Eric Pook from Cirrus Consulting Group joins Dr. Jordan Soll to discuss the complexities of dental office lease agreements and how lease agreements are often overlooked, despite being a significant financial commitment and impacting practice value. He advises dentists at all career stages to seek professional help to protect their assets and ensure smooth transitions.
Read the audio transcript below:
Dr. Jordan Soll (JS): Hi everyone. Welcome to Brush Up on Business presented by Oral Health Group, a special Brush Up podcast focused on the business of dentistry. I’m Dr Jordan Soll, Chairman of Oral Health’s Editorial Board, and today I’m joined with, actually, my friend Eric Pook. Eric is the owner of Cirrus Consulting Group, North America’s preeminent commercial real estate and office lease negotiation firm for dentists. Cirrus has helped over 13,000 doctors over the past 30 years, Eric has saved dentists over $400 million in his career by advising them on how to successfully leverage the dental office lease agreement to maximize practice value. Welcome, Eric. Before we jump in, I must say a little bit of not, certainly not conflict of interest. But full disclosure, I am a former client of Cirrus, and I’m so much looking forward to all the knowledge that Eric will share with you, because it was extremely helpful to me personally. So, Eric, let’s start off, Cirrus Consulting Group. Who are they and how do they help the dental community?
Eric Pook (EP): Well, thanks, Dr. Soll. It’s…
JS: Eric. Please call me Jordan.
EP: Jordan. Thank you. It’s a privilege to be here. Thank you so much for having us. It’s an interesting time in dental. We were just talking a little bit about that in the green room. It’s more difficult today than it was five years ago, than it was five years prior to that, than it was five years prior to that. With that being said, 30 years ago, a group of doctors partnered with some real estate experts and founded Cirrus back in Alberta, and since then, it continues to fit this little niche of a business you never think would exist outside of dentistry. But it still is a challenge today that doctors are signing these lease agreements, which have an immense impact, not only to eventual practice sale value, but to risk and liability and a massive financial commitment. So, Cirrus, to answer your question, again, was founded with the mission to help keep doctors being doctors.
EP: You’re taught to be fantastic clinicians, yet more and more often, what’s the next shoe to drop? As you were saying, right? What’s the next challenge on the business side, that makes it more and more difficult to be chair side. So Cirrus has that mission as it pertains to the landlord, to help make sure that doctors aren’t spending the 10, 20, 30, 40, 50 hours dealing with their different landlords or brokers and all the different components and help to make sure that someone’s in their corner, advising them every step of the way as it pertains to the importance of the lease. Let it be doctors buying or building their first clinics mid-career. Doctors expanding, renovating, relocating, or the biggest one now is, as we’ve done for 30 years, is doctors literally in between patients signing their lease renewal contracts, which represent millions of dollars and not really, truly understanding what the landlords added in or snuck in, et cetera, and then paying these exorbitant rental rate increases. So, Cirrus now, again, we’ve helped doctors through the entire spectrum, all the way through eventual practice sale and transitions, and we’re a really neat firm, right, with dozens and dozens of employees that do nothing but help doctors in that lease negotiation process. So, we’ve got all the proprietary data, yes, of over 13,000 leases negotiated, 20,000 dental leases on file. So, the proprietary data, and then we license all this great commercial real estate data. Let it be rental rates, vacancies, comp reports, and even demographic information, because it’s tough to be a dentist these days, and we wanted to provide that, you know, key skill to help support the doctor as their advisor. We’re only paid directly by the dentist. We’re not being paid for by the landlord, etc. And, you know, doctors now realize, or at least the 13,000 have, how important it is to have that expert in their corner.
JS: Okay, all right, let’s start at Ground Zero. What is a lease agreement?
EP: It’s funny, we talk about this all the time, and our CE course was like the one last night. We sort of do a raise of, you know, go around the room and what is it? And you hear the whole gambit, right? It’s a contract. It’s a, you’ll see some of the more tenured doctors or specialists, it’s a pain in the butt, right? And have some pretty colorful commentary, because typically, they’ve had the book thrown at them, or they’ve been forced to relocate, or other components. So, the way I look at is, look, it’s a check. It is the largest check that you will sign to any personal or professional entity in your entire life. The average doctors in the same location for 26 and a half years, right? And it is also their second biggest expense to overhead, which is right beyond staff, is the rent typically, and yet it is the least likely to be negotiated or negotiated properly. So ultimately, the lease is, in my opinion, the biggest ticking time bomb that most doctors don’t know what’s in it, and unfortunately, most just focus on the first half of the first page. Base rent, annual increases, maybe the term. Yet, there’s 86 and a half other pages that the savvy landlords have added in there that can have hundreds of 1000s of dollars of impact.
