The GeniusVets Show with Peter Kilkelly

The GeniusVets Show with Peter Kilkelly


On Wednesday, March 29th, 2023, Peter Kilkelly, Chief Development Officer, Terravet Real Estate Solutions, joined GeniusVets Co-Founder, David Hall, for a conversation about understanding and maximizing the value of your veterinary real estate. For anyone who missed it, or wants to see it again, the replay is now available here:

Hello Everyone and welcome back to another episode of the Genius Vets Show. I'm your host and co-founder of Genius Vets David Hall, and today I'm really excited to be bringing you just a fantastic guest. Peter Kilkelly is 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 Burzynski & Company, a veterinary-specific accounting firm. There, Peter worked with veterinary practice owners across the US to improve their practice's financial health and maintain compliance with federal and state tax regulations. After that, Peter worked with VCA Animal Hospitals as the director of acquisitions, where he developed relationships with veterinary practice owners and performed financial analysis, and negotiated over 50 practice acquisitions with a combined revenue in excess of $130 million. Peter's a past board member of the Veterinary Management Council of Connecticut and past member of the Connecticut chapter of the National Association of Certified Valuation Analysts. He now lives in Connecticut, where he and his wife are raising a son and daughter. And I can say personally, after getting to know Peter over the last few years, he's a good friend, he's a good guy, and he really knows a heck of a lot about real estate and the veterinary industry. And with that, I'm so happy to welcome Mr. Peter Kilkelly. Peter, welcome to the show.

Hey, David, how are you? Great to see you again.

Thank you so much. Great seeing you as well. So, hey man, tell me a little bit about what it is you're going to run us through today? Tell us what’s to come.

I think there are a lot of things that veterinary property owners should be aware of and need to know when it comes to the value of their real estate and, more importantly, how they maximize that value. We're going to talk about why it's important to know what the value is. I'm going to run you through what an appraisal is and the types of methods that are used to calculate values within an appraisal. We're going to talk about what it is that actual real estate investors and buyers, how do they look at veterinary real estate, and what things they are looking for that are going to drive the value of the property. Then finally, we're just going to talk about lease terms. Everyone should have a lease between the practice and the landlord, and so we're just going to run through some of the important terms that should be in all of those leases.

It's been surprising to me as I've really gotten in-depth to know so many ins and outs of the veterinary industry over the last seven years, how many veterinary practices just really don't have the real estate side of their business structured optimally to maximize their value. I just love this topic. I've seen you present on this, just really brilliant stuff. So excited to have you presenting to the audience today. Tell you what, man, I'm just going to shut up and hand it over to you. I believe you have some slides you're going to share as well.

Let me share my screen and away we go.

Now, for all of you on the podcast, you're not going to be able to see the slides, but Peter will talk through them. If you want to see the slides, we will have a link to the replay of this if you look in the description. So look for that link if you want to see the slides to this. Go ahead, Peter, take it away.

The topic of the presentation today is understanding and maximizing the value of your veterinary property.

As I just mentioned, I'm going to be talking about your property value. Why does it matter? Why should you know what the value is? I'm going to walk you through what an appraisal is and the types of methods that are used to calculate the value that you would see in an appraisal. I'm going to talk about what determines a property value in the eyes of the buyer, whether it's an institutional buyer or any third-party buyer that might be interested in purchasing your real estate. We're going to talk about five lease terms that drive that value for your property, and then we'll summarize it with just the overall key factors that every veterinary landlord should know that, again, drives value for your veterinary real estate.

You have two major assets. You have your practice, and then you also have your property. It's important for all owners to be able to look at each of these two assets independently. Granted, they're usually seen as being joined at the hip. Most often than not, the one owner of the practice is also the sole owner of the real estate. More often than not, who's responsible for certain expenses and who pays for those expenses gets muddied or is unclear because, at the end of the day, if you're a sole owner who owns both of these assets, it really doesn't matter. You're just switching cash from one pocket into another. But here I want you to do away or leave those thoughts and really take a hard look at your veterinary real estate property as a single asset wearing your landlord hat today.

Why should you know the value of your property? There are a lot of approaches that you can take when you look at your veterinary real estate that can help you either increase the value of that property, can help you increase the future potential value or cash flow of the practice, and/or can just help increase your future personal wealth.

From a practice investment side, you can use the increased value of your property to pay for expansion and renovation projects that will help generate additional gross revenue for your practice. So if you have equity tied into your real estate and you want to go out and refinance your property, you can pull out some of that equity and use that money to expand the building, add more exam rooms, add another treatment area, add another surgical suite or a dental suite. Again, all of that's going to promote additional growth of the tenant being the practice, and it's going to generate additional revenue, which is also going to lead to higher profit for you on the practice side.

