The Group Dentistry Now Show: The Voice of the DSO Industry

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Welcome to The Group Dentistry Now Show: The Voice of the DSO Industry!

Unlocking Value: The Power of Sale Leasebacks in Dental Real Estate.

Don Bingham III, Co-founder & Managing Partner of CrownPoint Partners joins the show to discuss:

What a sale leaseback is and how it works
The benefits of separating real estate from practice assets during M&A transactions
Strategies for funding de novo practices through sale leasebacks
Common mistakes to avoid in real estate transactions

To learn more visit https://crownpoint.co/

You can connect with Don Bingham on Linkedin https://www.linkedin.com/in/donbinghamiii/ or email him at [email protected]

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Sale Leasebacks in Dental Real Estate DSO podcast transcript:

Welcome to the Group Dentistry Now Show, the voice of the DSO industry. Join us as we talk with industry leaders about their challenges, successes, and the future of group dentistry. With over 200 episodes and listeners in over 100 countries, we’re proud to be ranked the number one DSO podcast. For the latest DSO news, analysis, and events, and to subscribe to our DSO weekly e-newsletter, visit groupdentistrynow.com. We hope you enjoy today’s show.

Bill Neumann: Welcome, everyone, to the Group Dentistry Now show. I’m Bill Neumann. And as always, I want to thank you for joining us, whether you are watching us on YouTube or on groupdentistrynow.com or listening on Apple, Spotify, or Google. We appreciate you checking in with us. We are going to talk about all things dental real estate today and get into a deep discussion about sale leasebacks and the value of doing something like that. Whether you maybe heard of those before, have a good idea, or maybe never heard of the term sale leasebacks. We’re going to talk to Don Bingham III here. He’s the co-founder and managing partner at Crownpoint Partners. Don, thanks for being here today.

Don Bingham III: Yeah, thanks for having me. Excited to be here.

Bill Neumann: This is a great discussion. We really have not touched on this topic at all. And you’ve got a ton of expertise in this space. I’ll give everybody a little bit of a download of Don’s bio here, and then he can tell us a little bit more about himself and about Crownpoint Partners and what they’re doing in the dental space. They work with emerging groups and some of the large DSOs out there as well, as well with single location dentists that have real estate So, Don is an expert in corporate real estate strategy. He’s active in all 50 states across healthcare, retail, and the industrial sectors. Extensive experience advising and representing operators, institutions, and private equity groups in sale leasebacks tied to complex M&A transactions, as well as in the sale or restructuring of large corporate real estate portfolios. He is a 2024 CREXI Platinum Broker Award recipient, and Don has closed over 500 million, that’s a half a billion with a B, in commercial transactions across 30 states. He and his organization are known for speed, integrity, and execution, and a trusted partner to top operators, developers. and publicly traded real estate investment trust nationwide. He’s also the president of DRB Companies. They are a holding company with over 200 employees, $13.5 million in revenue. So Don, thanks for being here. And again, like I said, we have really not touched on this topic before, so something that’s really important and I think it’s going to be eye-opening for a lot of our audience. We have a lot of emerging groups that listen to us as well as docs that have maybe a single location, maybe two locations. They own the real estate in a lot of cases. And then we’ve got a lot of established DSOs as well. Some not owning the real estate and others maybe that do. So yeah, Don, a little bit more about your background and then I’d love to learn more about CrownPoint Partners.

Don Bingham III: Yeah. Well, I appreciate the intro. I think you hit on everything really well. Just to simplify it, put a T on it, I think our group is a commercial real estate brokerage. So we sell commercial real estate, but we have a specific emphasis on sale-leaseback transactions. And a lot of what we do is in the is in the dental space, in particular, we’ve probably sold around 45 dental properties this year so far will probably have sold around 100 by the end of this year. So I, I think that. We add a lot of value for anywhere from single doctors all the way up to large DSOs. So I think we’ll be able to share some really good information with you today. In terms of me, me personally, my background is in real estate. I’ve been in real estate, commercial real estate for the last eight years now and brokerage specifically and healthcare real estate investment sales for the last seven years. We left our prior firm and started Crown Point Partners in January of this year. And since then, we’ve been off to the races selling a lot of healthcare real estate.

