What if my lease only has a few years left, can I still sell my dental practice?
Dealing with a short-term lease in the sale of a dental practice requires some extra effort, but it is not an insurmountable issue. The target for banks who are funding a loan for the buyer of the practice is at least 5 years of term on the lease, with many dental lenders requiring 10 years. This requirement from these lenders can be met by the current term (firm term) on the lease or a combination of the current term plus any lease options. The lender just wants to know that the buying dentist can remain in the same location during the term of the loan. They know that a displaced dentist may suffer a financial setback and, consequently, not be able to make his or her loan payments.
Customarily, the lease assignment is handled by the attorney of the dentist buying the dental practice. This generally occurs simultaneous with the drafting of the purchase and sale agreement. The selling dentist will notify the landlord of the proposed sale and introduce the buyer and the buyer’s attorney to the landlord. The buyer’s attorney will then work with the landlord to provide qualifying information about the buyer and coordinate the drafting of the assignment and as often is required, the personal guaranty. When a lease has less than 5 years of current term, the buyer’s attorney will also negotiate a lease extension as part of the assignment so that when the lease assignment is finalized, the buyer will not only take over the lease but will have enough extended lease term to satisfy the bank. This is why dental lenders will always want to review both the final purchase contract and final lease documents prior to drafting loan documents and funding the loan.
Should a dental broker be involved in this process? The short answer is sometimes. While dental attorneys are good at memorializing agreements, they may not be as knowledgeable at negotiating market terms of the lease. What if the buying dentist could get concessions such as free rent or tenant improvements as part of the lease extension, or even a lower rate? A dental broker who negotiates leases and is in touch with market conditions would know how to negotiate the best terms of the lease. But, introducing a broker to the process means that someone is going to have to pay a brokerage fee, and landlords generally don’t like to pay brokerage fees when they already have a tenant. The reality is that lease assignments are generally just headaches for landlords because they are basically swapping one tenant for another and are likely not benefitting much financially. Because of this, lease assignments can take longer than expected as landlords often put them on the “back burner”. On top of that, if a broker is introduced into the mix, the landlord may become even more reluctant to work through the process.
To sum up, yes you can still sell your dental practice even with just a few months left on the lease. If you are going to sell your practice, I would not recommend extending your lease prior to finding a buyer. Doing so means you could be liable for the lease payments over the entire new term. A better strategy is to find a dental buyer first and then have the attorneys negotiate an extension for the buyer. This will most likely result in you, the seller, being removed as a guarantor of the lease in the shortest amount of time.