Welcome to the Future of Veterinary Practices - Episode 5, Featuring Daniel Eisenstadt

 

Daniel Eisenstadt is the chairman and CEO of Terravet Real Estate Solutions. Prior to founding Terravet, Daniel was a co-founder of Community Veterinary Partners, where he served as President and Chairman. Community Veterinary Partners has grown into a regional corporate operator of veterinary practices with more than 50 hospitals located primarily on the East Coast. Previously, Daniel worked as managing director at CMS Companies where he led investments in companies focused on education, health care services, and manufacturing. Before joining CMS, Daniel was the founding executive director of the Auschwitz Jewish Center, a museum and visitor center located near the former concentration camp.

 

Prior to the aforementioned accomplishments, he was a corporate lawyer at Fulbright and Jaworski, L.L.P., where he focused on mergers and acquisitions and securities offerings. Daniel has an MBA from Harvard Business School, a Juris Doctorate from the University of Virginia School of Law, and a bachelor’s degree from Clark University. Daniel was also a Wallenberg Scholar at the Hebrew University of Jerusalem.

 

The background of chairman and president of Community Vet Partners gave you incredible perspective and insight into the business side of veterinary medicine, combined with your background in mergers and acquisitions. You've developed a skill set and knowledge base that veterinary practice owners across the nation would be absolutely super lucky to tap into. So in our conversation today, we'll talk a lot about veterinary practice real estate, and how that plays a role in owning, managing, and selling a veterinary practice, but I've got two questions to start with that we've been asking everyone this season just because of what's going on the world and I think they're interesting to address. I’ll start with a softball, a lighter one. What are you most looking forward to once we're kind of past COVID?

 

So you know, it's interesting. It's been a really, in a weird way, a blessing with COVID of being able to spend more time with my family, my wife, and three daughters, and that's been awesome, and I think a lot of us feel like wow, in busy, crazy lives, it's a weird thing and a great thing that we've had this year. But I will confess, I'm excited to get on a plane again. I'm excited to do some traveling. I love a two or three-day trip. I love seeing new places and interacting and I actually find that there are places in the U.S. I haven't been that it's just neat to check it out, check out new foods, new restaurants, different places. So I'm really excited about that when that comes.

We actually had a trip cut a little short to Costa Rica about a year and a half ago and we as a family are planning to go back, I hope in maybe a year. All three of my girls were beginning to learn to surf and I understand Costa Rica's a really nice place to do it because the waves are not ... They're really nice and easy. But I was amazed to watch all three of my daughters get up and you could see how infectious that bug was and they made me promise that next time I'm going to try it, so I'll let you know how it goes.

 

The second question that we're asking people upfront before we really dive into it is about mental health, a very important topic. Overall in the veterinary industry, mental health is something that needs more attention. There’s a very high suicide rate in the veterinary industry as you may know and it's something we should all be paying a lot of attention to. Throughout the past year, the craziest year of anyone's life who's alive today, most likely, that throughout the past year with all the craziness from COVID, political tensions, and stresses here in the U.S., what have you done or what have you been doing to protect your mental health?

Yeah, it's a great question. I'm going to tell you two things. One is a bit absurd. One is probably a little bit hackneyed, a lot of people do it. So I love to cycle. While it was warm here in Philadelphia, I was getting out on my bike and doing seven to ten miles and I just loved that feeling when you're cooped up. It's healthy, it also clears my head. Then I, like so many people, succumb as the weather got bad. I swore I was never going to do it, but I now have my Peloton so I'm getting my rides in and I just ... I think for me having that on a regular basis is such a good clarifying.

The other thing I will confess to is as the world seemed grim, my binge pleasure on Netflix is watching the entire seven seasons of West Wing for the third or fourth time and so that's like a romantic vision of a world that could be that isn't, and so it's such an obsession that my oldest daughter, who's 18, tweeted out that she thinks that if I hadn't met her mom, my wife, we've been married almost 22 years, that I would have wanted to marry Aaron Sorkin, the founder of West Wing. So that just tells you how much she believes that I'm obsessed with that. But that's been my other guilty pleasure that kind of clears my head, a bit of a romantic view.