Bill Neumann: So I think a lot of dentists, not all, but I think a lot have heard of sale e-specs before. And again, our audience is a real mix because we’ve got docs that have a single location. We might have what we would call an emerging group, which is either a single doctor or several docs that that have a small group practice where they might have three, nine, 15 locations. And then, of course, the large established DSOs. But I think an explanation of really what a sale leaseback is and how they actually work in the dental industry and why they even exist.

Don Bingham III: Yeah, absolutely. So the mechanics of a sales spec are super simple. It’s the owner of an asset, sells an asset, and leases it back from the investor who purchases the asset. So obviously, in this case, we’re talking about real estate. So it would be a dentist or a DSO that owns their property that they practice out of. sells that property and then leases it back from the investor that buys the property, usually on a long-term basis. So the dentist can continue operating out of the building and operationally nothing changes, but they’re able to get liquidity out of the real estate. So that is the mechanics of how a salee spec works. I’d say in the dental space and In general, the three primary applications of a sale e-spec, I would say, are sale e-specs that are tied to M&A transactions. So when you’re selling a practice or purchasing a practice. Sale e-specs that are geared towards funding growth. So using the proceeds or profits from a sale e-spec transaction to fund a new practice build out, for example. And then sale lease specs for reallocating equity in general. So if you have a million bucks in equity in your property and you might have an opportunity to reinvest that equity into another vehicle, whether it be acquiring a practice or buying another property or something totally unrelated, just a sale lease spec gives you the ability to pull that equity out and reallocate it somewhere that it’ll be more productive for you. But I think each of these maneuvers has the potential to significantly increase enterprise value and personal net worth. And a lot of doctors and larger companies don’t really understand that they have the ability to do this. So I think it should open some eyes. The more people that we talk to, the more business we do and the more eyes we open.

Bill Neumann: All right, let’s look at the M&A scenario from both a buyer and seller perspective. I guess in a typical situation, you would have a small group or a single practice owner that maybe owns the real estate selling to a larger entity that might not necessarily want to own the real estate or you’ve got different components. You’ve got the value of the business and the value of the real estate. So, maybe start from the buyer perspective and then we can talk about the seller perspective.

Don Bingham III: Yeah, happy to. So I think from a buyer perspective, the way that we advise clients at least is you should look at the real estate asset separately from the practice asset. And I think that to put it simply from a buyer perspective, What you want to look at is what is the value of this building or what price am I buying this building for? And what is this building worth if it were valued as a sale leaseback? The values are very different because a vacant piece of real estate, which is essentially what you’re buying when you buy a property with a practice because there’s no lease in place, is valued completely differently than a property that has a long-term triple net lease in place. So the delta in value creates an arbitrage opportunity really for a buyer. And you can use that arbitrage to offset your acquisition multiple, negate the need for acquisition financing, or sometimes completely offset the acquisition price at the practice altogether.

Bill Neumann: Wow. So it’s that, okay. So that’s an opportunity. Would you say that most Buyers that you run into are, because you kind of think about it from the seller perspective, tend to be smaller selling to a larger entity. They may not understand sale leasebacks. What about those buyers? We’ll stay on that and then I do want to move over to the sellers. But do you find that even a lot of the buyers out there aren’t savvy and don’t necessarily understand sale leaseback? What are you running into out there?

Don Bingham III: Oh, yeah. I mean, most don’t fully understand it, I’d say. I’d say the smaller, like single docs or one or two unit practices might just not know what a salee spec is at all, or not understand the value of applying it. But I would say when you get to the larger groups, larger DSOs, they know what a salee spec is, and they understand the mechanics of owning the real estate. But a lot of the times, their private equity backers don’t let them. invest in real estate because they want all of those proceeds or all of that capital going into buying more practices.