Another side is just your own personal wealth. Again, if you have equity in your property, you can pull that money out and use that to go and invest in other types of investment properties. You can use that money to help fund your children's college education. You can help it fund just future retirement for yourself. Or, if you want, you can also just take that very elaborate vacation that you've always wanted. So as we're talking about possibly refinancing and pulling that equity out, it’s going to require you to have a real estate appraisal.

Property appraisals are driven by banks and lenders. But it's very important for you, as the borrower, to understand how this appraisal is being done. What are the things here that are driving the value of that appraisal, and is the appraiser actually understanding your particular property? Do they understand what is inside a veterinary piece of real estate? So you want to know what valuation metrics are used.

When it comes to appraising veterinary practices, they can be a little funky. When they're not a standard office space that is just wide open with some bookcases and some other shelving, there are medical components to your buildings, so it's important that the appraisal can pick up on that and should reflect the value of having certain piping in the walls and other types of components to the building that are necessary for a medical office building.

Again, appraisals on veterinary properties can vary greatly. One of the big issues is that appraisers can be confused when it comes to these properties. Usually, it's a local appraiser when a bank retains somebody to come in and do the appraisal. However, they really don't have any appreciation for the tenant being the veterinary practice. They don't understand the stability of that business and the fact that that business has been around for maybe 30-plus years and has no signs of going anywhere.

The other issue is that there's no clarity on how we compare this specific veterinary property and who we compare it to. Is it fair to compare your property, which is a sophisticated structure, to one that is just a square box, pretty much a shell with nothing, no contents to it? There's just basic wiring and plumbing. There are very few veterinary property transactions that are publicly out there to allow these appraisals to go out and educate themselves to try to learn these things. They have very little experience doing it. Therefore, it's very important that when the appraisal time comes, you engage with the appraiser and talk to them and talk to them about your building, talk to them about what went into the building and how your building is different from the standard commercial real estate that they normally look at.

All right. In all appraisals, there are three types of methods that are used. The first one is called the cost approach. The second method is a sales comparison approach, and the third method is called the income approach. What typically happens is that each of these approaches calculates a value on the property. It's then on the appraiser to determine how they're going to use these three different values to generate the final appraised value. More often than not, they'll use some form of a weighted average to determine that.

I'm going to start here first with the cost approach. The cost approach is the cost in today's dollars to reconstruct a similar building of similar quality. Typically, this is used by insurance companies when a building is either destroyed by a storm or maybe a fire. To pay out the policy, they need to determine what the value of the building was. They'll look at it and say, okay, here's a 5,000-square-foot medical structure. We need to rebuild the structure as is, and how much is that going to cost today? So that would determine what the value of the property would be using the cost approach.

The second approach is the sales comparison approach. This approach is pretty common, mostly used in residential real estate when valuing the sale of a house. Because here, what the appraiser does is look at recently sold properties within a certain area around the subject property and determine what the price per square foot value of the property is. One of the problems, though, with this is that there's no other commercial property similar to yours that has sold recently. Again, this is all based on having recent transactions. Can the appraiser find another veterinary property that was recently sold? If they do find one, is it actually in your market, or have they had to look to the town over or a few towns over to find that comparison? And even if they do, are they really comparing apples to oranges? It's hard to take a veterinary property that's outfitted with all the different medical requirements and compare that to a vacated building that's really just a shell.

To do this and to try to create that comparison, the appraiser is left to make wiggle room adjustments. This is when they take the two different properties and try to rationalize why these two properties should be seen or how we can make them comparable. But with that comes a lot of subjective guessing. For that, that's where I want everyone to understand this process because I want you to be able to go back to the appraiser and talk to them and understand how they made their adjustments when they were making their comparisons and why they were choosing these different properties and how did they feel that those properties related to your property.

In this slide here, you'll see we have four properties that were used as comps for a sale of a veterinary practice. These four properties were quite different in value. If you look down here, the original sale price of property number one was 10.2 million, property number two was sold for 5.6 million, property number three was 8.4 million, and property number four was 5.3 million. So you can see the range in value is the low end of 5.3 to as high as a property valued at 10.2 million. That's a significant difference in value. Yet this appraiser viewed these four properties as comparisons for a subject property. So you could see here, based on those purchase prices and the size of the buildings, the price for square foot again ranged from 305 to a high of 589.

When they went ahead and made their adjustments to these values so that way they could justify using these comps to be a value determinator for the subject veterinary real estate, they went in and made these adjustments to the value, and this is the wiggle room that I mentioned. What they did here, on this property that was initially valued at 10.2 million, is they looked at five different criteria. They looked at location, aging condition, building size, basement, and wiggle adjustment. These four criteria.

