459-3413. Info@CirrusConsultingGroup.com. My direct line, I’ve still got my old number, (310) 699-1932. I can’t give up the 310, Southern California for life. I’m happy to support. Give me a call 24/7. You’re not alone in all of this. Doctors, if no one’s pat you on the back over the past five years alone, you’ve gone through inflation, you’ve got trade, we’ve got tariffs, we’ve got a global pandemic. If no one’s pat you on the back, it’s truly remarkable what you’ve gone through.

Continue to remember that your time is far too valuable to be dealing with landlords and figuring out investment strategies and figuring out what so many others have done before you. Leverage some dental-specific team like Jonathan’s, ourselves, etc. Yeah, we really look forward to having some great conversations and feel free to reach out. We’re happy to do a complimentary lease review rental rate analysis for any of your readers who can’t attend. I’m really looking forward to working with you and the team.

Awesome. Thanks, Eric. Thanks again. Always a pleasure. Readers, thanks for reading. We will talk to you next time.

Important Links

• Eric Pook on LinkedIn
• Cirrus Consulting Group
• Dental Wealth Mastermind
• Cirrus Consulting Group Email
• Aligned Advisors
• Jonathan Moffatt on LinkedIn
• Dental Wealth Multiplier

About Eric Pook

Eric Pook is the President of Cirrus Consulting Group, North America’s preeminent commercial real estate and office lease negotiation firm for dentists. Eric has been consulting small businesses since the late ‘90s with an emphasis on revenue creation and cost mitigation. He grew up in a medical entrepreneurial environment and continued that passion by starting or growing businesses throughout North America. Eric advises Doctors each day on how to successfully leverage the dental office lease agreement to maximize practice value while reducing risk and liability.