The GeniusVets Show - For Practice Owners and Industry Pros

Veterinary Industry Insiders: Peter KilKelly

March 31, 2022 David Season 4 Episode 2
The GeniusVets Show - For Practice Owners and Industry Pros
Veterinary Industry Insiders: Peter KilKelly
Show Notes Transcript

Peter Kilkelly is the Chief Veterinary Development Officer for Terravet Real Estate Solutions.  Peter has over a decade of experience in the animal health care and public accounting sectors.

In this webinar, Peter will cover:

  • Practice owners who are continuing to run their practice, and also own the real estate
  • Practice owners who want to continue owning their practice, but may want to cash out their real estate
  • Practice owners who wish to sell their practice, but continue owning their real estate
  • And practice owners who want to sell both their practice and their real estate

Hello everyone, and welcome to another episode of veterinary industry insiders. I'm your host, David Hall, co-founder of GeniusVets, and I’m very excited about this interview today. This is a really important one for all you veterinary practice owners out there because today we're gonna be talking about real estate and real estate is an often overlooked, incredibly important asset, as you know, and we're bringing one of the industry's foremost experts into the conversation today. We'll be talking with Terravet Real Estate Solutions. Terravet Real Estate Solutions is an investor, developer, and operator focused on veterinary real estate. They're focused on ensuring all veterinarians gain a better understanding of veterinary real estate as a unique asset and a critical part of a veterinary practice. Now, understanding the drivers of value for a veterinary property for owners or renters can be a key contributor to veterinary practice owners’ success.

A veterinarian's hospital building is often his or her second largest asset and frequently it's not given the attention it deserves from a planning and asset preservation perspective. The Terravet team is composed of accomplished practice owners, operators, lenders, and real estate professionals, each with years of experience.

Now joining us today is Peter Kilkelly, the chief veterinary development officer for Terravet Real Estate Solutions. Peter has over a decade of experience in the animal healthcare and public accounting sectors. He began his career in the animal healthcare industry working with Burzenski & Company, P.C, a veterinary-specific accounting firm. There, Peter worked with veterinary practice owners across the US to improve their practices’ financial health and maintain compliance with federal and state tax regulations. Most recently, Peter worked with VCA animal hospitals as a director of acquisitions, where he developed relationships with veterinary practice owners, performed financial analysis, and negotiated the acquisition of more than 50 veterinary practices with combined revenue in excess of 130 million. Peter’s a past board member of the Veterinary Management Council of Connecticut and a past member of the Connecticut Chapter of the National Association of Certified Valuation analysts. This guy knows his stuff, and I just wanna say, Peter, thank you so much for taking some time out of your incredibly busy day to meet with us here today.

I would like to kick off the day, just kind of give you the floor for a minute to tell us a little bit about Terravet. Tell us about your mission and your goals. How did it start? Where's it at? Where are you going?
Sure. Yeah, so Terravet is going on four years now. Currently, we own more than a million square feet of veterinary real estate across the US, and we're located in 33 different states. So where we're going is we hope to, or we plan to continue to buy more properties and hope to expand out and get into probably the lower 48, if not all the 50 states of the US. It's been a good run and there's just a lot of opportunities here on the veterinary real estate side that we're happy to be able to speak with owners of not just the practices, but also obviously the real estate and help them work through their transactions and their sales as they're coming up.

 

So there are a few different scenarios I'd like to unpack with you here today. And I'll just kind of go through them and then we'll dive down into the deeper questions of each one. So at a high level, so everybody kind of gets a sense of where our conversation is gonna go, number one, I wanna talk about practice owners who are continuing to run their practice and also own their real estate. What kind of things can they do to maximize the value of their holdings? Number two, practice owners who want to continue owning their practice, but might want to cash out and have a windfall based on their real estate. Number three would be owners that wanna sell the practice but own the real estate. So kind of both sides of how they wanna play that. And four, practice owners who are looking to sell both the practice and their real estate. So I know from our previous conversations that there are numerous considerations and strategies within each of those that you can unpack. Let's start with practice owners who are continuing to run their practice, and also own the real estate. What are the most common mistakes that owners are making that are actually kinda harming the value of those assets?
Sure. I'd say probably the biggest mistake is not paying a fair market value rent. More often than not, the rent could be to themselves. So, when you started the practice 20, 30 years ago you probably had a loan on the property. And so your rent to yourself at that time was probably whatever the dollar amount needed to pay the mortgage, and the mortgage since has been paid off and owners just for whatever reason don't adjust and they continue to pay themselves that same amount. The problem with that though, is, what the relationship between that payment and the price per square foot for rent is in your market. And sometimes those don't line up and you can either be overpaying yourself or underpaying yourself. And so it's very important for all landlords/practice owners to truly understand what the triple net lease fair market value rent in their area is.