JS: All right, so tell me what is wrong with the lease negotiation process for a dentist today.
EP: We’ve chatted a lot about this over the years, and it’s in my view…Of course, I’m biased, but it’s ripe for disruption. The whole perspective here is you need someone in your corner that does this and only this but can do it in a way to help ensure that the doctor’s maximizing their leverage. So, here’s what’s happening today. You and your clinic. You are the best tenant on the planet. Sometimes landlords, right, will push back, and ah, no, no, no, and, oh, I’ve got six other dentists that will take your space tomorrow. You’ve got the highest buildout costs, right? 260, we’ve got clients now in the Bay Area, $450 per square foot to build in the dental clinic today, astoundingly high prices. You’ve got the lowest default rates, right? In many cases, less than 0.5% default that the doctor defaults on that lease versus a restaurant that’s well over 90% right, yet you’re COVID proof. You can’t work from home regardless of what your staff says. And more importantly, again, that 26 and a half years in the same location and always bringing in high quality foot traffic. So overall, what’s broken is all too often doctors try to do, in many cases, just too much themselves. They graduate dental school with maybe a course, maybe just a few hours, maybe a pizza afternoon on the business side of dentistry. They then sign employment contracts. They then become employers, right, without any real business training, and then, more importantly, suddenly, they drive around their local strip mall, they see the number on the local sign, they call the landlord’s broker. Oh, hey, I don’t have any help. So, you can double end it. They’ll even the doctor will share with that broker. And the broker typically says, are you sure you really need someone to sort of help you out? They don’t normally say that. But ultimately, what’s broken is these doctors are signing these, you know, binding letters of intent, in some cases, on the trunk of a car, and without knowing it, they’ve now cascaded their entire next 10, if not 20, years of ever-increasing cost and overhead. Let it be base rent and annual increases, and even after the 10-year term, it continues to go up. So that’s a 20, you know, 20-year cost, in many cases, for some doctors, it’s $1.52 million for it. So, what’s broken is, you know, you’ve got those that are being paid for by the landlord and getting, you know, significant commissions as such. And that’s fine, that’s how that world works. But the doctor never knows how much of their rent is going towards that broker commission, right? And then by that point, if it’s locked in, landlords like to deal with one person. So now you’ve got one person, broker or other at the beginning, and then you’ve got the lawyer at the end. But by that point, if it’s already locked in, very difficult to make those changes by the time the lawyer gets it. And if the lawyer hasn’t done many dental deals, it becomes very myopic to say, well, hey, yeah, this looks about right, but does it have the dental specific language? So, we really, you know, again, we fit that sweet spot in between where we’re supporting the doctor and helping to make sure that they’re educated on how important it is, what the leverage is, and then leveraging the other deals we’ve done with that landlord in the past.
JS: All right, so why is it causing so many issues for dentists today. Give me some examples. Make the hair of the back of my neck stand up.
EP: Yeah, and I might ask the question back, because you’ve had an interesting history in terms of how important it is to protect the asset in preparation for sale. So, I might ask that question back in a second, but ultimately, it’s a lack of awareness. You know, I’m here today, and I appreciate certainly Oral Health magazine for this great event, because we are literally screaming from the rooftops so doctors know what their first of all, what’s within their lease agreement and why they shouldn’t sign anything without someone giving that a review to at least let them know what the issues are. The biggest ones most doctors don’t realize, that when they sign that personal guarantee when they open their clinic in 1984, is still there today. Secondarily, even more don’t realize that in probably 90% of the listeners’ leases today, they will remain as personally and continually liable as they are today, even after they’ve sold the clinic, retired, right? And, you know, driving down Highway 101, in California and full retirement, still being on the hook as much as they are today.
JS: Wow.
EP: Other components are inability to sell the clinic, right? Some doctors have sections in their lease that basically prevents them from assigning the lease from seller to buyer, meaning the landlord can either say yes, I will allow you to sell it to, right, Dr. Smith. No, Dr. Smith, I don’t think is a good fit for us. Or, Jordan, you know what? Not only am I going to say no to Dr. Smith, I’m actually going to terminate your lease on the day that you were due to close, and I’m going to engage directly with Dr. Smith and structure a new lease with them. Now, what impact would that have on your clinic?
JS: Yeah, obviously that just obviously wipes away all value of your clinic, right?
EP: And the, you know, again, it’s the old question, what’s the value of your clinic without the keys?