Well, the corollary to this, and it'll connect in some ways back to the real estate piece is that of course gyms got crushed during COVID and partly, I think, if you talk to people ten years ago, real estate investors, others would have said, "Look, the one thing you're never going to be able to do as well at home unless you have the means to have a personal trainer come in is we're never going to make it cost-effective for you to get really good classes. You're going to need to go to a gym for a spin class or for yoga." Well, P.S., that's not true anymore in our world, which is kind of interesting. So COVID, I think, has accelerated that for sure.

 

Well, let's go ahead and change course a little bit if we can. I know you've been working with real estate professionals, practice owners across the nation and I know that you've been supporting VMG as an organization with a lot of education. We're also a preferred partner with VMG, love the organization. My partner, Doctor Michele Drake's been a member there in VMG for 18 years or something like that, a very long time, so we're quite plugged in with that. Some of the questions that she brought up she knows that VMG members would like to address. One, how difficult is it to appropriately appraise veterinary real estate using current appraisal methods?

Yeah, so look. This is a big topic for us that we've lived as owners of veterinary real estate. So just by way of background, we own about a million square feet of veterinary real estate in the U.S. in about 30 states and that means that every time we buy a property if we're going to put bank financing on, which we do, that we need to have an appraisal done. So we've had many appraisals done, right? We always say we have over a hundred buildings. We don't give out the exact number, but we have over a hundred buildings. It's good, and in 30 states, so a pretty diverse portfolio already and growing.

So on appraisals, one of the challenges is that appraisers are really hired primarily by lenders and there are rules for how you appraise but one of the main things that appraisers will do, and there are several different methodologies, but one of the biggest methodologies is to go find comparable properties and to go and use the per square foot rent that was negotiated in an arm's length transaction between a landlord and a tenant in a comparable property and then to apply that rent per square foot, let's say $20 per square foot, to the square footage in the property being appraised and then once you have a rental rate, to put a multiple on that. That's a very standard appraisal method.

The problem is that there aren't that many veterinary practices that can serve as comparables. There aren't many veterinary practices within five miles of another veterinary practice, or within three miles, so you're talking about ... Often appraisers will go and grab a comparable that is ten miles away or two states away in an effort to get a veterinary practice comparable. The other thing they'll do is they'll sometimes reach back in time. They'll say, "Well, we can't find a current lease or a current transaction. We're going to go back two things." Well, things have changed a lot in that period of time.

One of the challenges is unlike garden apartments or a fast-food franchise where there are lots of transactions and there are probably lots of comparables within a reasonable radius, that's not true in veterinary. Often, as a result, the appraisers make the mistake of saying, "We have to go and find something that is veterinary." We would argue that the better appraisers and the ones that we will try and educate ... If you think about veterinarians really retail, mixed with some office. So if you can find, within five miles, several service retail buildings and if you can find several office buildings and if you can look at what the rents are, what the sales per foot were, there are comparable. Those are the best comparables if you can sort of blend it. That's where you're going to get to a market rate. That's where you're going to be able to sort of figure out what an appraised amount will be.

The other problem is that some veterinary practices have a ton of land. Think here about in particular equine practices, so that creates a whole separate issue. How are they appraising excess land? So we would just say that one of the most important things with an appraiser, and an appraisal more generally, is to really make sure that they get educated about veterinary ... What veterinary practices look like, what comparable buildings might be, and then importantly have a better sense than they do, most appraisers have no idea what a good business model veterinary medicine is, right? They sort of think of it as sort of this little cottage industry. It's important for them to understand just how profitable practices can be and are so that they don't under-appraise. We've seen a lot of situations where an appraiser will come and under-appraise a property by hundreds of thousands of dollars and again, that has a real-world impact both in terms of what a veterinarian thinks their building is worth, how much they can borrow against that building and can create, also, all sorts of conflict issues if two veterinarians are splitting up if a veterinarian is selling to an associate. The idea of being able to try and have a real-world appraisal is a good idea.