For location number one, what he's saying here is that the subject property's location was actually not as favorable as building number one was, so he's reducing this value by 20%. Aging condition, he's saying that the subject property is actually in a little bit better shape than property number one, so he's going to make his adjustment. He is going to increase by 10%. Building size, he's decreasing at 40% because he's saying that building number one here is quite larger than the subject veterinary building. Finally, he used the basement as a criterion, and he determined here that the basement of the veterinary property was not as favorable as the one in property number one. Overall, his wiggle adjustment when you add these three up was 47%. That's pretty significant.

You go over to property number two, same type of thing. Their wiggle adjustment here was only 5%. Property number three, same types of adjustments, different reasons they made these assumptions. They ended up decreasing this property value by 16%. So you could see here at the end, what started off at some $589 square foot property after the appraiser went and tried to adjust it to make it fit more like the subject veterinary real estate property ended up decreasing the value 47% and brought the price per square foot down to 311.

You can see here at the bottom, value after adjustment, he took this $10 million property and almost cut the value in half, and then said that that's a comparable property for the subject property being the veterinary hospital. This is where we have the questions about, well, how can you really take this property that is seen from a value standpoint to be much greater than the potential value of your appraised property, make all these adjustments, and then justify that this is a fair comp to use. As part of this presentation, it's pointing out these types of adjustments that are made, that it's important for any veterinary landlord to know that you need to understand these wiggle room adjustments when you get an appraisal back from a bank. Especially if you're relying on a refinance to do a build-out, you might have a certain value that you need to be able to pull out of your building to help support the cost of the renovation.

If the property doesn't come back or meet that expectation of value, you're not going to get the funding that you need. Well, if that were to happen and you look into these adjustments, you have the right to go back to the bank and say, "Listen, I'm questioning these appraisers' adjustments. Could we have somebody look at this to have another appraisal done? Could we get a better explanation of why they chose these different types of adjustments?" Because it could help you in actually increasing what would be the appraised value because going back and having them be able to change their adjustments here could create a higher value for you.

The third approach in a real estate appraisal is called the income approach. The income approach is rent and capitalization rates that are used to determine the property value. This calculation or approach is typically used by buyers of real estate. Most properties have a lease in place with an established rent, but it's very important to know if your rent is set correctly. You also need to ask, what is the capitalization rate for my property in my area based on the lease that I have?

What is the capitalization rate? The capitalization rate is really the relationship between the rent that the property is putting off or providing to the actual property value. In my example here, you'll see the property is generating $100,000 in annual rent, and the property value is a million dollars. Then, my cap rate of $100,000 divided by a million would be 10%.

When determining what the value is using the income approach, the formula goes rent divided by the cap rate to determine what the property value is. Similar to the other example that I just showed you, if we have $100,000 in rent, we know what the cap rate is, and we're looking to determine what the property value is, we can take the $100,000 divided by 7.5%, and you get a property value here of $1.33 million.

Take that same $100,000. Let's say it's a different cap rate of 8%. You can see here for that same $100,000 on an 8% cap rate, the property value then is at $1,250,000. Finally, here in the third example, the same $100,000, the cap rate continues to increase, and now it's up to 9.5%. Now your value is at $1,052,000. So it's very important for you to understand the relationship here with the cap rate. That is, the lower the cap rate, the higher the value. If somebody says that they're looking for an increased value and they want the cap rate to go up, that's not true. If somebody is looking to increase their value, they want a lower cap rate rather than a higher cap rate.

Within the veterinary industry, and with so much corporate consolidation happening with the practices, the term multiple is a common term used to determine value. Most practices today are sold on some multiple of EBITDA. A cap rate is just an inverse of a multiple, so the formula to calculate my cap rate in terms of a multiple would be to take one, divide it by the cap rate, and that'll give you your multiple. So if you were then to times that by the rent, that's how you would calculate your property value.

Here in the example below, we're going to take one, we're going to divide it by our 9.5 cap rate, and you're going to see that that's a multiple of 10.53. That multiple of 10.53 multiplied by $100,000 in rent, is going to give you a property value of $1,053,000, very similar to the previous slide.

In the second example, the same thing. We're going to figure out what is the multiple of an 8% cap rate. We're going to take one divided by 8%, and you'll see that's 12 and a half multiple, times the rent will give us $1,250,000 in property value. You can see here at 7.5%, that equals to a multiple 13.3, the same $100,000 in rent. You multiply the two together, and you get a property value of 1.33. So in the previous slide, where I showed you that the higher the cap rate, the lower the value, multiples work opposite. So the higher the multiple, the higher the value.