Bill Neumann: And on the seller side of things, talk a little bit about the benefits. So in most cases, the seller owns the real estate and you kind of went through a little bit of the benefit there, but you just kind of run through that again. You’re going to sell your single location or your small group to a DSO or another entity. You also own the real estate. So you would work with them and how would that work?

Don Bingham III: Yeah, yeah, totally. And we do a ton of this. So I would say what we always advise to sellers and practice brokers is separating the real estate asset from the practice asset, because they are two very unique, different assets. We suggest selling the real estate as a triple net lease, long term investment property, and then selling the practice to a DSO or another dentist. And the reason we suggest that is because of the value add that is created from that long-term lease that’s being signed. So when you, there’s a huge market out there for these triple net long-term investment properties, specifically medical investment properties, specifically dental. So you’re able to command a premium when you sell the property to an investor as this long-term triple net property. When you sell a property to the buyer of your practice, you’re usually selling it based on the appraised value. And there is not a long term triple net lease in place. So the appraised value is very different than what the actual market value is with this lease in place. And we’ve seen sellers often leave a lot of value on the table because they’ve sold the building with the practice and not taken advantage of this. So I think that the easiest way to know is just by approaching a professional like CrownPoint Partners and just asking for our opinion on what the value of the real estate is as a sale lease back and what the most effective way to structure a sale like this would be. Does that make sense? Does that answer your question?

Bill Neumann: Yeah, it sure does. So in a lot of cases, the seller owns the… I’m thinking of the different scenarios out there. Seller owns the practice, owns the real estate, and then is selling to a DSO. So in one case, they can sell the real estate and the practice. Probably the DSO looks at that as two separate things, but they’ll acquire both. But you’re saying actually in a lot of cases that the seller would be better off selling the real estate ahead of time, right? And then selling the practice to the DSO.

Don Bingham III: That’s correct. And the other really important piece there, too, is that when you sell the practice ahead of time as a sale leaseback, you have full control of the lease terms that are in place when you sell, which in commercial real estate, the lease is what values your property. So even if, let’s say a DSO doesn’t want to buy your real estate, they just want to buy the practice. So you do separate the two assets. And if you own the real estate, as part of your facility to practice, you’re going to negotiate a lease with this DSO. And these DSOs are sharp. And the leases that they negotiate are very tenant-friendly most of the time. And the more tenant-friendly the lease is, the more value you lose as a landlord. All it takes is one line of the lease to just totally decimate your real estate value. So when you do a sale lease back beforehand and sell the real estate, you control what that lease is. So you pick the rent, you pick the lease term, you pick the escalations, you pick the structure, whether it’s triple net or double net or modified gross or absolute triple net. And by doing all of that, you’re able to really control the value of the building and ensure that you get a maximum price out of it, if that makes sense.

Bill Neumann: Yep, yep, that sure does. And then from the DSO perspective, some of the DSOs in some cases are, they’re buying the real estate separate, so they’re buying the practice, they’re buying the real estate, and then in some cases they’re turning around and doing the sale lease back as well, right? Yeah, absolutely.

Don Bingham III: Yeah. Oh, absolutely. I’d say half of our business is just that. And it’s because of this arbitrage opportunity that’s usually available on these types of transactions because of the difference between appraised value and actual market value as a sales effect. On multiple occasions, we’ve seen DSOs not only fully offset the acquisition price of the practice, but make a profit by doing a sale leaseback. So for example, I’m doing a deal right now in Ohio, and the DSO, I say DSO, it’s a 20 to 25 unit operator. They’re buying a practice with the real estate right now. The real estate’s 650, practice is 550. And they’re selling the building as a sale lease back right after they purchase it. And we think we’re going to get them around a million three for the real estate as a sale lease back. So they’re not only into the deal zero, they’re going to make a profit on the transaction. And now they have a free practice as well. And we do that very often. Those opportunities are out there.

