In This Episode
The world of real estate has a lot of moving parts, especially when it comes to veterinary practices. Building upkeep is essential, but this can be difficult when you don’t control the space you practice in. This week on the Veterinary Innovation Podcast, Shawn and Ivan are joined by Daniel Eisenstadt, the CEO & Chairman at Terravet Real Estate Solutions, who shares how vet clinic owners can better leverage their existing real estate or landlord relationship to improve their facilities and help continue their legacies after they retire.
Mr. Eisenstadt recommends The Last Lion by William Manchester and Sharing Slow Ideas by Atul Gawande.
- Veterinary real estate
Shawn Wilkie: You’re listening to the veterinary Innovation podcast, you’re listening to the venue renovation podcast. My name’s Sean Wilkie and along with my awesome co-host. We interview innovators in the space every week Ivan. Why don’t you go ahead and introduce today’s guests.
Meet our guest – Daniel Eisenstadt of Terravet
Ivan Zak: Hi, this is Ivan Zak and I’m introducing Dan Eisenstadt.Dan is the CEO and the chairman of the terabit Real Estate Solutions, and he’s a former president and chairman of the community. During a partner’s the holds an MBA degree from Harvard Business School on a personal level previous jobs where corporate lawyer founder of a toy important business, which I’m very curious about and founder of an International Education Focus nonprofit organization. So I want to jump in with a sort of question that I experienced myself with the engineer medicine. I was trying to buy a clinic recently and one of the items that we were discussing your in the due diligence and negotiation process was a really stayed that belong to and fiction area and we were kind of thinking whether you know would buy the real estate with the clinic with the business. So the notion that the veterinarian or the concept that he was carrying is that that’s going to be a passive income and then and then for us we were thinking that it would be an expense so as we jump into this can you maybe help me understand that situation? What is the philosophy? Well, how do people think about when they’re selling their Clinic? Should they sell their release date with it? Should they keep it as a passive income? Is it better for seller or buyer?
Veterinary real estate
Dan Eisenstadt: Great question, well, first of all, thanks guys for having me on you know, I think there’s a range of different answers to what’s best to do for again. We’re talking about now What’s best to do for that veterinarian and in What scenario it makes the most sense for them to either hold the real estate for passive income or consider selling real estate one of the major things. We often talk to veterinarians about is what percentage of their overall assets that building represents because as much as very real estate we think is relatively stable just like overall the veterinary sector is and less prone to downturns. It still doesn’t make a lot of sense if you’re 70 years old, too. Fifty percent of your net worth in a single building, you know, there are all sorts of things. We all know that happen. And so I think a big piece of the equation here is diversification and risk tolerance and how different people want to think about it. The other thing I would say is that often there’s a question about who the future owner of that practice is going to be is that a corporate group that’s going to want to the owner of that real estate to put significant additional Capital into the real estate to build it out to expand to renovate and you know, how much does that veterinarian who’s now heading potentially towards retirement really want to be involved in that process and then, you know third, you know, this also ends up being a function of when do you want liquidity and at what value right real estate tends to particularly single tenant occupied real estate that is triple net which is what we’re talking about primarily in. Barry Real Estate, it tends to trade the value that real estate trades very closely related to the rent and the capitalization rate, which is often tied to interest rates. So if you believe that interest rates are going to go down and it’s hard to see how much more they go down, but they will a little bit then you might believe that the real estate values going to go up if you think that interest rates are going to go up it’s possible that actually the value of your real estate goes down. The other issue is what’s the term of your lease? Because the shorter term you have on your lease the less value there is in the real estate. So there is often a belief that real estate is can continue to increase in value that’s not always true. And so it may be that a veterinarian wants to sell his or her real estate sooner rather than later because they want liquidity at a certain value and there are no assurances that that value will be maintained into the future. So that’s probably a a long way with a lot of meat to dig into of answering your question.
Ivan Zak: It certainly is and if I choose to buy or sell the clinic with or without real estate, I should consult with you. So that’s a lot of variables that you can explain. But with that it may be a little more simplify a terms when the veterinarians are thinking to sell their practice. Should they be stuck on this issue? They really get a consultancy that time frame. What is their planning? Is it sort of their estate planning for long-term where they are in their life cycle would expect to do I think from what I heard there’s all tables and there’s no right or wrong answer.