Next, we're going to switch over to how real estate buyers determine property value. You're going to find that we don't or they don't base the values on your three approaches used in the appraisals that I just walked you through. They actually base the value on one of the approaches, and that's the income approach.

Now again, to lead off the income approach, we had mentioned that most practices had a lease in place with their landlord or said otherwise, a landlord has a lease in place with their tenant. That becomes really one of the value drivers of how you determine the value. You have this lease agreement, that's a long-term lease agreement, in there it's stated that the tenant is going to pay you X dollars in rent, they're going to do it over the course will say the next ten years, there might be an escalator in there of every year that rent is going to increase by a certain percentage point or a CPI index. With that, because you have this tenure commitment of rental income, the lease now really becomes one of the value drivers there. So for parties that are looking to invest in commercial real estate, the lease becomes one of their main things to help them determine what the value of that property is.

In addition to the lease, I'm going to walk through a couple of other aspects of the property that are key and that drive value. The first one is going to be the location evaluation. Every buyer is going to look at where the property is. Is it in a rural setting, is it in a suburb, or is it a metro near a city?

As far as the veterinary perspective of it, we're going to be looking at whether the area is attractive to veterinarians. When you're thinking about selling your property, the new owner of the property wants to keep the tenant in place, so they want to make sure that they're investing in an area where that tenant's not going to have a hard time trying to find labor. Can they continue to grow their practice, and in doing so, they will need labor to do that. So understanding where the hiring or the labor market is for veterinarians in the area and technicians and all lay staff for veterinary practices is one of the points that investors look at.

The other area that they'll look at includes if the area is growing. Is this a city that is growing year over year, or is this a town or an area in a state where more people are moving out than that are moving in? They're going to look to see how many competitors are in the area. If I'm investing in this veterinary real estate property and I want my tenant to continue to grow, what does their competition look like? We're going to look at that. The other thing is how accessible is the location? Is it close to a main highway? Is there a lot of traffic going by the front door every day that people see the practice, they can see the signs? So it's items like that.

The next thing, again, is back to the lease. We're going to look at the quality of the lease. Most properties have existing leases. The question is, what are the terms of that lease, and how many years are left in the lease? Finally, who is the guarantor, and what is their financial strength? When we're looking at a lease, and we're looking at the terms, and how many years left, it's definitely going to be more attractive to a buyer of the real estate if they know they have the tenant in place for the next we'll say seven years as opposed to buying the property, and that tenant only has two years remaining on the lease. They're going to be more interested in buying the property with more years than they are with less.

Understanding who the tenant is and their financial strength is also important. You want to know, can the cash flow from the practice support the rental income that the tenant is obligated to make? As a landlord, you just want to understand and know how healthy of a cash flow is your tenant's business putting off. You want to make sure that your rental income is secure and that this tenant is not going to have issues paying their monthly rent.

With the guarantor, you want to know who's backing the lease. With corporate consolidation going on, there is a different value looking at the lease when you have a large entity like some of these corporate groups that are backed either by private equity or one of the larger healthcare companies, and then there is if a sole proprietor is backing the lease. It's important to understand who the tenant is.

So again, getting back to the lease, it's about understanding where that rent is stated in the lease and how that compares to local market rent. One of the veterinary industry benchmarks historically is that your practice rent falls somewhere between 46% of practice gross revenue. But in addition to that, every landlord should understand, how does my rent on a price per square foot compare to the market that I'm operating in? Meaning, am I leasing my space, we'll say, for $20 a square foot? Is that what the going triple net lease market is in my area? You might end up leasing or paying a rent amount to yourself because it's being driven by a debt obligation that you have from when you purchased both the property and the practice. All right, you may find out that debt obligation, that monthly rent that you're paying yourself, is actually way above the market rent for your area.

Granted, you have a debt obligation, so that's going to trump any market data. But once that debt is paid off, if you're paying yourself $30 a square foot in rent and your rental market is actually more like $15 a square foot, it's important for you to understand that because if anybody else was to come in and you either sell the practice, that new tenant is not going to be interested in paying $30 a square foot. They're going to expect to pay the market rent, and it could be 15. So it's extremely important for you to understand what the absolute triple net lease market rate in your area on a price per square foot is. The top two factors for your property value are, again, the rent and the lease quality. Here I'm going to talk about five lease terms that everyone should understand and should incorporate into their leases when they are renegotiating a lease, either if it's with themselves or if you are selling your practice and you need to negotiate a brand new lease with a brand new tenant.

