182: Commercial Real Estate Ownership for Dental Practice Owners

Real estate is one of those investments that's just tried and true and despite its ups and downs, it really creates stability. Hi, I'm Emmett Scott and just like you, I've had my ups and downs in the dental industry, but times are changing. The DEO has built a map of how to succeed in one of the most challenging industries to navigate. On this show we talk to dental industry leaders, solve problems and get you the answers you need to face these challenging times and thrive. Welcome to DEO's Growth Secrets podcast for dental organizations. Now let's get started. Hello everyone and welcome to another episode of DEO Growth Secrets. I'm your fearless host, Emmett Scott and today I've got Kyle Henderson with withco here with me. And Kyle, so great to have you because as we're trying to figure out this new environment with inflation and everything else, one thing I think we all agree with is real estate staying around. You know, real estate is one of those investments that's just tried and true and despite its ups and downs, it really creates stability in any market. And in a lot of ways inflation can be helpful to real estate investments. So I'd love for you to just talk a little bit about yourself here in the beginning and then I have a few like direct questions I want to dive into. So when. Welcome to the show, Kyle.

Thank you very much, Emmett. Appreciate you having me on here. So, yep, I, so I'm the head of acquisitions over here at wythgo. I handle the deal flow, high level kind of investment underwriting. My background before I joined the company was with a public reit, so single tenant, triple net investments, a lot of dental practices, DSO kind of partnerships where we would do sale leasebacks and purchase the property. You know, know kind of turning their fixed assets on their balance sheet into working capital, letting them grow. But the difference is when you're looking at institutional landlords, they don't allow purchase options most of the time due to GAAP accounting rules. It doesn't flow the same way into their earnings. So, you know, it's the lease to own aspect what we're doing. I decided to leave that fund and come over here because it's new, it's different, it's kind of one of those rare business opportunities where it's a win win on both sides when it works out. So yeah, I appreciate you having me on again and excited to kind of talk a little bit about things.

Awesome. Well, it sounds like one, you're super knowledge about the real estate space. So I'm excited to pick your brain and learn some of this jargon, especially for those listening. But tell me a little bit about with co and how they're involved in dentistry right now. Like how is that playing out and what other industries have you guys done this in that's bringing you into the dental space?

Yep. So I'll answer the latter part of the question first. So our I guess investment thesis or the, the world that we like to kind of play in is e commerce resistant, service experience oriented industries where the real estate is essential to the revenue generation of the business. So you know, mission critical location is, is another way to kind of put it. And dental fits, you know, prime right in the middle of that. Right. So you have to have your patients come and visit your office, all that.

You're not going to be selling root canals on Amazon anytime.

Exactly right. It's one of those rare industries where you still do need that, that human face to face and you got to come to some place to go ahead and get your work done. So we love the space. I think we're not alone. Dental medical professionals, just in general I think have probably the widest net of lenders and capital that is kind of being shown to them because they're, they're great credit obviously, they're great operators. They put a lot of work and effort into what they do. And a lot of times that money, when you put it out into a dentist or a medical professional, you know, it ends up being good accretive investment. So yeah, that's kind of the investment space that we do industry wise. It's super wide from retail that, like I said, e commerce, service experience, retail, single tenant type of property. We have industrial, that kind of 10,000 to 50,000 square foot building where it's either you know, light manufacturing or a distribution warehouse. And then the last one is kind of that medical office space. Whether it's you know, a potential surgical center or if it's, you know, that office location where they go ahead and do those kind of routine procedures and kind of why we like the dentist space so much is what I just mentioned before. Right. It's, it's, they're great investment partners. You can trust them. They're obviously knowledgeable about one, their field. But two, they're generally just kind of intellectually curious individuals. So they like passive income type of ideas. Right. And just learning about different ways how to go ahead and, and better their financial situation. So yeah, that's kind of the, the service or the sectors that we, we go in. Right. I can get more in detail but don't know if we need to. But yeah, that's kind of why we like dentists. Right. The same reason why all the lenders kind of like to go ahead and, and go after them as well. They're just great, great people to go ahead and trust your money.

No, it's a good reminder of kind of how the outside world looks as from a business perspective. Right. Within dentistry and the confidence that is in this space and why, you know, many went into dentistry was because of the strength of this industry. So let's kind of talk about like your best partner situation in a dentist. I want, I want to start there and then I'm going to drill down on some very specific details. But imagine that a dentist comes up to you and says, I want to work with wythco. Right. I love what you, you all do. What is it that they are usually trying to solve and where are you, like the best solution for them?