Then the last thing I'll say about this is appraisals are really primarily built for bank financing so what we often say is there's appraised value and then there's often the value that a reasonable buyer would pay and they are sometimes the same and they are sometimes not. So it's not a bad idea to also get out and get broker opinions and if you want an opinion, we're happy to do it to get an opinion from a real buyer as to what the real estate would be worth.

 

One of the things that I'd like to ask you about and get your take on when you're looking at M&A, for instance, when you're looking at mergers and acquisitions and you're looking at different industries, different industries have different multiples and they can be really significantly different. I could give examples, but you know the different multiples as you just look at different industries. If you're looking at M&A, you can acquire a company and just kind of repackage what industry it's really catering to and how it would be categorized and significantly increase the multiple just to turn a flip. Does that sort of thing apply or not really apply at all to real estate because I appreciate the way you're approaching it, but if you're looking at real estate that wasn't used for the same type of business, does any sort of the same type of thinking about the profitability of this business sector kind of adjust that in any way? Is it taken into consideration?

Yeah. Look, it's a great point. We're diving a little bit down the rabbit hole but that's okay. The three ways you can have a valuation done in real estate, and there are probably more than three, one is replacement cost. So if we were to rebuild the building, what would it cost to replace it, which is valuable when you're building a building or when you have to replace it but isn't the most valuable once you have a lease on it and ongoing business. Let's set that aside.

Another value might be sales comparables, which is to say what is a similar building selling for on a per square foot basis? That's okay. The problem with that analysis is if I have a different tenant, the business is worth more, right? So my example that I often give is if I have an independent pharmacy as a tenant and that independent pharmacist is doing okay, I might look at that building as worth X, but if all of a sudden Walgreens becomes my tenant and Walgreens corporate is guaranteeing my lease, well now I have the credit of Walgreens behind that, that building's actually worth more as long as it has a long Walgreens lease in it, right? And that is because of what we would call the income approach, which is the same way that businesses are valued.

Here the way real estate is valued by most investors is you take the rent, you net out whatever cost the landlord reasonably has to have related to owning the property and in veterinary medicine, it should be a triple net lease, there should be very little cost because most of that is on the tenant. So you take the rent, you net out, you get to net rent and then you put a multiple on it, to your point, and it's more complicated in real estate. There's something called a capitalization rate which is just the inverse of a multiple to make things complicated. So the capitalization rate of a 10% cap rate is a 10 multiple. An 8% cap rate is about 12.5 times multiple. We'll just do multiples for the moment.

What's interesting is when you think about this, the first thing you need to figure out is, is the rent appropriately set? One of the challenges is because veterinarians own the real estate and the practice, they've often adjusted what they're charging themselves in rent either up or down to suit different things. They want to make the practice more profitable or less so. There are tax considerations. So one of the first things when you really think of what the value of that real estate is, I could charge myself anything I want, doesn't mean that that's appropriate, right?

The place where I was talking about comparables is to find what is market rent? Once we figure out what market rent is, irrespective of what the veterinarian's charging himself or herself, now I can say what multiple should be put on it and the multiple that we would mostly say we see more and more is somewhere between 11.5 and 13 times the net rent. That has changed. When we started it was probably somewhere between 10 and 12 times. Now part of that is interest rates have gone done and part of that, to your point about the industry, is there's more and more awareness by retail real estate buyers and by institutional buyers like us that veterinary is really solid. It performed really well during COVID, people made their rent, it's recession-resistant. By the way, there are more and more of these well-capitalized big businesses, like Mars, that have ownership in it which means you've got more Walgreens of the world coming into it, which increases some of the value of that real estate. But it's also an overall awareness that veterinary is a really good sector so as a result, the multiple of your rent should be higher, and is higher, in most good locations than it was five years ago and ten years ago and that's because of the strength of the veterinary sector.

Sorry, we went down the rabbit hole a little here.

 

You mentioned a few things I want to dig a little bit deeper into. Lease terms. How do lease terms impact real estate value?

Huge impact and this is a really important issue. One of the things we do a lot of education with VMG groups on is if the owner of the practice is going to think about selling his or her practice, particularly to a corporate group but it could be to an associate, really understanding for the first time they need to be thinking about the lease as a landlord because the tenant is who they're selling the practice to.