Bill Neumann: Yeah, this is interesting. The next question I have is, help me understand this because you were talking a little bit about how you’ve been able to help DSOs fund de novo practices through the sale-leaseback. So this is a really interesting strategy and I think Gosh, you know, you think of the challenges that groups have right now when it comes to funding. Huge challenge right now was I just looked at a survey that came out probably, it was right around the DICOMA meeting, so about a month ago, not even a month ago. And they talked about some of the big concerns that the DSOs have. And I think number three was really just, you know, the cost of capital. and just issues getting the funding that they need in order to grow through acquisition or de novo. So talk a little bit about leveraging the sale lease backs and how you can use that to fund de novo practices or even just expansion on existing practices.

Don Bingham III: Yeah, totally. Well, it’s really, it’s applying, I mean, this model, exactly, and utilizing the delta or arbitrage to help offset that acquisition financing. I mean, I’m sure we’ll discuss it more later, too, but I think one of the groups that we’re working with right now serves as a great example. They’re a nine-unit. small growing DSO in the Midwest. Their goal is to hit 100 units in the next three years, a very lofty goal. But our intent and goal is to fund that entire growth through saleesback financing. They’re not going to take any bank debt aside from their equipment financing that they use for every location to finance this growth. They’re only using these profits from these real estate transactions. So this group in particular, what we do, and what we do with several different companies is we identify vacant office buildings that are undervalued because they’re vacant office. We’re not in a great office market right now. And we underwrite them to determine what those buildings would be worth if they were long-term triple net dental sales specs. We specifically pick buildings where that arbitrage is big enough to fund the build out or conversion of that building to a medical office. And then we identify a buyer for the building and, and we acquire it vacant and then immediately sell it as this long term triple net property and build out the practice and move on to the next we’ve got. So this particular group, I think we have 24 buildings in our pipeline right now, all with this structure, all fully financed by the saley spec model. So small, small groups and large groups can take advantage of this.

Bill Neumann: And this, I mean, this news to me, so I didn’t realize that you could actually do that. And I’m assuming that it’s going to be news to a lot of people in the audience. So this is a strategy.

Don Bingham III: Oh, and one more, and sorry to cut you off, one more important piece on that too. One of the best parts I’d say is, through the sale lease back, there’s no personal guarantee. There’s no strict bank covenants that you would get if you were getting a loan of this amount. It’s probably $20 million, I’d say, in total proceeds that we’re using to build out these practices. No personal guarantee. Sorry, continue.

Bill Neumann: Yeah, no, that’s great to know. And like I said, I go back to the challenges that a lot of the groups have had, especially when they get to a certain point, you know, it’s easy, not easy, but relatively easy to get funding from a bank if you’re looking at one or two or maybe three locations. And then once you get beyond that, it gets to be really challenging with traditional lenders. And I think this is where a lot of emerging groups kind of get stuck and don’t know what to do. So this is a this is a great option. However, dentists tend to like to own their real estate because they look at that as a safe haven. It’s pretty predictable. So, this is a different shift in mindset for sure for a lot of the audience. Talk a little bit more about pulling out that equity and the value of the sale lease back and maybe what are the returns of holding onto the real estate versus the rate of return of pulling out that equity?