A triple net means that as a tenant, you are responsible for the taxes, repairs, replacements, and maintenance of the building. And those are the three.

 

So that's the thing is that it's so often they get paid off and then they're just sitting there. It's going little by little, they're not adjusting it. They're not including all of those things in there. So they're underpaying and ultimately on evaluation analysis, it's gonna look like it's worth a lot less than it actually would be unless they were actually paying a market rate, what it should be.
True. And then to add to that, also they're not reimbursing themselves for the real estate taxes, right. So they're taking that rental income that they're paying themselves, and then going ahead and paying the real estate taxes on the property. But the practice itself is not really recognizing that additional expense. So when not properly structured the practice owner/landlord could be losing out on some cash flow from the practice side or not recognizing proper expenses on the practice side, that then will come into effect should they get to a time when they wanna sell the practice.

 

Let's talk about a few other ways besides the rental income, the most advantageous ways for them to structure their real estate ownership. What are the types of things that they can do to build and maximize the value of that property?
I think one of the most important things is really keeping the building looking fresh and modern. I think sometimes practices are so focused on the operational side of it, they don't put enough attention to taking a step back to see, Hey, when's the last time the reception area was painted or even the back treatment room, or when's the last time the floor's been repaired. You know, you have a lot of traffic from pets coming through the practice, and floors could take a beating. So I think it's very important for landlords/practice owners to take that time to look at their practice, to make sure it continues to look fresh. Another thing is remodeling, right. I think COVID kind of shined a spotlight when the boarding aspect of the practice declined.

What we saw actually through conversations with practice owners was that many of them looked at those boarding areas that they had, and if they didn't have significant boarding as part of their practice, they ended up taking those spaces and reconfiguring them and turning them into additional exam rooms. They thought that they were gonna get more bang for their dollar in that space. And I think that was a pretty smart move. It was actually funny over the last two years to see that topic become a recurring conversation point with many different owners around the US.

 

I had a few of those conversations just this past weekend at an event in Atlanta. Practice owners talked about how they had a space with, one had boarding facilities, another one had lockers for employees and stuff like that. And they kicked in another exam room, got another doctor in there and it's just, just so much more beneficial use of the space. What about things like signage, and basic old real estate concepts. What advice do you give on that?
Yeah. Signage is very important. I think it needs to be properly lit. I think you need to make sure that your sign is visible in both directions of the roadway. I think it's important to make sure you're pruning if there are trees or bushes by the sign that they're not blocking the sign, and also understand your zoning requirements in the town or city that you're in too. Some of them do have specific requirements as to the types of signs, whether they can be lit or not. But if you're in an area where they don't allow a lit sign, there are other things you could do to that sign to still make it kind of shine in its space. It's very important that you have good signage for your building.

 

You've also shared a couple, I thought, really creative ways to make additional money from the property. You wanna talk about that a little bit?
Yeah, sure. It's become popular now, especially as solar energy is gaining traction. We're speaking with a lot of practice owners across the US that either have additional space, whether it be a field that's open in the back of the property, or the size of the building is quite significant, so there's a lot of roof space. So adding solar panels to the property is an opportunity for landlords to gain some additional rental income because you're able to sell back that energy that the panels are grabbing. So that's another source of income from the property besides the veterinary tenant. Another thing too is billboards. If you do have an area of the property, and you're able to put in a billboard and rent that space out to advertisers. I've actually seen that a few times as well, and that could be a very good source of revenue for a landlord.

