Can you predict the future for your veterinary practice?

If you're a TV addict as I am, no doubt you've seen the recent commercial in which the gentleman reprimands the lady and her baseball bat-toting little boy for not cleaning off their sneakers before getting into “his” car.

 “This is my car!” the little-league mom insists. But the man goes on to explain that he will be the second owner of that European luxury sedan and therefore he would like her to take better care of it until it lives in his garage.

Kind of wacky, but the commercial does start a person thinking about the possible advantages of trying to predict the future. Cars are a good example: Would you buy a new or previously owned model without considering its durability and resale value? And if you order one from the dealer, would you nickel-and-dime your way into taking delivery of an auto that nobody else would ever want? (Say, by ordering a taxicab interior or a bizarre color that appeals to you but not to many others.)

Yet while pretty much everybody thinks at least a little about the future marketability of a large-ticket item they plan to buy, why do so many veterinarians set themselves up in a practice facility which only they-and nobody else, ever-could love? Sadly, it happens all the time. And when it does, it can have serious longterm economic consequences-especially on retirement plans.

Practice real estate and the crystal ball

 When young Bill and Hilary Clinton became silent partners in an Arkansas land deal, they no doubt made an effort to predict that it would become a great investment (it didn't) and that their participation would never result in much downside risk economic or otherwise (it did). They learned the hard way what anyone navigating the world of real estate investing quickly discovers: Success demands a cold, calculating, objective and well-reasoned effort to predict the future.

When a veterinarian approaches the question of where to establish her practice, well-educated and emotionless guesswork is called for; indeed, it's vital. The checklist of questions begins at the macro-level and works its way to the micromanagement of lease, contract, easement and other document language. Here are some guidelines that may help the veterinarian who's new to the bricks-and-mortar game and expects to be closing a deal in the near future, either alone or with partners.

Macro considerations: Geography and demography

City/region. Sure, Flummoxville may be home to you and you'd never want to live anywhere else. But if you build a veterinary palace there, how many veterinarians will be out there 25 years from now who are willing to pay significant dollars to commit to practicing 15 miles from the Interstate, 30 miles from the closest movie theater and 75 miles from an airport?  Rural clinics, especially expensive ones, are getting harder to sell as the population becomes more urban.

Expansions. Plan for it! If you practice good medicine and treat team members and clients well, the practice will grow-and you need to anticipate that. Should you buy the vacant lot next door? Maybe you need to investigate an option to lease the adjacent space in the strip mall where you intend to open up. (Maybe you should investigate an option to buy the strip mall where you are planning to open up.) Don't let your failure to think outside the box today put you in a box tomorrow.

Neighborhood (7 years). Is the neighborhood experiencing a renaissance, or is it in a state of decline? If it's the latter, yet underserved by veterinarians, it might still be a good place to open or buy a practice building. It's probably not a good place to build or renovate a building. Declining neighborhoods usually mean stagnant or cheaper future rents. Yet construction costs in crummy areas are no cheaper than they are in more prosperous locations.

And did I say “buy” a building in a declining neighborhood? Absolutely: under the right circumstances, a fire-sale price or tax lien sale on a solid building in a less-than-ideal neighborhood can be smart. Many clever veterinarians have done well by following a strategy of “buy-practice-move a mile or two-repeat.” This strategy can result in a lucrative and marketable practice in a decent neighborhood at the end. And if the first building was a super bargain, it may continue to generate cash for old doc as a storefront sandwich franchise.

Neighborhood (8+ years) So … you've found the spot where you want to build your career and practice forever. It's so keen that you are ready to borrow big bucks and build an impressive hospital-which will have high standards and high overhead. Nothing wrong with that, as long as you can reasonably predict that the area will remain fundamentally unchanged until you are ready to retire. Think about-and make a diligent effort to predict-the following:

 Political climate. Is local government fiscally responsible? Or is it overly anxious to tax and spend on unnecessary infrastructure? This can lead to crushing taxes in the future, which may scare off potential practice buyers just when you are ready to head to Florida. Or are taxes artificially low, so needed improvements to local roads and sewage projects are being postponed indefinitely and hurting future growth?

Climate. Once you have invested heavily in a practice, you'll have to live with the weather. If the town where your practice is located is cold and miserable a lot of the time, the number of potential practice purchasers will drop accordingly. This comparably low “demand” can hurt price when it comes time to sell and retire.

Emergency hospitals nearby. If your practice is to grow, you will likely need associates. Nowadays, many new graduates are hesitant to take positions that require being “on call.” And those same doctors probably won't like the prospect of doing their own after-hours emergencies any better when they are older and looking for a practice to purchase or buy into.

Mid-level concerns (infrastructure, building costs, lease longevity)

Environmental Issues. You may not care that there used to be a trolley car repair facility on the property where you plan to build your clinic, but the next veterinary to own the place probably will. Never, ever skimp on doing background checks on potential toxins in a building (lead paint, asbestos and so on). Don't ignore underground environmental threats that may make it difficult to sell the property to the next owner. Even if your state doesn't currently hold current owners liable for the oil dumping and other sins of past owners of real estate, that may change at any time. And you don't want your title saddled with contamination you had no role in but still have to answer for.

Is your target building or leased property on the sewer line? Does it have natural gas? Does it have public water or just a well? If it doesn't have all three, you may be faced with a special tax when the municipality makes you hook up later on. As an owner, you may have to dig up your parking lot at great cost. As a tenant, your strip mall lease may obligate you to kick in a pro-rata share for such so-called “special assessments.”

Do you have perpetual renewals available on your lease? If not, your practice may eventually end up homeless. I know of several former strip malls on Long Island that, over time, evicted all of their tenant businesses so that the properties could be used for condo development. If that happens to a veterinarian, he may not be able to re-establish his practice in the same neighborhood because of zoning restrictions or simply because he can't afford to rent commercial space nearby.

Micro considerations

Will I be proud of my utility bills when I go to sell and retire? If you build or remodel your clinic building on the cheap, prospective buyers may fear big expenses if you cut corners by electing against energy-efficient lighting, water-saving toilets and spigots or high-R value insulation. Also keep that second owner in mind during any renovations.

Could a non-veterinarian use this building? I sold a practice building a while back and it was an easy sell. The veterinary practice moved down the street to a new building but the old place I had designed with multiple uses in mind. Because of decisions I'd made at the time of construction as to the layout of load-bearing walls, organization of rooms, HVAC and so on, the new owner had no trouble turning my old clinic into a day care center.

Consider phased build-out. Your practice will probably make lots of dough. But if it doesn't, why put yourself in a financial hole?  By placing your initial structure strategically on the building lot, as well as pre-placing gas, water, sewer, cable, Internet lines and high voltage upgradeable conduit, you can build your first 1,200 or so square feet and see how things go. Then, when you are making a solid income, move ahead with phase 2 and build an attached 4,000-square foot addition to accommodate all your new kennels, diagnostic equipment and team. Preplanning is so much cheaper than retrofitting.

Dr. Christopher Allen is president of Associates in Veterinary Law PC, which provides legal and consulting services to veterinarians. Call (607) 754-1510 or email info@veterinarylaw.com.