So if you were a landlord, what you want is you want the longest possible lease term you can get because that's the longest possible commitment to pay my rent at this amount. If it's a shorter lease, if it's a five-year lease, and then the option is at the tenant's option to extend it or to leave, then all I really have is a guarantee of payment for five years. If I have that for fifteen years, well, wow. Now I can really value it off of that income that's coming in as long as I believe that that tenant is going to be strong. So landlords always want longer, tenants typically want a little bit shorter because what they want is they want optionality. They want the option to be able to say, "You know, if I've outgrown the building, I don't want to have to be legally bound to stay."

What's happened in the veterinarian sector which is really important is when I started eleven, twelve years ago the standard lease the corporate groups offered and I think that a lot of associates buying and offered, was five years. Five-year lease term with three five-year options at the tenant's option. The challenges that a lot of the veterinarians that were selling their practice and becoming veterinarian landlords only, thought of it as a twenty-year lease because five years plus three-five years is twenty years, but from a buyer's point of view or from a lender's point of view, it's just five years because the obligation's only for five years.

And so what's important is if you're thinking about it as a landlord what you really want to say to the buyer of the practice is, "No, no, I need a minimum of ten years, and if you really believe my building is a good building you really shouldn't be worried about that because I've got a great building, I've got room to grow. You don't need the option. You're not going to use the option."

Where this becomes important is ten years ago, most corporate groups and certainly most veterinarians, were not regularly moving practices to other locations. That is beginning to happen. Some of the largest veterinary corporate groups we know, because we've interacted with them, are beginning to say, "Hey, we've outgrown buildings that are a little tired, and instead of putting money into them, we have the right ... Our lease is coming to the end. We know," especially with the Amazon effect there's more retail buildings available, "We can move and there's a landlord a half a mile down the road that's going to give us lower rent and some concessions," and all of a sudden that veterinarian that sold their practice and thought they were going to have twenty years of rent coming in from their building is left with a vacant building.

If that veterinarian, as they're selling, had said, "I insist on ten years. I insist on fifteen years," then it changes that dynamic dramatically and changes the value of the real estate. So we won't buy real estate, veterinary real estate, that has less than a ten-year term and we often get fifteen years and sometimes twenty-year term.

 

You mentioned something I'd like to ask you to unpack a little bit. You mentioned the Amazon effect, which is huge, but we've got ... And the Amazon effect has been building in retail. We've seen the retail apocalypse. That term is more than five years old and I've got some very, very good friends that are big commercial and leasing agents in retail spaces that have been dealing with that for a while but now with COVID, you've had so many businesses, just like what caused Zoom to take off, all of a sudden all of these companies where if people wanted to work from home and the bosses didn't know how to manage people at home so they were resistant and all of that, well that just got broken wide open as people got sent home. People have been working from home and a lot of companies discovered, "Hey, wait. We can do this and actually I like not sitting in traffic every day and every night. We can keep doing this and we can save costs on our office space," and so there's a lot of companies that aren't just going to be rushing back into the office late this year. A lot of them are going to say, "Maybe this our new paradigm here." What do you perceive as the impact over the next few years and potentially long-term given that?

Well, this is the reason we are so focused on longer leases and market rent is for this reason when we try and project what does the world looks like in five or ten years? I think in most of the locations, suburban locations that veterinary practices are located on major roads, you're going to have more vacancies of retail and office than you have today and I think that's going to happen because of, to your point, working from home more. It's going to happen because Amazon is literally making the retail model of bricks and mortar harder and more expensive. I just think most sophisticated folks think that there are going to be more vacancies, not fewer.

So what that means is you're going to have more landlords that are going to be saying to good tenants, read veterinarians and veterinary practices, "We have an attractive space for you." I know of several of the larger veterinary groups that have moved into, especially emergency hospitals, into former Staples or even former video stores like Blockbusters. Blockbusters are gone and by the way, it's not a bad 12 thousand square feet, a big box that you can fit out for veterinary. So I think it is naïve for us as veterinary real estate owners, and this is mostly veterinarians that are veterinary real estate owners, to pretend that somehow in five or ten years our veterinary building is going to be the exception. So how do you ... What do you to deal with that?