The top five are initial term and the length of that initial term. So anywhere from 10 to 15 years in the initial term is seen as a value driver for your property. Most often, there are renewal options as part of the lease. Typically, they're anywhere from three to five years. However, they're all tenant-driven. So from an investor's side and determining the property value, the renewal options aren't seen with the same sense of value as the years left in the initial term.

Said another way, if you get a 10-year initial term lease with two five-year renewal options, all together, that's 20 years, but you do not have a 20-year lease, you have a 10-year lease. Typically, the tenant has the option to renew twice for an additional five years each. Because those are tenant-driven options, you really only have a 10-year lease. That's what you have control of. That is how the lease is valued. It's valued as a 10-year lease, not as a 20-year lease. So it's very important to understand that.

Number two here is the lease guarantor. Who is supporting the payment of the rent? More often than not, when a practice is sold, if it's being purchased by a subsidiary of a company, you're going to want the parent company to be the guarantor on that lease, not the subsidiary that's purchasing your practice. It's very important for you to know who the tenant is. I see this name here as the tenant on the lease, but who are they? How do they fit into this corporate structure that I'm selling my practice into? Is it the main entity, or is this a subsidiary of that entity that is my tenant? So it's very important to understand the difference between the two, and you always want to strive to get the guarantee from the main entity.

You want fewer expenses as you can negotiate as the landlord. Earlier, I said that, more often than not, the practice tends to pay for a lot of the repairs, maintenance, and replacement costs of the structure and the property. A lot of times, it's just because, as an owner, you may own both, and again, the cash is coming out of either one of your pockets. So at the end of the day, it doesn't matter, but it is important to understand who is responsible for each of the maintenance, repair, and replacement of the components of the building to the parking lot to the roof to the yard. If you live in an area with snow, who's paying for snow removal? If you have a grassy area, who's paying for the lawn care? As a landlord, you want to have those expenses taken on by the tenant because you're going to be renting your property back on a triple net price. So it's not fair to accept what we'd say is a gross lease term but only get triple net lease rental income from it. You want to make sure that if I'm accepting a triple net lease rent rate, my terms reflect that, and the tenant is going to be carrying the expenses for any of those future costs.

Assignment language is a provision in the lease where the tenant has the right to assign the lease typically to any other entity or subsidiary that it may own. What you want to do here, though, as a landlord, is try to protect that guarantee that you have. You don't want to have a guarantee with the main entity and then not have sound assignment language, which would allow them then to assign the lease back down to a subsidiary entity. To do that, you want to have a provision in there that states that the tenant can assign the lease but only to an entity that is of equal or greater value than the current guarantor. This way, again, you're protecting that guarantee that you were getting originally in the lease.

Finally, getting financial reporting is very important. Sometimes we don't think about it because when you own the practice being the tenant, you're involved in the day-to-day operations and how well your practice is doing. But there may come a time down the road after you sell, you're no longer working, but you still own the property, and you don't have that connection with the practice anymore. But as a landlord, you're going to want to still understand how well your practice is doing because you're looking to make sure that they're able to cover the rental income that's due to you.

It's very important to have a provision in there that at least once a year, you're provided a profit and loss statement from the tenant. Then you can see how financially well they're doing. The worst-case scenario is that if they're not doing financially well, it allows you to keep your finger on the pulse and say, "Okay, I may have a risk here of a tenant either not surviving or suffering such a decrease in cash flow that they're going to have trouble making my rent payment." What it will do for you as a landlord is that then that gives you an opportunity to approach the tenant and say, "Listen, what can we do here to work together?" Or if it's something where you just don't feel like they're going to make it, now's your opportunity that you might want to be able to pivot out of the property and put it on the market and sell it.

I put together this little analysis, and based on the previous lease terms that I just reviewed with you, we have identical properties here with identical rents, but each has two different leases because one failed to negotiate a really strong lease and the other one actually did very well in negotiating a really strong lease. So I'm just going to walk you through this, and I think this is something that is really the eye-opener here, why it is so important to get those lease terms that I just mentioned in the previous slide.

Here, we have a failed to negotiate a lease. So the landlord here has an initial lease term of only five years. They did get an annual rental increase of 2%. The guarantor here, in this scenario, this was sold to a corporate practice buying group, but their guarantor is not with the main entity, it's with a subsidiary. Landlord responsibilities: the landlord is responsible for the replacement of the HVAC and the parking lot, and they have structural responsibilities. Do they have the right to assign the lease? Again, they did. The tenant can assign the lease to any entity. It feels like there's no financial reporting. In year one, rent of $80,000, based on this lease term, the cap rate being valued or being used to determine the property is 10%. Again, 10% being an inverse of a multiple, that would be the multiple would be 10. Ten times the rent of 80,000 would give you a real estate value here of $800,000. Said another way, $80,000 divided by a 10% cap rate would give you a value of $800,000.