 

Awesome. A lot of veterinary practice owners today, they've gone through good growth in the past couple of years, and some need to expand their facilities. I mean, I know my partner, Dr. Drake, she is really feeling the pain of this being in California. The coastal commission is like, absolutely not. You can't modify the building whatsoever in any way. So, you know, practice owners across the country, they may or may not be able to do that, to have an expansion for a variety of reasons. What are some of the issues that you're seeing around practice expansion and do you have any ideas for handling those?
Yeah, I can't stress enough how important it's for landlords to understand what the zoning requirements are in their area. Different setback rules for property lines become an issue. And then another big issue is you may have the space to build and do the expansion that you want and the setback lines might not come into play, but the other factor of that could be a parking requirement, right? So many towns have a certain number of commercial spaces of square feet that are being used. And so you might be able to put another thousand square foot expansion on your building, but the question is, do you have additional room to add to your parking, to meet the requirement of those additional parking spaces? So understanding what the zoning requirements are is just a very vital component to the growth of not only the practice but also the growth of the value of the real estate.

 

Yeah. Absolutely. All right. Well, I think you nailed that. Let's talk about practice owners who want to continue owning their practice, but might wanna cash out their real estate, you know? What are the options there? How do you advise practice owners who go about exploring those off?
Yeah. I think there are two categories here. One is you have a single-doctor practice. I think for a single doctor practice, the real estate actually adds a real good value to the total package. So my suggestion is you really want to hold onto the real estate cause it's probably gonna be sold along with the sale of the practice to another veterinarian that will have interest. So I think from that perspective, you definitely wanna hold it, don't do anything with the real estate until you're ready to sell the practice. For practices that have multi DVMs and larger practices, Terravet would be an opportunity. You come to talk to us, we would have interest, it's an easy way for you to find a buyer. No transaction fees, no broker fees, or anything like that. And so I think we would probably be the first option for you if you're looking to sell the real estate, but you want to hold onto your practice.

 

Awesome. Well, you know, let's ask, and I know this is asking you to kind of advise against yourself here, but it's one of my favorite things about you guys is, in all of our conversations, I just get nothing but understanding that you're really looking out for win-win situations, the best for everybody. You’re just so ethical and awesome in those ways. So let me ask you if they're gonna move from being landlords of the real estate where their practice operates to just being tenants, are there things they should consider in structuring the deal? What kind of mistakes should they avoid for their own self-interest?
Yeah, sure. You know, from that viewpoint, you're gonna wanna protect your practice, right? So you're gonna wanna protect where your practice operates from. So you should definitely not accept anything or sell for anything less than a 10 to 15 lease term, so you know that the landlord is obligated to lease the space to you for 10 to 15 years. Besides that, you should have an expectation of what your costs will be. Again, when you own the real estate and you own the practice, sometimes there's a blurry line between who pays for what, when it comes to real estate. So having a good understanding of the expected costs that you're going to face as, now, tenants only in this location. And those expenses would obviously be the real estate taxes, the maintenance, and the repair replacement cost related to the building. But I think overall your focus is gonna be, I wanna get into a lease. That's going to secure this location for my other asset being the veterinary practice.

 

Absolutely. Cool. Well, let's talk about practice owners that wanna sell their practice, but actually continue owning their real estate. What kind of things should they be thinking about when structuring those deals?
Yeah, the big thing there is understanding the rent that you're going to accept as now a landlord from the new owner of the practice. You wanna make sure that your rent is at least a fair market value or within the fair market value range in your area.

 

How do they know, how they do that sort of valuation? I know this is an area where you guys have kinda broken ground and have some unique ways that you approach it.
Yes. We're happy to work with any practice owner. We can provide them with a rent analysis. We'll look out into their area within about a five-mile radius. We have access to triple net leases that are actively or spaces that are being actively leased. And we can develop what a range for a price per square foot is in that area, and then share that back with them. It's vital that they don't settle for a rent that's under a market, or even too far over the market range, because either way you're gonna have a negative impact on the value of the property.

 

Okay. Now, as a landlord where the owner no longer has an ownership interest in the veterinary practice, what are the liabilities that should become top of mind and how do you advise they mitigate those liabilities?
Well, I mean, the big thing is, again, your lease is gonna be an absolute triple net lease, right? So as strictly a landlord in this scenario, you're not gonna have any responsibilities more than just the structure of the building, right? So you're not gonna be responsible. And it's important to make sure that the lease is worded in a way where you're not responsible for the plumbing, the electrical, the parking lot repairs, the HVAC placements, and those costs the real estate taxes. And again, it's making sure that, and I can't emphasize it enough, that the rent is set at a fair market value rent for your area because again when that time comes when you decide you do wanna exit out of the property, you wanna make sure that you're able to maximize the value for it, and at that time the rent is gonna be the value driver for your property.