One, it is hard to move a veterinary practice. There is a fair amount of build-out and also you have a unique, particularly with a general practice, you have a client base that comes from a short radius, ten miles, five miles depending on density. So operators of veterinary practices, veterinarians, they don't want to move the practice if they don't have to, but there'll be a temptation because there's going to be a landlord a mile down the road waving, saying, "I've got lower rent. I'll build it out for you. I've got an open space." So what do we do as veterinary landlords to prevent that? First, long lease. The longer lease you have, the better chance you have to say to your tenant, "Hey, listen. You signed a contract." That's your protection, so that's one.

Two is to make sure that your rent is market because the worst situation is if market rent right now is $18 a foot in your area and you're charging $30 a foot, you may be thrilled that you're getting $30 a foot today but if you have a five-year term on your lease there's a pretty good chance with Amazon going on, your rent is escalating so by the end of that five years because there's annual escalation typically, you're probably at $33 to $33 a foot, but if I'm right about the Amazon effect, your market area may be down to $15 a foot. Now it's very tempting for that veterinary operator when they see the landlord half a mile down the road saying, "I've got a vacant building," they're thinking they can cut the rent in half whereas if your rent is market and now the market rent's dropped a few dollars, it's not nearly as appealing. So these inflated market rents are another issue.

Then another thing is to make sure your tenant feels good about the building. Put money into the building. It's got to be sized for growth. We all talk about there's been great growth in the veterinary sector and that's fabulous but if you have two exam rooms, I don't care how great you are, it's really hard to have four doctors. Here's the other thing. The other thing we all know is there's a labor shortage in terms of veterinarians and technicians and if you think you're going to be able to recruit and retain in an old, tight facility, you're going to have a really hard time doing that.

So you've got to really be focused on market rent, longer-term, and making sure that that building, both in terms of space and look and feel is something that your operator feels good about. If they do, I'd argue that veterinary tenants are going to want to move, even though there's vacancy because it's a pain to do it. So anyway, that's how we think about the Amazon effect.

 

 

You did a ton to explain so many factors that drive the value of real estate, but very conversationally and what I would anticipate is that we've got some practice owners that are sitting here, that are paying attention, that potentially are taking some notes and finding that their notes are going in a few different places. Can you kind of bullet point for us, give us a kind of concise list of the factors that you would say drive the value of real estate so they can put together their own quick list-

First of all, and this is the old hackneyed line, "Location, location, location." It is true that real estate in San Diego, dirt in San Diego is worth more than dirt in Kansas. It's just true, right, so that means the multiple of your rent you're going to get in San Diego is significantly higher than the multiple of rent you're going to get in Kansas City. That's reality.

The second piece of this is what is your rent and how close is it to your market? On this income approach, that is multiple of your rent, that is going to drive some of your value. So if your rent is $20 and that's market, your building is going to be $20 a foot, what your building's going to be worth is different than if it's $30. So your rent rate.

Then we get into some other things that we think you really have a lot of control over. What does the lease look like? How many expenses is the landlord agreeing to in the lease? Does the landlord have to repave the parking lot every year? Is the landlord responsible for the HVAC, the air conditioning, and heating units? Is the landlord responsible for repairing and replacing the roof? We would argue that in a true triple net lease, the landlord should be responsible for none of that, and the tenant's responsible for that. That's what triple net means.

In the veterinary sector, often triple net has come to mean everything, meaning the tenant pays for taxes, insurance, and maintenance except for maybe replacement of the roof and structure. That's fine, but that doesn't mean repair the roof. One of the questions on the lease is how clear is it that the expenses lie with the tenant, because remember, we're multiplying off of net rent.

The other piece in the lease that's really important is what ... Who's guaranteeing the lease? And let me just say, this is the lease and who your tenant is. This is a reality. If in fact you really have VCA as a tenant or Pathway as a tenant, and you really have their major corporate group as a tenant, this is like my Walgreens example, that's valuable to a buyer because now you have the financial wherewithal of VCA, of hundreds of millions of EBITDA, of earnings, behind the commitment to pay your rent.