Dan Eisenstadt: I think that’s right. I think there’s no right or wrong answer but I think you’re spot on that. They ought to get advice from wealth manager CPA lawyer conciliatory how their ever they want to think about it because I think the old school rule of thumb was oh you hold on to real estate. It’s good passive income and that may be the right decision to do it may also be that the right decision is to sell it for they tried to outline it also may be that someone wants to hold on to it for a few years, but then plan within a couple of years to sell it there after and then any of those scenarios, I think the owner that real estate wants to think about and have a plan and keep re-evaluating the plan because it is for most veterinarians after they sell their practice the building ends up being their largest single asset. And so it’s just responsible to just think about and not to just act as if this is going to always be Be what it is and to just be thoughtful about it and happy. Of course, we’re always happy to talk to folks about that.
Shawn Wilkie: I got a couple things there that I wanted to jump in on. So one is have you seen the other scenario so veterinarian owns practice owns building on the land and they sell the land but keep the practice is that see ya guys ever run into her about real estate right now.
Dan Eisenstadt: It’s about 50 buildings with an Your million dollars and we have a dedicated pool of capital of more than 200 million dollars to buy primarily Veterinary facilities that are real estate boarding as well. And we have a giving of three buildings to in particular where we actually bought the building and the veterinarians are relatively young and they continued on the practice and in those scenarios. It’s actually really interesting. They came to us and said look and each has a somewhat different scenario, but effectively they’re saying we could go and buy the building we could go get a mortgage and we could pull together the down payment and we could we could do this. But if we do that, we’re going to give up some of our dry powder some of the capital that we have to either live our lives and not be totally stretched or more importantly in two of the cases to be ready to buy an additional practice. Husband wife veterinarian team and they’re you know, they’re in both cases significantly, you know under the age of 50 late 30s into their 40s and their entrepreneurial and they own they’ve bought in both cases a practice that had really each of these practices. We had gone down as an older veterinarian hadn’t really taken care of it and these husband-wife teams have come in bought the practice and in both scenarios have brought us into by the real estate and in both scenarios. I have brought us into by the real estate with intention of us investing in the physical plant and then increasing rent in accordance with that investment in the real estate and what they’ve both said to us is we know of four five six small single doctor practices or maybe more within 5 miles that we would like to own some day and we’re holding to our dry powder to be able to buy those practices because we think financially will do better buying the practice and ending up with two or three practices than any up with one practice on the real estate and yet what they want is they want to real estate partner a landlord real estate partner who in the lease is going to really act like a partner and understand that as they’re improving the practice. They want to have someone investing in the building. And so that’s literally what we’ve done in both of those scenarios in one case. So it’s a building. We’ve probably put about 300,000 in other case about fifty to a hundred thousand and and there’s a pre-negotiated amount that the rent bumps as we’re doing that so it’s been a really interesting scenario. And then the final thing I’ll just say is I also have seen the situation where veterinarians to aren’t ready to sell their practice, but are really really excited about the fact that all of their friends seem to be numbers from corporate groups and where veterinarians are saying, you know, I’m not ready to sell my practice, but I really would like a liquidity event. I want to buy the you know, the second home and in those scenarios, there are a couple of you have come to us looking to sell the real estate while keeping the practice. So you do see some of that but to be fair it’s the minority of situations. We see that it’s more often the case that we see someone selling real estate when they’re selling their practice or five years ten years after they’ve sold their practice.
Shawn Wilkie: That’s so cool Dan. It’s a really unique approach and you know, I’m sure they’ll be listeners in the audience that will think to themselves. Wow, this this is an opportunity to maybe increase my quality of life today. But continue to do the same thing that I’m doing, you know a the older veterinarian that still happy to and that’s sitting on this asset that they may not be able to leverage enough dollars to start that second or third practice and all of a sudden there’s this very unique opportunity to be able to expand your business by getting out of the real estate business and focusing on the veterinary business. So very very interesting very unique approach.
Dan Eisenstadt: Yeah it I mean, we really we think that they’ll be more and more of that happening. I also think I would just emphasize that I think the issue around improving the physical plant and the buildings is also one of the drivers right? Because a lot of times we see folks that have bought really good practices, but they’ve been inadequate facilities and the cost of the renovation is really really significant and that they may at times be better off having a third party expansion and renovation of the practice because it may help them with recruiting retention just quality of medicine and revenue generation. So this issue of building and renovation is an issue as well.