Don Bingham III: Yeah, totally. And I get this a ton. And it makes sense. The answer is very nuanced. So safe is subjective, I would preface. But I think the way that I see it is it goes back to that equity reallocation item I touched on earlier. And I think everyone can agree that they want their equity where it’s going to grow the fastest. And when you have your equity in this real estate that houses your practice, your equity growth is really quite capped. I would say your equity is probably growing at a rate of 2% to 8% a year, depending on the market that you’re in. But really not a heck of a lot more than that, because the value of your property is based on that lease that’s in place. And when you, let me put it this way. The way I see it, when you buy the real estate, you’ve made your money. That’s what you make your money on, acquiring that real estate and building out your practice. At that point, your equity growth has gone up and then starts to flatten out a little bit. So the way to take advantage of that equity growth is by obviously selling the asset at a premium value. And the way that you can, sell that asset at a premium value is by doing a salee spec like this and trading into another property which is valued different than commercial real estate. And what I mean by that is a lot of doctors look at these properties like they’re safe investments and They might be, but there are definitely risks that a lot of doctors may not take into account. And I think one of those risks is the value of the property being tied to the lease that’s in place. So you could own a building for 20 years and let that equity growth compound over that 20-year period and then sell your practice to a DSO. allow them to put a three-year termination clause in the lease, and boom, there goes all your real estate value. So it felt really safe until a mistake like that is made. And unfortunately, we see that pretty often. So I always suggest that doctors, and this is dependent on specific situations, but a lot of the time I suggest that doctors take advantage of this model, the Salie-SPEC model, to ensure that they get peak value for this investment and then reallocate that equity into somewhere else where it’s going to continue growing at a quick pace. A lot of doctors look at commercial real estate like it’s like it’s residential, kind of like when you buy a house, you can pretty much bank on it increasing in value at 2 to 5 percent a year for forever, whether it’s occupied, vacant, whatever. However, commercial real estate is different. So if you can sell and maximize the value of this investment, and then trade into something like an apartment building, which is more valued, like residential, or buy another practice even, or add ADOPS to your current practice so that you can double production. Whatever it is, it usually makes more sense to reallocate that equity to where it’s going to earn more.

Bill Neumann: Let’s talk about mistakes that you see when it comes to the real estate transaction, maybe from the DSO and the dentist perspective. I mean, you’ve seen, you’ve had quite a few deals already, would you say like 30 some odd deals this year? And what are you seeing some of the common mistakes that both sides are doing, whether it’s the doc that owns the real estate or whether it’s the DSO that’s acquiring?

Don Bingham III: Well, I think the biggest mistake, I’ll start with the sell side. The biggest mistake that I see is not consulting a commercial real estate specific professional when you’re signing this lease that the DSO is negotiating as part of the practice acquisition. Because it’s so easy for that lease to really hurt the value of your building, whether it’s agreeing to 25% below market rent, or agreeing to a three-year lease term, or agreeing to no rental escalations, or agreeing to a single unit guarantee. Or, and I can just, I could just keep on going. All it takes is one of these things to reduce the value of your building significantly. And I’m, big numbers. I mean, I, I saw a doctor not too long ago, it was in the last 12 months. He sold his practice and signed a lease that had a full termination right tied to his employment. And it made it, it not only reduced the value of the building, obviously, but it made it to where we couldn’t sell the deal. Because we couldn’t find a single buyer in the whole marketplace that was comfortable with that language in the lease. So it’s very important. It’s a big deal. And it’s things that attorneys don’t always catch. Because an attorney might not know the actual implication of, in terms of value, of not having a rental escalation, for example. or having a three-year base term instead of a 10-year base term. And these things contribute to value a lot. So I think that that’s a pretty big mistake that I see. On the buy side, I would say, not consulting, also, I mean, in the same vein, not consulting a professional regarding the real estate piece of a transaction and buying a piece of real estate that’s overvalued. I think that’s really damaging just because if you buy a piece of property with a practice that is overvalued and you don’t have the ability to make a profit or even get your money out by doing a sale lease back, then that’s all equity that’s just gone to waste. call it a million bucks, that it’s going to be hard to get back, and it’s not going to earn you a great return, so on and so forth. So I think that’s a pretty big mistake, knowing what price to buy an asset for. But I’d say those are two of the bigger ones.