Now the tricky part is a lot of corporate groups will create single-purpose entities to buy the practice. They'll create, I don't want to pick on any one group, but Corporate Group of Lichfield, Connecticut, LLC and that's your tenant. In that case, and they're not doing that to mess around with rent, they're only doing that from a liability point of view. But if that's the case, you better get a guarantee of your lease from the actual corporate group. So you don't have the Corporate Group of Lichfield, Connecticut. You have an actual Corporate Group as the guarantor because otherwise you actually don't have any better ... You think that you have Walgreens but you really have an independent pharmacy, right? So understanding that piece.

And I'll give you one more thing in the lease that's important that we see all the time which is in most commercial real estate, the tenant will agree in the lease to provide financials on the performance of the tenant to the landlord at least every few years or if there's a sale or refinance happening. The reason that's important is when I go to sell a property, the buyer's going to say, "How strong is the tenant?" And I'm going to say, "They're great. They're a vet practice. They're doing fabulous," and the buyer's going to say, "How do I know?" If I can say, "Oh, I have last year's financials. They generated $3 million of revenue and had earnings of $500 thousand," the buyer's going to say, "Oh, that's great." If it's just, "Trust me," the buyer or the lender is going to say, "I don't know what to do with that." By the way, what happens is five years later and ten years later if you're the veterinary real estate owner, you may have owned the practice before but good luck getting those financials if it's not legally required in the lease.

What's interesting is in most commercial real estate transactions, it's required. In the veterinary sector, it's rarely offered unless you negotiate for it to get a commitment to give you the financials. Again, it would be great to get the financials on the entire corporate group, sometimes you can get it, but at least the four walls because there's nothing very secret and it can be subject to confidentiality and all this good stuff. But that's a hugely important thing that will change your ability to finance or sell and potentially can add real value.

Most people, including some of the most sophisticated intermediaries and advisors in the sector, don’t consider that last bullet. Again, and it's natural not to because if you're the veterinarian who owns the practice and the real estate, you know how the practice is doing. It's just how the mentality that says, "I'm not going to because I'm going to be retired in Arizona and I'm going to have no way of knowing what's going on," so that's important to know.

 

That sets us up for a great transition because I'd like to talk about the transition, about the transition to going from an owner/operator, you own the real estate, you own the practice, and all of that to these trends of consolidation, trends of people a point in their careers where they started their veterinary practice 25, 35, 40 years ago and now they're looking to retire, they're looking at various exit strategies. Unfortunately, consolidation seems to be the most popular one, although I do want to emphasize it's not the only one. Please check out our earlier webinar with Dr. John Tait from last season where he talked about alternative exit strategies and we'll have more coming out about that. 'd love to ask you for your perspective on this. Why are practice owners selling to corporate consolidators as opposed to other strategies?

Look, I think at the end of the day we all understand as much as people, veterinarians, are committed to their practice, they are committed to their families and themselves first and so if an associate offers a million dollars and a corp group offers four million dollars, it's very hard to walk away from that corporate group. And corporate consolidators have been putting more ... There have been more and more higher values because there are now 60 corporate groups in the veterinary sector and 50 private equity firms and so the amount of money that is chasing a smaller group of larger practices is ... It's just a supply/demand issue. Will that continue? I don't know.

Now, having said that, the one thing I think I may have mentioned to you before, David, is I'm amazed people have not thought of their real estate as an alternative exit a little bit and this has not happened often, but there are two ways that I think about this which is if you're a veterinarian and you don't want to sell to corporate and you don't want to sell to your associate and feel bad that you're not getting the same value that your friend got for a similar practice because he sold to corporate.

 

I do want to emphasize, though, that there are alternative exit strategies maybe not for every single scenario but where you can structure deals where you do sell to an associate where maybe you're not getting the same amount of cash upfront but long term it can actually situate you better financially, so please-I would agree. I would argue ... This is an important point to make. You're going to probably make more not selling to a corporate group and continuing to operate your practice or these alternative structures. The big piece is the big pot of gold that comes one time that's so alluring. I agree, this is more sophist acted than the pot of gold so I agree completely and I think Dr. Tait's right and there are alternatives that people should really look at.