 

Yeah, absolutely. You know, there's a structure that we've talked about just a little bit before, and I know you don't see a lot of it, but you said you do see some of this. And in this particular scenario where a practice owner might actually become the landlord, it might be something to talk about a little bit. In commercial real, leasing, there are often terms where the rental price can fluctuate based on the performance of the business. So, what are your thoughts on like, so basically if the business is really growing and significantly performing a lot better, then they can charge a premium. It's built into the contract that they're paying a little bit more. But they're secured with a floor on the price. What are your feelings as far as how that changes the deal? Is it advantageous? Do you advise avoiding that? What are your thoughts?
Yeah, it's not common in the veterinary industry to lease a space depending on your growth sales. I don't know exactly why it's not compared to other industries.

 

I know it's like a premium-type thing. Like if you're at this premium corner or something, that's gonna get all this traffic. That's one thing. If it's more of a setback, it's not such a remarkably special property, it's probably not as big a deal.
Yeah. And it could have its benefits. If you're a growing business, and you wanna enter into, like you said, a really premium space and you wanna get in there knowing that this is gonna help you grow and your business is gonna grow and the landlord wants to work with you, coming up with that kind of arrangement might make sense. It allows you to get in on a premium piece of real estate, knowing that as you grow, your rent is just gonna have to grow with it. As I said, it's just, definitely with the amount of practice consolidation that's going on, it is not common at all for practice buyers to be looking to enter into those types of lease terms.

And so, I really think that's the probably what's driving it is just, I think, from a budgeting standpoint, from the buyer's side that they know if they can get a fixed rate and it's gonna grow by an annual escalator of somewhere between two to 5% every year. It allows them to understand that expense and can kind of plan it out a lot easier than should they be able to grow revenue by 20% and then know that rent's gonna go up by X percent next year. You're gonna kind of just deal with this up and down or large spikes and rent spent growth year to year. I think from managing, it's much easier just to set the rent and then have kinda a very lower escalator on that.

 

So obviously there are a ton of things on the practice management side, and running the practice and building it up and all of that. And we're talking about that here at GeniusVets all the time, but from a real estate perspective on that side, what are the things, you've got a playbook, a list of things that you say, look, if you're gonna sell in six months or whatever, here are the things that you wanna run around and make sure you're doing. You wanna slap the new coat of paint. What is the stuff that you're telling people, you gotta do this if you're gonna maximize your sale price?
Yeah, definitely. So big thing is, again, to take a step back and look at your facility. Is your roof about to, is it in its last year of life? Are the HVACs about to go? Most consolidators are gonna have a building inspection done, right? Or at least, the inspection is done on the mechanicals. Understand whether you got five years left on your HVAC, or if you got one year. So when that conversation comes up, you're ready for it, and you have a plan on how to handle it, if they're coming back asking you, Hey, listen, we want you to invest $8,000 to replace this HVAC unit before we close on the practice. But a lot of it just kind of comes back to, again, rent. Where is rent at? Is rent set appropriately? What are the expenses being paid out of the practice for the real estate? Are you recognizing the real estate tax payment outta the practice? Is that showing up on the profit and loss statement? Are there repairs and maintenance expenses related to the building, are those showing up in the cash flow of the practice?

Those are the things. If they're not, the suggestion to the owners is that they should, because when the buyer comes in here and starts looking at the cash flow at your profit and loss statement, they're gonna wanna see those expenses if the expectation is that they're gonna continue to pay those expenses moving forward once they're the tenant. It's harder to sell them on that idea when they don't see it in the PNL rather than coming back to 'em and say, okay, here's my EBIT, my practice is a hundred thousand dollars, but I'm also expecting you to pick up this $20,000 real estate tax bill that I've always paid through the real estate entity.

Now it's gonna affect your practice value. So the biggest suggestion to them is just to make sure that the building is looking good. You have a full understanding of if there are any areas for improvement that you are, one, at least aware of, and two, hopefully, you have the time to kind of put the money and invest in them and repair them. And then finally, the last thing is making sure that all these expenses are reflected properly on the practice, on the tenant cash flow being the practice, and that'll just help all your conversations and make setting the terms for the new lease you're about to enter into with the new tenant much easier.