JS: It’s everything, right? Everything, all right. So let me ask you, what are the implications for early-stage dentists, buying, building a practice. Mid-career dentist, expanding, renovating and relocating the practice, and late career dentists preparing to transition, needing an emergency, sometimes you need an emergency exit. And I’ll add one other thing, even if with late-stage dentists, they have to make sure, if they decide to go the DSO route, the DSO’s leasing lawyers are going to have a very good look to make sure that they’re not caught off guard.
EP: For sure. Yeah, it’s a great lot of questions in there, maybe to break it down one sort of career group at a time. And for a new start, similar to what I was saying before, they have incredible leverage, and so they’re out of school, they’ve been an associate. You know, they might not be enjoying being an associate. They want to branch out into private practice, and they don’t know how to start. And in many cases, there’s so many great services, many of which you’re interviewing today, that will do a whole bunch of work at no fee, just to help advise them, help educate them. And of course, what’s in it for us is most of the clients then hire us and retain us to help out. But just the education is the first piece so that early-stage doctor, what’s broken, if you will, is just sort of a lack of knowledge of these great resources. Let it be the dental supply partners and the contractors that will come out and check zoning and check to see if we can drill. There’s devastating examples now going off across the country; some cases, doctors have signed a lease for a massively large, three unit type clinic, but because the condo board or the landlord refuses to upgrade the electrical panel, or one other of the examples, it was a half inch water intake pipe versus a full inch, and suddenly they couldn’t build out their clinic right or equip enough chairs. So there’s so many of those little nuances that become just a devastating example where some people have paid two years’ worth of a lease payment to the landlord, yet can’t actually build out a dental clinic.
EP: So, from the early stage doctor, they have the most leverage, least amount of cash. So that’s a challenge. So, the banks are a big advocate for us, and one of our top referral sources with the accounting firms. But a big component there is to say, look, you are the best tenant. Don’t just get so excited and just sign that lease. Oh, you know, I had a family friend that was a lawyer. They had a quick look at it and moved forward. We did that for the dentist of the San Francisco Giants, and that was exactly his story. We’ve got his video on YouTube, but it was a perfect example like that, where so many doctors just signed it and never really reviewed. What was it they signed exactly? So then that moves to mid-career, mid-career areas. Now, right, the teeth have been kicked in, proverbially, into the realizing, hey, maybe the business world of dentistry isn’t all we had anticipated, and suddenly now saying, hey, what was that lease I signed 10 years ago? So a lot of the work we do is doctors that are renewing that lease every five years. One of the biggest challenges we see are doctors that don’t realize the impact of the term of the lease, meaning the business has changed from when you started practicing to today. The banks will not issue a long-term loan for your buyer if there’s insufficient term on the lease, correct? So that mid-career doctor might think, oh, I’m just, you know, oh, I’ve got a 20-year lease. Well, no, you’ve got a five-year term with maybe three, five-year options. But every five years, that’s the opportunity to renegotiate. So then again, brushing up on business, one of the best practices I can share with your listeners is, don’t just exercise that option. Use that as the opportunity to negotiate a net new 10-year term and keep those five-year options for your future buyer down the line. Sort of like my three and my seven-year-old, right? It’s like Pirates of the Caribbean, if you just keep taking each step walking off the plank, by the time, heaven forbid, something happens to you…My godfather, you know, tore his rotator cuff. The dentist couldn’t practice wet finger dentistry anymore. When you really need the term or options, you don’t have them, you’re now completely beholden to the landlord to give you the term to facilitate the sale, because the buyer can’t get the loan without the long-term lease. So, rule of thumb is, for the mid-career doctor, structure a 10-year term, don’t just exercise that option and use it as an opportunity to renegotiate the whole thing, because the landlord typically will do the same. So that’s mid-career transitioning to that last point.