Now we jumped back over this column here, and we have the exact same property, but here we had a properly negotiated lease. The landlord here was able to negotiate a 15-year initial term that does not include the renewal options. They have an annual renting price here set at either the greater of 2% or inflation. They have the guarantor here of the corporate entity, and it's not a subsidiary as it is over here. As far as landlord responsibilities go, they're responsible for the roof and structure, and that's it. The parking lot, HVAC, and all of the maintenance, replacement, and repair expenses are on the tenant. Their assignment language has its set to protect that corporate guarantee that they got. So the tenant can only transfer this lease or assign this lease to an entity that is of equal or greater net worth than this corporate entity up here that's given the guarantee. Financial reporting here, they got it on both the practice financials, and they're also getting the financials from the guarantor.

That same $80,000 with these lease terms, this property now is being valued using an 8% cap rate, generating a real estate value of a million dollars. You can see here the impact or the difference between what a properly negotiated lease and a poorly negotiated lease can have on your property. In this example, it's worth $200,000, so that's why it's so important for veterinary landlords to truly understand when it comes to negotiating a lease agreement, that they really need to take a hard look at it, understand the terms that are in it, and make sure that they're getting market terms. Because if they don't, it can have a negative impact on the value of their real estate.

Now I just want to sum up, a quick summary of everything we went through. Again, the three keys here that everyone should walk away with when it comes to valuing their real estate is, one, you want to have your rent set at a market rate. It's very important that your rent is not set way above the market and that it's set within a range, given your particular market. Usually, we will look somewhere around a five-mile radius. It could go out to 10 miles around the actual property itself to determine what the rent range is within that area. The second thing is lease quality. What are the terms of the lease? Are they market terms? Is the tenant, the guarantor, creditworthy? There is a difference in the credit risk between a single individual practice owner and one that is owned by one of the significantly large veterinary healthcare companies.

Location and building. Is the area that I am in a strong demographic region? Is the area growing? What does my building look like? Have I been keeping up with it, or does it look like paint hasn't hit the walls of this building in 20 years? Those are all the things that any investor looking to buy the property is going to really consider. So it's very important that all veterinary landlords, at least at minimum, focus on these three factors because you only have a certain period of time to focus on these factors, but this is what's going to determine the value later down the road when you do decide to sell. That's pretty much the presentation..

Peter, that was fantastic. It's always really interesting for me to hear you run through that stuff. I have a couple of questions.

Of the three approaches that you talked about, which one typically gives the highest real estate value?

Great question. I don't know if there's one or the other that gives the highest because each one has its own potential issues. Depending on the wiggle adjustments that an appraiser uses on a sales comparison approach, they determine how aggressive those adjustments are, which could determine whether the value of being driven by that approach or calculated by that approach is higher or lower.

The income approach, I would say, is probably the truest of value approaches. I think that probably is a better way because the one nice thing about the income approach is that there's a little bit more consistency with the numbers, what the lease is, and what the rental income is generating. You can determine whether that's market rent. So there are a lot more concrete numbers to base your value on. With the sales comparison approach, there's just so much subjectivity to it that it could go either way. So personally, I'd lean heavier toward the income approach.

That was exactly my next question, whether you had one that you typically prefer. I can see that you're able to look at a bunch of factors and see if one or the other would be potentially more advantageous, but it sounds like, all things equal, you'd lean toward that income approach.

Yeah, just because if there's a lease in place, it's going to let you know how much income is going to be produced off of this property for the next five to ten years.

In your experience, do you think any one of those has the biggest risk of being refuted by a potential bank or buyer?

Yeah, definitely the sales comparison approach because it just depends on what adjustments are made. I had this great example up here in the northeast with a veterinarian who I knew who had a bank appraisal done for doing a renovation and came back to me. The property was valued less than what he was planning or what he really needed to fund the project. It wasn't a huge gap. It was a six-figure gap, though. He came to me and said, "Hey, listen, do you mind just reviewing this? Any input? The bank said I could put comments out to them if I wanted to." So we reviewed it and looked at the comparisons they were using, and we noticed that one of the comparisons that were being used was dragging the price per square foot down. There was actually a significant reason for this. The reason was that this was a very large building, and half of the building was used for boarding. It was actually a veterinary hospital, and the other half was outfitted for medical purposes.