Shawn Wilkie: And we get a friend that I think with love to talk to you this guy Joel Parker. He helps consult Veterinary practices and this is such an interesting leverage point for the individual practice owner to compete against corporate, you know, if you see an opportunity, but your cash-strapped and you don’t have the power Our as you say to kind of pull the trigger on it? This is a very interesting and unique approach to being able to do business expansion.
Dan Eisenstadt: I think that one of the things we’ve seen a lot is that veterinarians who are really good at practicing that are in medicine and are pretty good at running their practice are often a little bit small C conservative about how quickly they invest in their practice and their building and right. This is it’s all coming out of their pocket. And sometimes that conservatism is warranted and sometimes from a pure business point of view. They would be better off quickly adding another veterinarian quickly adding an exam room, you know quickly adding marketing function is the like because it would make their lives much better.
Ivan Zak: And by the way the medicine who make their older stakeholders their patients or clients better off if they did that sooner but because Of the Catholic is drained as in its. Dr. Smith’s pocket, they don’t and so we view ourselves a terrible is very much as a potential partner to any Veterinary operator be they in individual veterinarian or a corporate group and as a way of extending out that Capital so one of the ways of you know thinking about the real estate in that equation that I’m kind of bring it back to that Michener and that I thought that you know when you’re thinking about selling your practice, think about retaining real estate basically right now if I own it, it is not landing on my PL and then I think that my thinking was and the negotiation point where I said, okay, I’ll buy a building because basically when you’re converting that into your passive income and you are now charging the new business owner, then your p&l your ibadah basically is now less the amount of rent you’re going to be starting paying. So if you’re paying the multiple then that eats up at a multiple During your acquisition. Is that is that the right way of thinking about it?
Dan Eisenstadt: Well it is but let me sort of add something to it. So I think what I think what you’re saying Ivan Zak is that let’s just say I’ve been charging my side on the building and I own the practice and I’ve been charging myself a hundred thousand dollars in rent or I’m in charge myself zero in rent, right? However, that works if I charge the new owner of the practice. Keep the math easy, right? Then that’s $100,000 of less of earnings for the practice. Right and therefore the amount that I can sell my practice for is reduced by whatever the hundred thousand times whatever the multiple is seven eight. So it’s a seven hundred thousand eight hundred thousand dollar decrease in the value of my practice right exam. That’s how I was thinking about it. Yeah, but here’s the however, right and it’s really interesting. However in general real estate, Raids single tenant net leased real estate trades based on cap rates, which are really just inverse multiples and the multiples of the rent and it’s a little more than ran its net operating income. It’s a rent – whatever expenses or reserves are associated with it. But let’s for the moment pretend that it’s just rant because it’s pretty close there. Very limited. The should be limited reserves if it’s a real triple net lease and and $100,000 of rent now going to $200,000 right the multiple that we we on average of paid is about an 8% capitalization rate, which is a 12 and a half times multiple, right? So for that additional hundred thousand dollars in rent, right, we would pay an additional, you know, 1.25 million dollars for the real estate, but the reduction of the ours Indy baton the practice would reduce the value of the practice by seven or eight hundred thousand dollars. If in fact the idea is that eventually someone’s going to sell their real estate and their practice. They’re better off having more rent and lower purchase price of the practice and higher purchase price for the real estate because the total aggregate I gave you in my hypothetical goes up by about a half a million dollars and it’s interesting and it’s that scenario. That’s one of the things people often don’t think about the veterinarians will often implicitly understand that because what they’ll say often as well. I don’t want to sell my real estate because if I’m getting a hundred thousand dollars in rent, it would take a lot of purchase price for me to replace that cash flow, right and they’re right about that, but that’s another way of saying that if someone is a sophisticated by our real estate, they should pay a fair amount for that cash flow said differently. They should actually be paying in almost all situations more for the cash flow related to the real estate. Then the cash flow related to The practice. Now one caveat the world has gotten crazy as you guys know and what groups are paying for practices as gone, you know way up since I started a decade thing five times in six times ebitda now, they’re paying 10 11 12 and for specialty emergency hospital sometimes more. So what I just gave as a rule of thumb is just that a rule of thumb but it’s really worth someone thinking about as they’re negotiating their lease at a point that they’re selling a practice to make sure that they may really be better off taking a little bit less in the purchase price on the practice but having a little bit more on the rent because it may long long term lead to more cash flow and then ultimately a greater value on the property.