But one of the things you can do is to say, "Look. I want some liquidity. I've been working hard. I've been earning a good living." One of the things you can do is to refinance your building at very low-interest rates. Take out a loan against ... You paid down, over 30 years you paid your mortgage off. Refinance at 3%-Historically low. Never going to be this low again. We're not getting it again, and you could take out, potentially, twenty-year, twenty-five-year mortgage potentially on your real estate and take a million dollars out of your building and now say, "The boat I wanted, the vacation." I mean, you can use your real estate in doing that.

The other thing you can do, because obviously that ... Usually you can only 60% or 65% or 70% out that way. The other thing you can do is, we've done a few times with veterinarians where they want to keep their practice. Their practice is a representation of them, their clients, their employees, their stakeholders. They love their building, but they really love their practice so one of the things we've done is we've said, "We'll buy the building and we'll lease it back to you. So we'll pay you 100% of the value, you become our tenant, you have a very long lease, so you have full control of your practice, and now you've got a ton of cash that you can do a variety of different things with it." We've even built into it for people that have said, "Look, my practice is good but my building needs half a million dollars and I don't want to take on debt to put half a million in." We'll say, "Why don't we do this? Why don't we buy the building from you, give you the cash, and in the lease we'll agree that we will pay for half a million dollars of renovations and then we'll finance that by increasing your rent based on a negotiated amount." So we almost act as, if you will, a bank in a way or finance that way.

So I think there are alternative ways. It's not for everyone. There are reasons why you might-Or you do that in combination with what a Dr. Tate or others are suggesting in alternative approaches. There are things that I think people need to look at and what they require is a little more work. We're happy to consult with people as they have questions like that.

 

So using this, I mean it's starting to get into and touch on what would cause more practice owners to want to maintain ownership and how to build and maximize the value of their practice. Let's get your insights on that.

Yeah. So here is the interesting thing. We have several tenants who are independent veterinarians, often husband and wife teams interestingly, who have decided not to own the real estate, and what they're committed to doing is to build a great practice and then to look to buy or to open other practices nearby. The reason they say, and I think this is really logical, is they say, "We can make more money by having four practices in the area, or having three practices in the area, and by the way, we can make more of a difference. This is really what we know how to do." If you can do that and recruit veterinarians to your two other locations, and they have three locations, there are examples of veterinarians around the country that have actually been able to cut back on how much time they're working with patients and seeing patients to two days a week. Yet they're making ... Now they own three practices.

So I think there's some genius to that. The old school model was to build your practice, buy and own your building and I get it. That made some sense, but when you buy and own your building, it means you are putting some money into the building as opposed to, "Hey, maybe instead of tying up three, four hundred thousand dollars, I can use that three or four hundred thousand dollars to buy another practice nearby," and that's a really interesting sort of logical thing that I think some younger veterinarians are starting to do and look at, which I think can be really smart.

The other thing I would say, and this is the flip side, is if you own your own building but you really want to invest in your practice and you think that what you need to invest in your practice is to hire more staff, hire a veterinarian and pay them a little bit more base. The other thing, depending on how you feel about debt, is if you refinance your building and take a little bit of money. Let's say you can refinance and take $200 thousand out and say to yourself, "I am going to recruit that great veterinarian or two great technicians because, at the end of the day, it's the quality of my team that is going to allow me to grow my practice." That's a really smart thing to do, as well. Everyone's got to get comfortable with their level of debt, but if I knew that basically by taking a mortgage at, again, 3% or lower, I could go ahead and have a better chance of competing to hire that great associate or the two great technicians or the great front office person or, "Can I go buy the dental x-ray machine?" Whatever it is that is going to help drive the value of the practice and your wellbeing, that's a great decision it seems to me, but people tend to be old school about it and get nervous about how much debt they have. So it's a whole other piece.

Again, this is another reason why I think it's important to understand the value of your real estate. A lot of veterinarians built their building thirty years ago or bought it, and they've kept it up to date and the idea in their mind about how much it's worth is based on ten years ago, twenty years ago, thirty years ago and they may be surprised that their building's not worth $700 thousand, it's worth $1.2 million and now if I know my building's worth $1.2 million, I might be more interested in borrowing $100 thousand against the building because that seems like a very small amount of money relative to the $700 thousand value. So I think these things work in concert a little bit.