When the building was purchased, the value of it, he didn't understand that the full square foot of the property was split. So the value of 10,000 square feet was valuable, hypothetically, say at $10 a square foot, whereas the medical office building the other 10,000 was at $25 a square foot. He was trying to use this value as a comp, which it really wasn't. What he could have done, though, and this is what we ended up doing, is go back to the bank and say, "Listen, this 10,000 square feet of medical office space component of this building is $25 a square foot, that's being compared over here because there's no significant boarding to this property where this doctor's trying to get a loan on." And the bank understood it. They adjusted it, and it was a big enough swing to get him the money that he needed to fund the project.

That's really interesting. I think it goes to my next question. If the appraiser makes wiggle room adjustments that you know you don't really agree with, number one, can you really expect to be successful in arguing those? And number two, is it up to the appraiser to revise that appraisal, or is it up to the bank or buyer to just adjust the figure and understanding that they're going to use?

No, it's going to take the sign-on by the appraiser. At the end of the day, the appraiser has his license here and his certification that he's putting on this. So the question would be generated from the property owner back to the bank to say, "Hey, listen, I disagree with the value here. Let's have a conversation with the appraiser. Have him justify why he made these adjustments. What was his basis for making those adjustments." That's then, on that info, how you can pick a way to argue against one of his reasons for adjusting. It'll be then on the bank to say, okay, that's a valid reason or not.

So, ultimately, it sounds like you do have to take it up with the appraiser first and foremost. I wasn't sure if you really meant the appraiser has to sign on and say, "Yeah, good point." Or if the appraiser really needs to be involved, but it sounds like the bank is the ultimate judge.

Well, yeah. The bank's not going to trump the appraiser. The appraiser will have to sign on, but then the bank also has to accept that; okay, yeah, this is a reasonable adjustment up as well. So both of them need to agree on it. That's why my recommendation to anybody who's having an appraisal done is to sit down and meet the appraiser before he comes through your property and into your building and give him a half-hour beforehand to talk to him. Most of the time, they're going to have their comps already. So they're coming to you when they come and do the site visit, and more often than not, they already have the comps that they think they're going to use. So you could start having this conversation early on before the report's issued, right? Let me know what you are using as comps. What did you find?

Yeah, I mean, this is a person who is going to play a significant role in determining the value of probably your most valuable asset. Advice I got when I was young and advice I'm imparting to my kids is I'll say now, anybody who's going to play a really significant role in your life like that in being able to determine the value of something you own or make some determination that's going to affect you in a significant way, it really helps to establish a bit of a relationship with them before all of that action commences. Because people are people, and if they like you better, they tend to roll in your favor a little bit more. If they don't like you, sometimes people can stick it to you. So it is always a good idea to sit and spend a minute connecting with a human and getting on the good side. I think it just makes things feel better.

Absolutely. I agree, for sure.

You talked about capitalization rate, and I love that explanation. It looks like cap rate can be, number one, a very good way to determine fair market rent for a property, but it's also a strong factor in determining the value of a property. So let me ask you, is there a cap rate that you would say is a good standard for veterinary practices around the country as a base overall? You had 10%, 8%, 9%, 7.5%. You had a range in there that sat there. Is that what people should be expecting theirs to fall in?

Yeah, it's a pretty wide gap or wide range, just because you know what you're going to pay for a property in downtown Los Angeles, which is going to be quite different from what you're going to pay for, we'll say, the rural mountain area in North Carolina or West Virginia. So that percent and cap rate would be quite different.

Excluding high real estate value areas, the Manhattans, the boroughs of New York, the Chicagos, the LAs, and San Franciscos, I would say for your typical suburb of veterinary real estate, and again, this also is really reflective because we had so many significant interest rate increases, which plays a significant impact on cap rates over the last 12 months. The range has definitely crept up. But I would say somewhere between seven to 9% is pretty much the going rate. Whether you're on a high or low end of that will be determined by where you are, the position of your building, and then what type of lease you have.

Awesome. How much can people really know if they want to try and take their fate into their own hands if they're going to try and figure out, hey, I want to drive that cap rate down, so that drives the multiple up, it drives the value up. So I want to evaluate property improvement projects or evaluate better signage or evaluate better whatever it might be that could make that property more attractive.

Is there any good understanding and approach that they can take to evaluate those potential capital improvement projects?

Because I know that there are some things where it's like people could spend a lot of money on an improvement that actually doesn't really do much for their value, and from a valuation perspective, it's wasted money. If it makes you enjoy your life better and it brings you some value that you hold owning it or working there, then that's different, and that's great. But from a pure property value, is there any wisdom or people they can lean on for expertise that can help people evaluate those types of projects before they get into them?