Shawn Wilkie: Well, then there’s a legacy there too. Like if they wanted to give that, you know, real estate to their children or whatever. There’s all of these different factors and that really natural.
Ivan Zak: The other thing is that that you didn’t account into that formula that you just outlined as also then the payout that they receive from the real estate and also with the invest that money right because that also they start generating passive income on it on its own depending on the size of the building all of that. So that also adds to the entire equation right?
Dan Eisenstadt: You’re absolutely the right way to think about this is whatever they would do with the payout wherever they’re going to invest the patent that of taxes that they’re paying that creates its own passive income. The other thing that I would just mention about the notion of increasing your rent before you sell your practice if you’re keeping your real estate or if you’re looking to sell that at some point the future is that it’s important to also be aware of what the market rent is because what I just said about being able to get more value for your real estate is generally true as the rent goes up. But if the rent is significantly above market then the extent to which the multiple on the rent that you get is higher is going to be limited and the country let’s just say is really 80,000 and they’re good way to determine market rent which we can talk about if you guys want and in fact, the veterans been charging a hundred thousand and he or she then decides in the process of selling the practice and keeping the real estate. They want to bump the rent on their practice to 200,000 even if the buyer the practice be they aventurine Aaron or a corporate group of Greece that 200,000 when a real estate buyer comes along to look at it. They’re going to say whoa. Whoa whoa, whoa. Wait a second. This is more than two times Market rent. And therefore I am not going to be as excited about paying twelve and a half times that rent. I may pay ten times because I’m now worried that I’m way ahead of what the market is and that in the future. If someone were to move this practice or leave I’m going to be left with a building that I’ve paid off of a very so one of the other variables to really be aware of is to understand the relationship of the rent being charged and agreed to in the lease to what the market is. So that that’s maybe more in the weeds but worth understanding. Yeah, I like it. The other thing that I thought of two is taxes, right, you know, if you’re going to have an x to the Penske going to set up corporate, you know, you’ve selling your building which is one asset a completely different asset and your practice which is another asset and to think of them as two separate assets could really help. From a tax planning perspective as well which is which is really cool. Yeah, the one other thing I would just say in taxes and there’s also something kind of interesting that it’s possible to do one of the things we do that I think is unusual for institutional real estate players and it’s because really view ourselves as part of the veterinary sector is we have on numerous occasions joint ventures and partnered with on the building in the future. So we might have to veterinarian selling and one wants to take a full liquidity event. The other one wants to keep some ownership in the building. Let’s say they want to keep 20% We’re happy to do that and we’ve done that a number of times especially with some of the bigger specialty emergency hospital buildings. What’s interesting for attacks point of view there. And again, we’re now going a little bit into the weeds is that when I as a third-party buyer by the real estate I can go and do a car. Cost segregation study to evaluate the different components of the building you send an engineering and I then can basically write up the value of the depreciable parts of the building that allows me to take depreciation on that building and to offset income and to if you will defer income the revenue I’m getting from the rent for a period of years so that I may be able to take the rent out of a hundred thousand a year, but literally report on my taxes losses because of this depreciation opportunity man veterinarians who have owned a building for a while can’t do that because they’ve already taken that depreciation. But if they reinvest with us or with anyone and keep 20% Then they can share in that same depreciation shield on the 20% reinvest. I meant the IRS requires them to actually go through a sale to a third party. So there are some really unusual situations where you can actually get your cash out. You’re going to pay a lump sum potentially of taxes on the cash unless you do a tax free Exchange more in the weeds, but on the reinvested amount there are ways to actually defer your taxes if we’re able to use depreciation that the veterinarian could
Shawn Wilkie: Thanks so much for listening to the veterinary Innovation podcast. We’re pretty social people. So you’ll find us on every social media channel. Also, you can check out our website at the veterinary innovation podcast.com. Thanks so much for listening.