Yep. So our, to answer the first part of the question, I would say our middle of the fairway. What we would love to see every single time is a dentist that has been operating out of their office or, you know, like I said, surgical location for the remainder, we'll just call it their practice. So that has been operating out of their practice, you know, for two, three, four years plus. And now their landlord is deciding to sell the building and, you know, they maybe don't want to go ahead and allocate capital to go ahead and purchase the building themselves right now. So that's the number one. Right. So it's a dentist that has proven their operation out of a location and now that location is being sold and we can come in, step in and just easily purchase that real estate from the landlord and sign a lease to own with a dentist. So that's our middle of the fairway. But to get.

Okay, tell me. Okay, so I got the first part. Why that benefit you? Why would the dentist come to you? Where does the dentist benefit in this? So one of the things I heard was dentist doesn't want to. They. It sounded like the dentist wants to own a piece of the building but doesn't want to put any capital in.

Yep. So I think the best reason and maybe the most value that we add are to those dentists who just like I said, so they have capital on their balance sheet. Right. Maybe they have some cash, whether it's on their balance sheet or just personally have cash to go ahead and purchase it. But, you know, maybe their dentistry is growing or maybe, you know, they want to Buy new equipment, things like that,

where they can want to open a new location, you know, down the street.

Exactly. So that's the best example is where you take that, that cash or the capital that you have and, or even if you want to go get debt financing somewhere, you go ahead and take that capital and you go and invest it in growing your actual operation instead of going to go and purchase the real estate. So a lot of times it's really a decision. A lot of small businesses and dentists alike have cash on their balance sheet. But the kind of decision is okay, do I want to use that money to go and put it towards a down payment and purchase commercial real estate? And it's obviously that's a long term investment, right. So that's even a possible retirement play. Or do I want to go ahead and take that cash and better my operation, whether it's maintain my business, better grow my business, like you just said, which is the most common one, Right. So you want to go open a new shop, it's somewhere around, you know, 600 to $700,000 for a full equipment set up to go ahead and build out your dentist office. Right. So let us take care of the, you know, one to $2 million purchase of the real estate and then you go take, you know, financing or your own capital and invest it in the equipment. And that way you don't have to choose between the, the two. You get the best of both worlds.

Do I own some of the real estate? What's my benefit for bringing with co and versus I don't know, telling my buddy like hey you should buy this building because I don't want to put my money towards that, you know, and what, and why? Yeah, how does the numbers work out that it's like in my benefit to come to Witco?

Yeah, great question. Thanks for asking that one. It's, I probably should have let off. Right. So the way that it works and the kind of beneficial play here is we go ahead and purchase the property, right. It's an, it's. No, it's not a debt obligation. It's not a lending tool. We, it's, it's a landlord tenant relationship. Right. So It'll be a 10 year lease with a purchase option in year five. And as they're paying us rent years one through five, we're taking a portion of that rent and we're applying it towards their equity credit in the building. So when, so five years down the road when it's time to execute that purchase option and buy the building from us, they've accumulated 10% equity in the building. So generally we point them to the SBA that requires a 10% down payment. We tell them, hey, look, go get approved by the SBA. The SBA approves them. We take that 10% equity credit that they have accrued over the five years, and we send it to the SBA on their behalf, basically letting them go and convert from, you know, paying rent into the abyss to now owning the property, paying in equity into a mortgage. So that's kind of how it works. It's a way to go and own the property without ever having to outlay that down payment capital and keep that kind of large sum on your, on your own person.

Oh, wow. So by taking this approach, you said in five years or 10 years.

So it's a 10 year lease and the purchase option comes year five. The reason we do a 10 year lease is just security both ways. If they decide not to execute the purchase option now, it's not where it's a dead lease and all of a sudden they're out on the, you know,

but within the five years, I'm at my 10% of equity position and I can go ahead and execute, go get an SBA loan and basically be zero percent out of pocket. So this capital protection for my growth, I can continue to do so. I can go open that other location. And in theory, if I was opening one location after another, and for some reason every time I moved in, the landlord wanted to sell, which might be saying something, but anyway. But then I could bring Witco in and every five years, in theory, I could go then to the sba, borrow against the real estate. And would you say that the, that the SBA lending against real estate is easier than trying to borrow money for a new location? In dentistry, I would say yes.

