Part 4 of Valuation Basics – Facilities & Rent

by | Oct 12, 2020

The last major group in your P&L that you should not overlook is the facilities and rent group. It does not draw the attention like Salaries and Wages nor is it as obvious as Cogs, but generally speaking, it presents favorable valuation opportunities.

Let’s start with rent or real estate, if you own the real property.

If you own the real estate and you want to sell with your hospital…

  • Do not fall victim to focusing so much attention to your hospital deal making that you neglect the same level of deal making for your real property.
  • Consider the real estate as a separate transaction, even if a single consolidator is willing to buy both.
  • Do not accept one purchase price offer for both, without a bifurcation.
  • Some consolidators will buy the real estate directly, some will only buy hospitals, and some have partnered with REITs (Real Estate Investment Trust) to separate the acquisition of the real property.

If you own the real estate and you want to be the landlord with the consolidator as the tenant…

  • Rent amount is a variable in the hospital purchase price offer. Be mindful of purchase price and rent changes by consolidators, as the typical scenario is one will go up but the other will go down.
  • Just a few years ago, 5 year terms were the norm. Now the lease terms are 10 years and even 15 years.
  • Fixed annual renewal terms/increases are even more magnified. For instance, the difference between a 2% annual increase and 2.5% or even 3% will amount to significant dollars for the landlord.
  • Tenant and Landlord obligations on a 20 year total lease can have a profound implication throughout the life of the lease.
  • Not all triple net leases are the same. As the saying goes, the proof is in the details. Each consolidator will have different lease terms and as the landlord, they can be significant differences over the course of the long-term lease.
  • If you own the real estate and are interested in speaking with a veterinary real estate specialist, I’d like to mention an old VCA friend Peter Kilkelly at #Terravet Real Estate Solutions.

If you are a renter…

  • Consolidators will initially assume the rent stated in your P&L is fair market rent (FMR), therefore the valuation presumption will be no change or adjustment, as rent will continue as is.
  • Typically, landlords will like a corporate consolidator who will sign a long term lease.
  • All LOIs will likely have language that the proposed offer is contingent upon a long term lease signing with current terms or similar terms.

Other expenses in the facilities group that can impact your practice valuation (assuming our P&L definitions are the same)…

  • Repair and maintenance that is considered non-annual expenses can be “added-back” in your valuation. For example, HVAC (Heating, Ventilation, and Air Conditioning), roof repair, parking lot resurfacing, and the like.
  • Personal/family cell phone expenses can be added-back to your valuation.
  • Is there an immediate CAPEX need? Major hospital equipment may require inclusion in the practice valuation.

Final Thoughts

As a reminder, practice valuations are subjective as are purchase price offers. The following non-valuation factors can play an important role in your offer. Is your facility visually pleasing? Do you have a great location? Is the hospital signage easily visible? Do you have room to grow? Is the hospital situated with direct access from major road? Is there enough parking?…and so many other factors. Very few hospitals can check off all the boxes. Being proactive, aware and prepared can go a long way towards a favorable outcome.

Next week I will summarize the rest of the P&L.