Make the Best Choices for Your Dental Office
This article originally appeared in Catalyst Magazine.
The right space in the right location makes a big difference to the success of your dental practice. So it’s worth taking some time to consider a variety of factors that govern this crucial decision.
Is this city an attractive place to live?
You’ll spend years building a practice that can provide for you and your family and be worthy of sale upon your retirement. So the area in which you’ll locate your practice needs to support the demographics, neighborhoods, schools, and activities that align with your intended lifestyle and preferences. If your life partner plans to work, the location should also provide suitable employment opportunities. And, of course, you’ll want a sense for what it’s like to live there in all four seasons. No sense setting up shop if you can’t take the heat…or the cold.
Will this area support my economic needs?
As you take a deeper dive into prospective cities or neighborhoods for your practice, here are several characteristics that support a profitable business model:
- A stable, growing population promotes new patient acquisition as well as patient retention. Look for areas with higher home prices and low vacancy rates on rentals.
- A diverse industry landscape with low unemployment increases the likelihood that dental care will be affordable for your prospective patients. It also decreases the risk of exposure to localized economic downturns.
- Higher per capita income and per capita retail spending suggests both a capacity and a penchant for personal spending. Ideally, this personal investment reflects a focus on healthy lifestyles.
- Communities with substantial retiree populations can be a boon to the dental industry if they have the requisite means to pay for services. This group also tends to have fewer distractions that would otherwise impede their ability to show up for scheduled appointments.
- Communities with an educated population are more likely to have qualified staff to support your practice.
Are there too many dentists?
If the area already has plenty of dentists or shows signs of practice start-ups, it may prove unappealing even if it passes muster on the aforementioned points. National averages suggest a ratio of one dentist per 1,700 residents. As such, you’ll want to find an area where this ratio is higher than the national average, where the population suggests a higher need for dental services, and/or where the existing practitioners may be nearing retirement.
Is the office space available to support my professional needs?
As you start to explore office space, you should consider both your immediate needs as well as the potential for growing your practice. Your office should be accessible for patients of all physical abilities and provide convenient parking for your staff and your patients. In an ideal world, it’s close to public transportation and provides good roadside visibility. A storefront presence in a high traffic area provides a marketing boost; however, this factor becomes less important as your practice stabilizes.
Should I lease or buy my dental office?
If your target neighborhoods present options for leasing and buying property, you’ll need to “sharpen your pencil” with a competent tax professional to determine the best use of your hard-earned money. Here are a few considerations that come to the fore.
First and foremost, you need to think about the length of time you expect to occupy this space. Generally speaking, if you plan to stay less than seven years, it may make sense to lease your space and avoid all the up-front costs associated with securing a commercial loan. When building a practice, it buys the time to determine whether you’ve really found the ideal location based on your interests, goals, and knowledge of the local market. It also enables you to get a better handle on how big or small you’d like your practice to get so you do not under- or overbuild your space.
When occupying rented space, your leasehold improvements are eligible for depreciation over a 15-year life. You will deduct your rental expense and rental insurance as well as any other expenses for which your lease holds you responsible. These expenses can include property tax, maintenance, and utilities. You’ll need to read your lease agreement carefully to make sure that you identify all such obligations and factor them into your analysis. If the landlord attends to maintenance and repair, be sure to include provisions that ensure all work is conducted in a prompt and professional manner. If the building does not function properly or looks run-down, it won’t help you attract and retain patients.
A purchase decision depends on your ability to secure an attractive sales price, favorable reviews by a commercial appraiser and inspector, and reasonable terms on your financing deal. As a rule, the building and the associated capital improvements are subject to a 39-year depreciation schedule based on the date placed in service. That being said, if a building engineer performs a cost segregation study that breaks the building into IRS-sanctioned asset classes, selected components may have shorter recovery periods (i.e., 5-, 7-, or 15-year), thereby accelerating depreciation. Some of those assets may also be eligible for Section 179 bonus depreciation, as determined by your tax professional.
Expenses associated with purchased property may be deducted in the year incurred. These expenses include loan origination fees, mortgage interest, mortgage insurance, real estate taxes, and applicable building insurance (e.g., hazard, flood). Repair and maintenance expenses may also be deducted. The latter requires expert knowledge on newly revised tax regulations that provide detailed guidance on when and how outlays must be capitalized and written off over time, and when they can be treated as ordinary operating expenses.
Finally, a purchase decision should reflect a reasonable expectation that the property will appreciate during the term of ownership. As noted earlier, the 7-year tenure or greater tends to favor property ownership over and against leasing. However, you may prefer the simplicity that comes with letting someone else assume responsibility for the building and the headaches that come with it. If that’s the case, you’d want a reasonable degree of certainty that the owner will support your tenancy for as long as you hope to stay there.
What's the right answer?
There isn’t a one-size-fits-all answer to the question of which office space is best for a dental practice. It depends on your personal preferences, the market dynamics that you hope to enter, the space available for lease or purchase, and the expected term of occupancy. An informed decision considers the revenue potential, the total cost of ownership (or leasing), the tax implications, and cash flow.
If you are overwhelmed by the magnitude of the decision and the amount of information necessary to make a good one, don’t worry. There are dental practice specialists and tax advisors who can pull together all the necessary facts and figures to help you make a really good choice. They’ll stay by your side as you take possession and start building your business.
With the right space in the right location and the right advisors by your side, you can focus on providing the best dentistry that will make you and your patients proud.
Meet the Author
Partner - Real Estate
Jonathan McGuire, CPA
Aldrich CPAs + Advisors LLP
Jonathan McGuire has over eight years of experience providing strategic tax planning and compliance expertise to private middle-market clients. He has a deep focus as a real estate accountant, working with investors, developers, realtors, property managers, and other professional service providers in real estate. He works with a wide range of property types ranging from... Read more Jonathan McGuire, CPA
- Real estate
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- Qualified Opportunity Zones
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