Bill Neumann: What are you seeing as far as trends? You’ve done the number right and I’ve got here 65 million in dental real estate so far this year. So you’ve done a lot of transactions already. I think you said you feel like it’s going to probably be close to double that by the end of the year. What are you seeing just in the market right now? Just things that both the buyers and sellers should be aware of? Yeah, I think that

Don Bingham III: It’s a really strong market right now for healthcare real estate in general, specifically Dow. I’d say that’s one of the biggest trends that I’ve witnessed probably over the last five years or so, ever since the start of COVID. I think during the flight to quality that occurred in the commercial real estate space during that time has really just lit a flame underneath healthcare real estate. Investors have just flocked to the space, and it’s been great for everyone. I mean, it adds liquidity, increases values, increases optionality for buyers and for sellers. So that’s a big trend that I’ve seen, and I think it’s really positive for everyone, and I think it’s going to continue. It’s similar, I would almost compare it to what we saw in retail real estate 25 years ago maybe. I’d say early 2000s is when net lease retail real estate sort of caught its stride and investors, developers, operators, did all of this and experimented with sale leasebacks and figured out all of these strategies in retail. And they have over the last 25 years really perfected them. And because of that and everyone’s education of these strategies, there aren’t as many opportunities in retail anymore. Healthcare, I think, is 20 years behind. And I think we’re just now seeing healthcare real estate start to hit that stride that that retail real estate hit 20 years ago. And there’s just going to be more and more opportunity over the next call it 510 years. And then I think people are going to start catching on to these models or these strategies, and they’re probably not going to work as well. So that’s the biggest trend. I would say a lot of liquidity in the marketplace right now, a lot of interest from buyers and health care, real estate and just a lot of opportunity all around.

Bill Neumann: No, that’s great news. That’s really good news to hear. I’m sure a lot of people in the audience are going to want to reach out to you and learn more. So if you’ve got some real estate out there, if you’re solo or somebody has an emerging group and you might want to do a transaction at some point, or even if you’re not going to do that, you might have a lot of value sitting in that real estate that can be deployed to grow your group or like you said, invest in a real estate asset that would grow more quickly than commercial real estate would grow. What’s the first step that they really should take to explore whether a sale leaseback is even right for them? Because I’m sure it’s not right for everybody, but it sounds like in a lot of cases it is.

Don Bingham III: Yeah, I would say that first step is sit down and really think about what your goal is for your business and personally, just in the next five or 10 years. Because I think that once you have that goal in mind, it’s easier to reverse engineer how to get there. And then obviously set up a call with a group like mine. There are a few groups like CrownPoint out there that really focus on sale e-specs. But sit down with one of us, talk about what your goals are, and we’ll just candidly let you know if we think that this could be a good model for you in helping achieve those goals. I mean, like you said, It makes a ton of sense for a lot of people, but for some people, it just doesn’t. I mean, I was talking to a guy last week and he plans to practice for another 20 years. He lives in small town, Ohio. He owns his building, he owns his practice. He loves his life, doesn’t have any real plans to continue growing, is super happy. And in those cases, probably just doesn’t make much sense. I mean, why do a sale lease back? and become a tenant and all that, but you don’t need those proceeds to reinvest somewhere else. So sometimes it just doesn’t make sense, but a lot of the time it does, especially if you are planning any sort of M&A event in the near future or the distant future, is the plan to grow at all, or if you just have another investment you wanna make or a reason to take your equity out of your real estate.

Bill Neumann: Don, if anybody in the audience wants to find out more, what’s the best way to contact you and learn more about CrownPoint?

Don Bingham III: Yeah, our website, definitely. Crownpoint.co, super easy. Follow me on LinkedIn. I’m pretty active on there as well. But I’m super responsive. My email’s on the website. My cell phone number’s on the website as well. So reach out anytime. I’d love to get on the horn and just talk about this with anybody. Excellent.

Bill Neumann: Thanks, Don. And Don’s email, just for the people that are just listening to the audio, it’s don at crownpoint.co. And it’s crownpoint.co is the website as well. And we’ll drop your LinkedIn handle in the show notes and email address and all your contact information. So People can find out, but great, great conversation. I learned a lot today about sale leasebacks and I think there’s a great opportunity and I’m really encouraged that you feel that what you’re seeing in the market is just the opportunity for commercial real estate, specifically health care, commercial real estate. for the foreseeable future. So that’s great. I think a lot of people are going to be very excited to talk to you about this. So thanks Don, and thank you everybody for watching us or listening today. Until next time, this is the Group Dentistry Now show.

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