Determining an Appropriate Rent Metric for Veterinary Real Estate

As a veterinary real estate owner, establishing an appropriate rent metric is crucial when leasing your property.. In this article, targeted towards veterinary real estate owners, particularly retiring veterinarians looking to sell, lease, or expand their practice, we will explore the concept of rent metrics. We will discuss factors to consider when determining rent, introduce the triangulation method for rent determination, provide a real-life example, highlight rent benchmarks for veterinary clinics, and present best practices for setting rent. Finally, we will explain how Terravet, as an experienced professional, can assist you in navigating the complexities of rent determination.

Understanding Veterinary Practice Rent Metrics

Rent metrics are quantitative measures used to determine appropriate rental rates for a property. They consider various factors, such as location, property size, condition, market demand, and tenant expectations. By using rent metrics, veterinary real estate owners can set rents that align with market conditions and ensure a fair return on investment.

Factors to Consider in Veterinary Practice Rent Determination:

1. Location: The geographic location of the veterinary practice property plays a significant role in rent determination. Factors such as demographics, nearby competition, accessibility, and market trends should be considered.
2. Property Features: The size, layout, and condition of the property influence its rental value. Consider factors such as the number of exam rooms, treatment areas, parking availability, and any additional amenities or unique features.
3. Market Demand: Understanding the demand for veterinary services in the area is crucial. Consider the number of pet owners, potential client base, and competition when determining the appropriate rent.
4. Comparable Properties: Analyze rental rates of similar office, retail and healthcare properties in the area. This will provide insights into the market standard and help establish a competitive rent rate.  Since it’s unlikely that there are sufficient veterinary rent comps in the property’s local area, it’s better to use other local office or healthcare properties to establish a market comp.  When looking at rent comps it is important to know if the rent is for a Gross lease or NNN lease.  In a Gross lease the tenant pays rent and the landlord pays all expenses related to the building including real estate taxes, insurance, and maintenance costs.  In a NNN lease the tenant pays rent, real estate taxes, insurance, and maintenance costs.  A gross lease rent rate is typically higher than a NNN lease rent rate since the landlord is paying for the costs related to the building.      

Determining Veterinary Practice Rent Using the Triangulation Method

Different calculation methods are used to determine rent metrics for veterinary real estate, such as the “Triangulation” method, which refers to using the following three rent metrics:

1. Rent as a Percentage of Sales: This metric calculates the rent amount as a percentage of the veterinary practice’s revenue or sales. It helps assess the affordability of the rent and ensures that it remains in line with the practice’s financial performance. The rent metric can be tailored to the practice’s income level by considering the revenue generated.
2. Market Rent: Market rent refers to the prevailing rental rates for similar office, retail and healthcare properties in the local market. It involves conducting market research and gathering data on comparable rental properties in the area. By comparing the practice’s rent to the market rent, practice owners can gauge whether the rent is competitive and fair within the market context.  Remember to use comparable rent rates depending on whether you have a gross lease or NNN lease.
3. Coverage Ratio: The coverage ratio is a measure of the practice’s ability to cover the rent expense with its cash flow or profits. It assesses the sustainability of the rent payment by considering the practice’s financial performance. The coverage ratio compares the rent to the practice’s revenue or cash flow, ensuring that the rent remains within a reasonable range that allows for profitability and operational stability.  The formula is Earnings Before Interest Taxes Depreciation Amortization Rent (EBITDAR) / Rent. 

By utilizing these three rent metrics together, practice owners can better understand the appropriate rent metric for their veterinary real estate. The triangulation approach provides a balanced perspective, taking into account the practice’s financial capacity, market conditions, and industry benchmarks. It helps ensure that the rent metric is fair, sustainable, and aligned with the practice’s needs and the local market dynamics.

Triangulation Method Example

Let’s consider an example of Dr. Anderson, a veterinary practice owner, using the triangulation method to determine the appropriate rent for his property. Dr. Anderson analyses three rent metrics: rent as a percentage of sales, market rent, and coverage ratio. After reviewing his practice’s financial records, conducting market research on comparable properties, and assessing his practice’s financial performance, Dr. Anderson finds that the rent as a percentage of sales is 8%, the market rent is $3,500 per month, and the coverage ratio allows for a maximum rent of $4,000 per month. By triangulating these metrics, Dr. Anderson determines that a rental rate of $3,500 per month would be fair, competitive, and sustainable for his veterinary real estate.

Best Practices for Setting Rent in Veterinary Real Estate

To ensure a fair and successful rental agreement, consider the following best practices:

1. Stay Informed: Regularly research and monitor the local veterinary real estate market to stay updated on rental trends and competitors’ rates.
2. Seek Professional Assistance: Consult experienced professionals, such as Terravet, who specializes in veterinary real estate. They can provide valuable insights and guidance tailored to your specific needs.
3. Evaluate Lease Terms: In addition to rent, carefully consider lease terms, such as lease duration, renewal options, maintenance responsibilities, and any additional charges.
4. Build Relationships: Foster strong relationships with tenants by providing exceptional service, addressing maintenance concerns promptly, and maintaining open lines of communication.

How Terravet Can Help with Your Veterinary Practice Rent Metrics

Terravet, as an experienced professional in veterinary real estate, understands the challenges faced by veterinary practice owners when it comes to rent determination. We can provide valuable assistance and guidance in navigating the complexities of rent metrics. Our team of experts can help you analyse market data, evaluate property features, and leverage our industry knowledge to establish a fair and competitive rental rate.

Conclusion

Determining an appropriate rent metric is crucial for veterinary real estate owners. By considering factors such as location, property features, market demand, and comparable properties, owners can set rents that align with market conditions and ensure a fair return on investment. The triangulation method offers a practical approach to rent determination, allowing owners to consider market research, property evaluation, and tenant expectations. Terravet, as an experienced professional in veterinary real estate, can provide the guidance and support you need to navigate the complexities of rent determination. Contact Terravet today and let us assist you in maximizing the value of your veterinary real estate investment.