Just because of the collateral. Right?

I agree with you. I'd agree with you.

So I think, I think that is the case. I think again, kind of talking about how the medical professionals are just viewed in a different light by lenders. You know, we point the majority of our small business partners to the SBA because it's the best small business loan around, we believe. But I think that dentists are in a unique position where they have a lot more tools from various banks. It doesn't even have to be sba. You know, I came from Merrill lynch back in the beginning of my career and, you know, we had plenty of different, hey, grow your practice type of lending situations that kind of mimic the sba, right? Low rates, lower down payments, so they can get traditional financing, like, luckily for the dentistry world, so it doesn't have to be SBA is kind of what I'm saying for the dentist.

All right, how about this? So that's like, no brainer. Meaning you guys are like, we're on board. You want to do that. And so, okay, what about this? I'm a dentist now. I'm going to iterate on your solution. You tell me when I get outside of what you guys do. I'm a dentist that wants to open a new location. I found a building for sale, and I want to. I'll start off with an easier one. I want to move my current. My landlord's not selling, so I want to go find a location. I want to move my current patients across the street, whatever, not far. And I want to buy that building, and I want your guys's help with that and do the same arrangement. Would you guys do something like that?

Yep. So we would. The. I'll just throw in the potentially right hurdle for the. For the dentist acts. It's not. Everything's not right. All simple hunky dory. So.

Right.

In that. In that instance, yes, we would love to be a part of it. The two parts that I'll just mention is, one, we don't do site selection. So it would be on the dentist to find their new practice location, and then you just send it to us. What we'll do is we'll market price it. So, you know, we'll go ahead and check the market data to kind of get evaluation in house appraisal, kind of. So we're going to. They just have to send us the address. And we do all that and kind of have that conversation with them to align on the value. And the second one is if we go buy a new location, they're going to have to be the ones that go in and put in that improvement cost to get the equipment into the space.

So, okay, so all TI will be on the dentist, generally. Correct. Okay. Okay. So I need to think about that. But what I would be doing is, let's say another location where I still am, have the majority of the TI, at least in this one, in five years, I have the option of owning 10% and buying the entire thing. Right. But I'm getting this 10% credit. The whole adage of, like, renting is just flushing money down the. You know, we can argue whether that's true or not, but this is kind of the best of both worlds. Basically. It's like I'm actually getting some Level of credit for my, my rent. Now let me take it one more iteration. Let's say I wanted to open a new location. Same idea. Would it work? You know, if I'm. Maybe I, I have a model that's worked. I want to do another location. I find a building, I want you to help me build it out. Or maybe it's my 11th location or something like that. Does this work or does that get outside of, of your guys's?

Yep. So it works. That is one where the underwriting process is just, there's going to be a little bit more diligence in it. Right. So we're going to just have to be able to, you know, project and forecast kind of their, their performance out of the new location. Totally in the wheelhouse though. Right. So for good operators, we're okay with going to open up a new site with them and taking on that, that real estate liability. It's again going to be, hey, look, we're going to look at your financial statements out of, you know, if it's one location, like you mentioned, potentially your 11th, we're just going to look at your performance out of these locations, get comfortable with you as an operator, your ability to generate cash flow and if it, if it, you know, we see it hits the bars, hits the correct metrics, right, then yeah, we're okay with going and doing that. And that's part of, we love that growth strategy actually. So we like finding great operators that we can reinvest with. Right. So it's good money out the door. So you meet one individual and you can do three, four, five good investment deals with them. It's better than meeting five different individuals and doing five different. Right. Just from a capacity perspective and all that good stuff.

Right? Yeah. Build that trust, build that momentum together. For the dentist, the benefit now is by doing that conversion at that five year mark. In theory, my payments are similar, let's pretend. Is the SBA going to give me a 10 year, 20 year or 30 year amortization?

So it's, that's going to be your choice.

So what's the longest they would.