EP: Similarly, is if you’ve got a million-dollar producing clinic and you think, oh, Jordan, I’ll just roll it down and I’ll be a month to month tenant, and my buyer will figure it out. That is the riskiest and one of the worst decisions a later stage career dentist can have, because it’s so tough, and we’re selfish people, and that’s okay. That’s us as business owners, but by taking off the practicing hat today and putting just on the landlord hat is exactly the way they should look at it. No different by owning your building, but from transitioning, it is so important that they look at it from the buyer side. What is the buyer getting? How does Tier Three, Roi Corp, et cetera, do the valuation? It’s to sell it to the buyer. If you can sell it to the buyer, and more importantly, their bank, give them as much term as possible, give them as much continuity and predictability of revenue so that they can have a 20-year runway and minimize those devastating clauses of relocation and demolition. I’ll touch on those briefly, because that’s one of the top questions we get. Many practice brokers, like last night we did with Tier Three and also MMP, will actually reduce the practice price of the clinic by $350 per square foot. The valuation, price, what they put on the glossy flyers by $350 per square foot. If there’s any hidden red flags in the lease that will impact the buyer. So, if you in your practice has a demolition clause month one, they will reduce that by $350 per square foot. The example we used last night was $525,000 of a million-dollar producing practice with high EBITDA right at six or seven times multiple. It was a $525,000 drop just because one little clause in the lease that, you know, their broker locked them into a 15-year term, and it was a huge challenge. So ultimately, a huge component for that transitioning doctor. If I may, from your perspective and all the conversations we’ve had over the years, protecting for the unknown. I reference your story to so many doctors because financial planning or otherwise, how do I protect my family, protect the assets? And your example, if to share, here’s what happens. If I die, go to this drawer and open. Can I ask you about that? Maybe to turn a little bit.
JS: Sure. So, it’s no secret. Everybody knows how OCD I am, and I do look five to ten years down. And in reading Oral Health Journal and all the experts that we have today, I read about all these huge mistakes, and I don’t want that from my family, for my wife, my kids, and so I compiled this book, and it says “final instructions” on it. Everybody knows it’s in the bottom drawer at my night table. Something happens to me. Your name’s there. David Chong Yen’s names there. Everybody is there. The, you know, where they’ll find the lease, where they’ll find this, where they’ll find that, because I kind of think about it as it’s a treasure map. Go here, go here, go here, go here, and you’re going to find the treasure. And if you don’t, if you don’t have that attitude, and if you’re arrogant enough to think that nothing can happen to you. Well, unfortunately, you can start to cross the street one day, and it’s just out of your control.
EP: And I’ve shared that best practice with so many. So, I appreciate that, because it’s you’d be shocked. I would say close to 35% of the doctors we talk to on a daily basis of roughly five or 600 a month across North America, I would say almost 35% don’t have a will in place today, right? Which is so short sighted as a business owner, because it’s not just the assets, it’s the liability as well, and that lease is binding to your successors and heirs. So, as a fantastic best practice is exactly that. If, heaven forbid, something were to happen to you, what does that emergency exit look like by owning your own building? It happens all too often. If there isn’t a lease in place, if you’re not paying yourself rent, if you’re paying yourself a different rent from what market value is, all sorts of issues can occur. So, we appreciate you being a multiple time past client. I mean, what a great example. Every five years, getting a new practice valuation, getting an updated lease agreement in place, and saying, honey, if anything were to happen, here’s exactly the process. And from a buyer’s perspective, it couldn’t be cleaner, because here’s the lease I’ve had in place for myself for the past 10 years, 15 years. I’m just transferring that to my future buyer.
JS: I will also add to that. It also gives you or bulletproofs you, if CRA comes sniffing around. If you have a dental professional corporation, you have a hold code that does own your property. If there’s a very clean lease done by a third party, not much they can really say.
EP: It is, and the data becomes important. That’s where the rental rates and vacancies and all too many doctors: Are you paying yourself rent today? No. Well, you know, sort of my accountant at the end of the year does little adjustment. Okay, right? Is it the same rent? Or the second question we ask is, do you want to keep real estate as a passive form of income post sale? And 98% of the time they say, probably, right. And with the valuation of practices these days, it’s astonishing. Talking to a doctor last night, $3 million valuation for the practice, right? Plus, the real estate is probably now 4.5 million between the two locations. So, you know, what buyer in their right mind is going to pay 3 million for the clinics plus buy both buildings. It’s just Looney Tunes in terms of pricing. So, giving the option to have that light lease as a lease to own or otherwise is truly instrumental.
JS: So, Eric, I have to say, as always, we could talk for hours about this, but I’d like to take time to thank you very, very much for coming in, stopping in today and joining our podcast and viewing program. Really great information that you’ve enlightened us about, and certainly if you’re starting out mid, you know, mid-career, getting ready to wrap up, I really encourage you to reach out to Eric and the team at Cirrus to, just before you do anything, understand what you are dealing with. Because your lease truly is what’s going to, you know, allow you to sell your most valuable asset. So again, thanks so much for stopping in.
EP: Jordan. Truly appreciate it. Thanks for your time.
JS: Thank you. Be sure to subscribe to Brush Up’s email alerts, Spotify or YouTube, to be notified every time we post a new episode. Please remember to keep brushing up!