 

Can you describe a little bit, just kind of go into really Terravet's specific, number one, offerings? Can people ... obviously, we understand that you do acquisitions and rent and lease space. You do consulting to help people understand their own business better. I just want to say and who would be overall people who should be reaching out, contacting you? What type of clients are you serving?

Yeah, we would be happy ... Listen, we would be happy to ... So we don't charge for consulting. We're primarily operators and owners and developers. Because of our commitment to the veterinary sector, we've been doing continuing education webinars and seminars for VMG, for other groups as well. So one, we're happy if you have a group, we're happy to ... Our chief development officer, we've worked on content with a few great folks, Dr. Karen Felsted and Don Burdette have worked with us on developing these continuing education seminars. So we're happy to do that and we don't charge for that. So if that's something ... If you have a group and you're interested, we're happy to do that and that will give you a lot more than what I just did in a PowerPoint.

Similarly, if you want to just reach out to us, we have the database and we have the availability. It's not hard for us. We've created something we call ... It's sort of our Terravet Dashboard. It's a real estate dashboard that is really a two-page, or the back part is a glossary, and the first page is, "What is your market rent relative to what you're charging them per square foot? What are certain metrics that real estate lenders and buyers look at? What are the demographics? And then what would we say the cap rate, or multiple, end value of the real estate is?" It's a one-pager, it's not an appraisal, but it's a quick run at what we would think we would pay. We'll do that for anyone who reaches out. We'll do that. We don't charge for that. We do it both, obviously, we think it's a good service for veterinarians to know and also obviously our hope is at some point we do that and some people, when they do decide to sell, they'll give us a buzz and we'll have a shot at potentially looking at it. But that's another service that we offer and we're happy to do as well and I think can be helpful and useful to people.

 

It's a lot of the approach that we've taken here at GeniusVet—we do a tremendous amount of things that are incredibly valuable to veterinary practice owners and veterinarians across the country that are just purely free that start to touch on what we do professionally but that we hope that delivers so much value and that they get so much from it, they can just enjoy it. If they never work for us, hey, get the free stuff, run a better practice, we think we've done some good for the world and that's great but also it's likely anybody who leans into that, it's very likely they're going to end up saying, like, "We're actually getting more value from you than we're getting from some of these other people that we have paid for stuff like this, so what can you do professionally?"

You and I probably believe in the karma bank. We're doing it because it's the right thing to do. Veterinarians are great, the veterinary sector is great, we want to be helpful and it frustrates me when I get a call from a veterinarian who's got two years left on his lease and thinks that he's got twenty years left and his building doesn't have the same value. I want them to know that, to have that information beforehand. So we're doing that for the right reasons, but ultimately if you make deposits into the karma bank, eventually it pays back, too. But we're doing it. We do it all the time and it's part of our core values at Terravet and part of the vision we have for the company.

 

I would really encourage everybody who is on here, reach out to Daniel, to his team. Do you want to let people know how do they get in contact with you? How do they reach out to you? What should they be doing?

Yeah. On our website, which is terravetrealestate.com. Yeah, so if you go in there, you can actually hit on a "Contact" button or a "Get information" button or a "Get a Valuation Done" button and one of our team will reach back out to you and we try to be pretty responsive on that. I look forward to hearing from folks and trying to be helpful.

...

Daniel, thank you so much. Everybody reach out. Terravet Real Estate. Click on the link in chat. We're going to follow this up with ... You'll get an email to a webinar replay. It's very likely that you're going to want to, if you have business partners who didn't see this, you probably want them to see it now, don't you? So we'll send out the replay. Watch for that. Watch for next week we've got another fantastic episode so we'll also send out links to that.

Remember if you are a veterinary practice owner, you actually right now already have a full-page profile on GeniuVets.com. Go to geniusvets.com/start and there's a quick little video, one minute video, that'll tell you all about it. You can claim it for free. It's absolutely free and we're just going to just give you a bunch of valuable stuff. It's really fantastic, so take advantage of that.