25. So 25 is the longest amortization, I think for the real estate, probably the 20 year to 25 year. Probably the best bets. There's two different types of loans, a 504 and a 7A the 504 is a fixed loan, the 7 is a variable loan. You know, so it's kind of, hey, you see the numbers, Everybody knows what's going on with interest rates right now, which honestly that's kind of. If I was talking to a business owner a year and a half ago, you know, maybe a little over a year ago, I'd always say, hey, look, if you can go in the SBA and go get approved for a loan and it doesn't break your balance sheet to go do it, go get involved and buy it right now. Don't lease to own. It's great rates right now. When I speak to them, it's like, hey, look, now you can kind of get into a situation where you have five years to let rates cool down and get an idea of, you know, come right now, I think, you know, you're going to see a loan around maybe 9, 10% on the SBA to purchase your real estate when traditionally in history it's kind of that four and a half to six percent interest rate. So if you wait that five years with our lease to own, wait for rates to cool down a little bit, it might be a better situation than going getting involved in a different type of loan right now. Especially if I were for fixed, right?

So typically when I do that conversion, I take that amortization out 25 years. Will my lease payment or my rent payment be similar to my mortgage payment now? It will.

So it will. It's. If you get a 4 and a half to 6% interest loan, it will be lower. It won't be significantly lower, but it'll be noticeably lower if you get one. Nowadays, it's really almost hard with paying the same. And it's about 20 to 30% of that monthly rent payment is what's counting towards your equity.

Okay. So, yeah, so the big thing is if I plan on holding my dental group for the next 20 years, or even if I sold that dental practice at some point, but sold it and knew that it was going to be, you know, a great operator there, I've got this ongoing investment. What's so beautiful? I know we kind of think of our lives together with our dental practices, but the reality is, what's so beautiful about this is I've got another entity investing for me, right? So, I mean, you think about a retirement account someone's putting into my quote, unquote, foreign 401k real estate. For me, everyone, it's better than a match, right? It's just direct payment towards that. The depreciation, though, of the building, the interest payments, all that's flowing down to lower my taxes as well, right? So that's what's so magical about this is, you know, if I'm really successful, then the next question is, so how do I pay less taxes? But by the way, I want my, you know, retirement account to be amazing and I want this and I want that. And traditional 4:1ks are somewhat limited. You do those, then you got to include your employees and you're doing matches. You know, it just can get expensive versus something like this. Now your business, or frankly, if you ever, you know, after you bought it, if you ever got in another dentist in there, they're helping to pay your future value of that real estate. Right. In 25 years, you own it free and clear.

On a free and clear. Like we kind of mentioned before, right. It's a lot of small business owners. It's retirement account type of situation. Right. So now you own the real estate, you retire, and now you rent it out to somebody else. And now you get these monthly payments free and clear, which, which can obviously be used to kind of supplement different retirement accounts. Like a 401k if you were at a corporation, now it's supplemented by these rent collection after you go ahead and kind of take out. But like to your point about the taxes, that's a great point and I'm happy that you touched on that. Right. So if you're leasing the rent payments, you can deduct it from your taxes. Sure. Everybody can do that for, for pet, for whatever purpose. But when you own it, like you mentioned, you have your depreciation, like you said, your interest, that you go on that. And not only that, if you want to go ahead and just if you, you mentioned before, open your 11th location, if you own those practices and now you have a huge portfolio that you plan on passing down to whoever it is that is in your family. Right. Your different heirs. Now it's the same as the stock market. If you're passing down a portfolio of stocks, there's a step up basis when it goes and passes down. So now it's repriced at the new market when it's passed down to the lower generation. And it's just kind of that similar tax deferral game that you play with keeping generational wealth. It's a great way to go ahead and do it. If you never liquidate it, it just keeps stepping up and the tax base is just goes up and down.

Yeah. So as you think about building out your, your dental group, this is a place where you can create exponential wealth for yourself. Right. So if you think, oh, I have three locations, five locations, 10 locations, what would it be like if you had three buildings, five buildings, 10 buildings as well along the way, that's really what you guys are bringing to the table. And currently, as a dentist, I could go down to the bank and I could get an SBA loan and I could borrow the money, etc. But like you said, the negative there is, then I'm going to constantly be putting out that, that 10% and then that's going to slow me down in my ability to grow elsewhere versus in this situation. I never really put any money down. I just continue to operate and then I convert. Right?

Yep, yep. And I always like to kind of iterate. Like we are just now a. We're kind of the first national platform doing the commercial lease to own. So I just, I just like to throw out to people like, hey, look, we're not the best situation or the best solution for every business. We're now just another financial tool that it fits in very well to certain people's operations and with other people, it's. It's not the best solution. Right. So some people might be listening, like, hey, like you just mentioned, I can go to the SBA and get it myself. Certain people have certain situations, so we're just a new tool. Just, you know, love to kind of talk to people about it and see if it's.