Yeah, I think a couple of things. One, just look at your clients and survey your clients, right? If your books are full, your appointment books are full, and you're busting at the scenes, and you're generating a max revenue, and you have significant bushes and trees that are blocking your building from being seen on the street, I'm not going to say it makes sense to go and rip all those out. People are still finding you, right? But if you see that you could definitely have room to grow your practice and you just don't know, do I have a good street presence? I might be on a really good main throughway, but I might have all these bushes and trees that are just blocking my building. So people drive by, and they don't even know what's behind the bushes that they drive by. Then I'd say, "Listen, you probably want to clear those out."

You definitely want to look at your property from the client's perspective. You want to be looking at it as you're driving down the road, you want to be looking at it as you're driving into the parking lot, is it welcoming? Is it clean? But I would say definitely one thing you can do is just survey your clients. What do they think about your reception area? What do they think about the exterior of the building? Do they feel like it's easy to get in and out of the parking lot?

For people, I have mentioned this a few times, and that's your building, especially with this tight labor market we went in. When you're looking to hire somebody, the building's the first thing they see of your practice before they meet you. So as they're approaching coming in for that interview, it's really their building, and that's what's going to sell them initially. Is this clean? Is this inviting? Is this really beautiful, and does it look like a sophisticated medical building? Do I want to work here? That's the vision you want to be able to portray when they walk through the door. Then the next step is that they actually meet you, and you go through the interview process. The recommendation is don't be afraid to survey your clients and then just take an honest look at it from yourself as if you were a client coming in here. Do you still have the same furniture as when you bought it 25 years ago? Maybe it's time to update that.

Yeah, I always recommend people get a friend, get somebody who maybe has a design eye and exterior and interior design sensibilities that you would respect because it's so easy on a daily basis to look past the things that you've seen for a long time and become blind to them and forget that they're even there, to literally just not even see them. The brain's funny that way. So if somebody looking at it with truly fresh eyes can a lot of times point out stuff that you're like, "Oh yeah, I totally stopped even looking at that. Good point."

No, absolutely. We look at so many properties now that sometimes I look at them, and right off the bat, I'll just see a tree that's on the corner of the building, and I'm like, "Why is that there?" It's sitting on the roof. It just looks horrible. There's no purpose to it. I'm like, "Get that out of there." It just makes it look a little bit dingier.

And they're like, "But it's always been there."

Yeah, correct. Yeah. It blends in. It's like sighting now at that point, right? They don't even see it after staring at it for so long.

Exactly. Well, hey, I tell you what, this has been fantastic. It's obvious to everybody in the audience that you have supreme expertise and knowledge about real estate, and that's very interesting. But before we cut, why don't you actually take a second and tell the fine folks about Terravet Real Estate Solutions and how they can reach out to you.

So Terravet, we are investors in veterinary real estate, owning more than 150 veterinary properties across the U.S. Besides investing in veterinary real estate, we do a lot of the CE and provide a lot of insight for veterinary landlords. So you can reach out to us by going onto the web to You can reach out to me through my email at [email protected]. I'm happy to provide any rent data if anyone's looking for some, they just want to have ideas about putting a lease in place if they don't have one, and they just want to talk through some of the concepts I introduced today, and I'm happy to have phone calls with people. It's definitely important that everyone looks at their real estate wearing a landlord hat, not as the owner of the practice being the tenant.

Fantastic. I love it. Hey Peter, thank you so much for coming today. I'm going to have a link. We're going to drop in chat. We're going to drop links in descriptions wherever this video is posted. It's going to be posted around our different channels and syndicated as well as on the website. We'll drop some links in there that people can use. If they want to reach out, they'll be able to fill out a little form and get in touch with you.

Everybody who came today, I'm sure that you got a whole lot out of this. Make sure to come next time. We've got this incredible series lineup. I am astonished and feel very fortunate that so many of the brightest industry leaders in the veterinary industry have been reaching out and want to join the program and share stuff with the audience. We've got a lot of great stuff coming up for you in the weeks and episodes to come.

If you haven't taken a look at it yet, you should go to because if you're a veterinary practice owner or manager, did you know that your practice currently, right now, already has a full-page profile live at It's true. It's completely free to you. We've put a team on it to put great information out there online and try to give independent veterinary practice owners an advantage over corporate chains. We want to make sure that everyone can find you. These are optimized. They're showing up really high in Google Search results. Check it out. You can claim it totally for free. There's a wealth of other awesome resources available to you once you do. So go to, look up your practice, claim it, and we'll reach out to give you a whole bunch of other resources as well. Thanks so much for joining us. David Hall from Genius Vets signing off. See you next time.