 

Before we wrap up here, tell me what's it like—number one, who should be reaching out to you? What are the different scenarios that you think really qualify somebody to reach out to you where you can deliver some value to them? And then, what's that process gonna look like? What can they expect?
It doesn't matter really what stage you're at in your veterinary ownership career. Whether you're early on and just about to do a startup or you're about to start a practice. You just found a space, maybe you're a year or two into it, and you kind of want to get a sense of where rent is. Again, you're probably basing your payment right now on a mortgage that you probably have 10 to 15 years left to pay on. So having conversations, just getting an understanding of where that rent or that mortgage payment is and how it compares to the rental market in your area, is vital.

Practice owners who are five years away from retirement, and just again, are starting to get their ducks in a row regarding the PNL of the practice and wanna have an understanding of where rent is. So if they wanna make changes, they have time to do it. A practice owner who's entertaining offers right now from buyers. Many times we're brought in right in the middle of that process as they're talking to potential buyers and now they wanna understand lease terms. They wanna understand how do I get the best value for my real estate and what kind of lease do I need with this new tenant? And what should I be aware of? So really, at any time of ownership, it's worth reaching out to us. We have a property dashboard that we provide practice owners that's pretty insightful, and it combines the activity of the practice and the real estate. So you can see at what different points, the two kinds of intercepts, and how that can impact the value of both the practice and the value of the real estate. So, we are happy to do those dashboards for anybody as well, too, if they reach out to us.

 

I don't know how anybody can own a practice and own the real estate they're practicing in and not reach out and take advantage of that. That's just part of this information. Like, you gotta have great information about what you're worth, what drives that value, how do you improve it. And this is just an incredible first step. So I think it's one brilliant business strategy on your part to actually develop that and put that out there. I always believe in delivering value first and just value, value, value, and as people experience that, and fall in love with it, it always leads to good things for the business as well. So, thanks for doing that for the industry. And, I think it's brilliant. How do people reach out to you? What's their next step?
Next step, you can reach out to us via our website terravetrealestate.com . Click on the contact us button. Feel free to reach out to me at peter.kilkelly@terravetrealestate.com.

 

Awesome. Well, Peter, before I let you go today. One thing I think is important for everybody that I've, you know, for people who have been watching the last few seasons here of our webinars, one thing I like to do, I always like to humanize people that are, we're all we work all day long. We work super hard. We're delivering value and doing all this stuff for our profession, for our careers, but we're people first, right? So tell us a little bit about what you are into outside of work? What is it that Peter likes to do?
Well, I have young kids, so right now we're coming up in spring here in the Northeast. And so, lacrosse season's kicking off. So I'll be spending some of my nights with my son on the lacrosse field. I did. I did. And, it's a great sport. So, he's in second grade, so we joke around and it's less lacrosse teaching and more of herding cats, I guess, is probably a better explanation of the responsibilities and duties you do.

 

I coached my son's touch football around the same age and growing up and it was just if you can teach those if you can truly herd them. If you can get them to just move as a semi-cohesive group, that's a win man.
Yeah, I never would've thought. So my family's from Ireland, both my parents grew up on farms in Ireland and my mom grew up on a sheep farm. So when we were kids, we'd go over to Ireland and I would work the sheep farm with my grandfather and my uncles. I never would've thought that skill would have any benefit to me. And now as I'm teaching young kids on the playing fields here, it's amazing. But the similarities between herding sheep and keeping eight-year-old boys in line.

That is some parenting advice I think that a lot more people need. You need to go out and spend a week actually herding sheep on a farm. You're gonna be way better at it.

It was easier on the sheep because we had a dog too, that we got to use. You don't get the dog on the lacrosse field to help you.

 

Fantastic. Hey, thanks so much for coming, spending some time with us today, and sharing a bunch of valuable wisdom and advice.

 Remember your veterinary practice already has a full-page profile at geniusvets.com. It's true. Go to geniusvets.com. Pick your states, put in your city, and look, and you already have a full-page profile. They're free. They're totally free to claim. Don't charge anything at all. Once you've claimed your profile, you can use our job board. You can use our HR toolkits, our guides on how to attract doctors and staff, social media toolkits, and so much more, all free of charge. Go check it out. Very valuable. Thanks so much for taking some time outta your busy day to be with us. Tune in next week as we have another fantastic guest and a great webinar coming. And we'll see you around.