Yeah, I'd say if you're that dentist who's like, yeah, I definitely couldn't right now go to the SBA and go buy my building. But man, I love the idea of that option. Next five years, I think things get better for me, not worse. And by the way, I wouldn't mind if some of my lease went towards, you know, towards an equity position in my building up to 10%. I mean, that sounds fabulous. So you all are doing a specific webinar around this for people who want to go deep, really understand it. I see it's October 11, 2023. So this October 11, in a couple weeks, 5 o' clock Eastern. We actually have a website that you all have spun up. It's with. And anything you want to say about that? It sounds like you guys are going to go deep. And Kyle, are you going to be teaching that one?

Yes, sir. So I appreciate you mentioning it. I will be hosting it. So I'll kind of give, like you said, a little bit more in depth rundown with a little presentation in the back. Maybe last, you know, 15, 20 minutes to kind of discuss the product in a little bit more detail and then just open it up for a ton of questions. So we ran our first one just last week. It was actually great participation we had about 15 questions coming at the end, which was awesome. So, yeah, if you guys want to go ahead and learn more or ask specific questions, please hop on. I'll answer everything that comes through. And even we didn't get to touch on this group, though. But you did mention associates at practices earlier in our conversation here, even kind of mentioning a way to use the tool. Right. So an associate that's been at maybe a DSO for five years and now they're like, hey, it's time for me to go start my own practice. They haven't had the time to accumulate enough money to go ahead and purchase commercial real estate yet. Or maybe it's difficult to go get financed through a bank just because they need operating history. You know, the benefit of not being a bank and being more of a, you know, a private institution is that we can be more flexible. So, you know, we talk to the associates, we understand what's going on in their life, what they're looking to do, and we're kind of a tool for them to go ahead and get involved in. Hey, look, you're going to go open your first shop. You've been doing this for five years. You have a customer book or client book, and now you can go ahead and get into owning your first office kind of right off the jump. So again, a little bit harder to pass through underwriting. It's. It requires a little bit more diligence, but it's an option and a tool out there for the associates that are.

Now I'm going to combine this together. Let's say that I have an associate wants to go start their own thing. And I said, well, why don't I partner with you? Then I bring in with CO2, right. And then I quote, unquote, go buy it with them, so to speak, with you all. And pretty soon, in five years, you know, maybe I can get some credit. We can own that real estate together. So starting to leverage off of, of that partnership to the next level as well.

Yeah, so we, we've done situations almost similar to that too, where you basically, yourself and that associate just create a little prop code, right? Just a separate LLC where that purchase option is granted to that separate LLC and you can flow the purchase options into that, you know, like I said propco over time to go ahead. Yeah, you guys can go ahead and just own that real estate together and figure out how you guys want to split it when it comes time to do so. But yeah, that great, great point.

This is definitely a tool that you want to be thinking About I'm going to give the website against with.co deo. I love right when you click in there, own your practices, real estate and just 5 years with percent down. Great start to it. Hey, thank you so much, Kyle. Anything else that we need to talk through and how could people get a hold of you if they're like, I don't want to wait till October 11, I want to talk about this now. How could they reach out to you?

Yeah, no, I think. I think we covered the majority of everything that. Thank you very much for asking the great questions. Yeah, if you guys want to get a hold of me early, my email is super simple. It's Kyle at with so K Y L E I T H dot co Please feel free to reach out with any questions. If you want to go ahead and just reach out to me personally and give me a call, you can give me a call at 973-600-3959. Yeah, happy to field any questions and talk to anybody.

Well, I appreciate the innovation. I mean, I almost feel like you're helping us squeeze that extra juice out of all the hard work that operators do so that really nothing's left on the table and they can really maximize the outcome of their work. So appreciate the work withco is doing. Appreciate you being on today. For those who want more information on this, of course, go to this website with Co deo, sign up for the webinar or come over to our Facebook group @CEO GrowthSecrets. Ask questions there. And until next time, keep smiling. Thank you for listening to deo's Growth Secrets podcast for dental organizations. Continue the conversation on our Facebook group and meet other dental leaders. Get questions answered and the strategies you need to succeed. Plus, we have some free resources for you right there on the Facebook page. Remember, you're not alone. Let's do this together. Join DEO's Growth Secrets Group on Facebook and until next time, keep smiling.