What can a DSO real estate broker do for you?

A DSO real estate broker can run a competition/demographic analysis, and help with site selection and tenant acquisition, or buy the property, lease it back to the DSO, and even offer an equity partnership.

DSOPro: Describe your background and what brought you into the DSO real estate business?

Starting from the very beginning, I was a professional wakeboarder for about 12 years. During that time, I got really involved in the health and fitness part of it. So, I decided to open fitness centers in Orlando, and we were growing rapidly. That’s when I met my partner, Nate Palmer. We were looking to expand into an area called Winter Park. It’s sexy, with lots of kids, and where all the good businesses are located. Another area called Kissimmee didn’t appeal to me as much. I didn’t like the demographics as well. So, my partner ran a competition/demographic analysis of both trade areas. We went like seven layers deep for the data.

What we found was that the area I felt good about, Winter Park, was saturated with competition and the rents were way too high. Kissimmee was wide open, but I had no idea because I was just going off my gut feeling. I learned something important: you can’t make good decisions without good data. I got lucky in that I sold the gym in 2019 right before COVID hit and Palmer invited me to come work with him on the commercial real estate general partner side. He started in real estate in the urgent care space about 14 years ago and then segued into dental around 8 years ago.

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I had been an investor in real estate before but was on the limited partner side. When I started working on the general partner side, I focused on site selection, new construction developments, and lease-back acquisitions for healthcare/dental. It’s like DSO real estate.

We act as a third-party real estate development department without any of the overhead. We do detailed analytics and demographic analyses to help clients find the best location that will help stack the deck in their favor and out-position their competition.

DSOPro: What other types of services do you provide?

We handle everything. If you have outgrown a location or it’s not serving you well, we help with the relocation process. We also work on site selection for de novos. And we’ll buy the real estate for a new-construction development and lease it back to the dentist. Or if they’re acquiring other practices and that real estate is for sale and they don’t want to buy it, we’ll buy it during the acquisition process and do a lease-back to the DSO or dental group.

We also negotiate leases, so we do anything related to real estate.

DSOPro: Explain how your clients can earn free equity.

If you’re a growing DSO, and if the real estate is for sale and there is an opportunity for us to buy it and lease it back to you, we’ll give 10% of that general partner equity to the DSO that we’re leasing to.

The advantage for them is they now have part ownership of and equity in the building that they rent from us. As the value of the building continues to grow over time, their equity will continue to grow over time. The value of their equity, because it’s not an exchange of money but a non-taxable event until they sell, is that it is a tax-deferred event.

DSOPro: Give us some perspective on the scale of this operation.

Each building is anywhere between $400,000 to $2 million. We have 11 deals in our pipeline right now that we’re looking to add to our fund.

We are really lucky to have some very financially well-off limited partners who have given us the go ahead to do anything healthcare related. Historically, we funded it through friends and family and our own money. So, capital has never really been a bottleneck for us. And we are open to investment if other people want to invest in these projects.

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DSOPro: Describe your concept of the three major phases of development.

Pre-development is the site selection part. That includes running the demographic and competition analyses. This is determining the best location, what’s available there, and negotiating the best price for the land/building.

Phase two is construction, which can range from a totally empty piece of land, where you build from the ground up, to using an existing building. That construction process would be converting it to what’s called a “gray shell,” which means we’re not finishing the interior. Many of the groups we work with have their own architects, designers, and general contractor who do the final build-out for them. However, we can also do that (phase three), which is what’s called post-development or getting the location completely ready for clients to walk in and start offering services.

A DSO with 10 units or more, say up to 30, has done this so many times that they’ve got the processes down and their own people they work with. They can save on costs that way. So, while we offer post-development, it’s less typical for us because of the size of the dental groups we work with.

DSOPro: What other services fall under post-development?

It can include marketing and advertising for the practice as well as finding additional tenants for the building. For example, we’ve done developments with Starbucks and Chipotle. They’re really good neighbor tenants for dental groups and DSOs. They’re not competition and they’re slightly upscale. The demographics are better, and they attract a more affluent client. So, we do multi-tenant new construction or redevelopment projects that have non-dental users because having a retail store right next door brings in a lot of foot traffic and it’s a great way to promote their business.

We typically will buy the building and lease it back to them so they have no responsibilities for the building or need to outlay any of the capital. We’re the owners and landlords, collecting rent from them and the other tenant. We’re also in charge of securing the tenant next door.

If groups want to buy and manage their real estate, we can help them find and buy a building and acquire tenants. If they don’t want to own it and are willing to sign a 10-year lease, we’ll buy it and be the landlord for both tenants.

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DSOPro: Are DSOs your main clients or do you work in other areas?

DSOs are our main target, but we’re interested in anything healthcare related. We’ve done thousands of transactions where we’ve helped clients determine the right place. Site selection is more of an art than a science. You can calculate all the different numbers and all the different demographics, but at the end of the day, you’re still going to have to make a judgment call. We are really good at looking at healthcare real estate. It’s called medical retail, which is dubbed “medtail.”

There’s a lot of overlap between what a DSO looks for versus how a veterinary, urgent care, or behavioral health group approaches real estate. What you’re getting is our stamp of approval on a certain location. We analyze whether this spot will help you optimize your business in terms of drive-by traffic and new patient acquisition, but also in terms of out-positioning existing competition or competition that might take that space if you don’t.

DSOPro: What happens if a DSO wants to move on or continue adding more offices?

We do typically want a 10-year commitment from a DSO. We don’t want to buy a location, build it out, and then in 2 years find out they are leaving. We’re looking for long-term solutions for long-term clients. If they want to continue to grow, that’s perfect. We love helping them decide where to go next and will continue to find new locations for them.

Our process is the same if DSOs want new locations in other states. We have the best subscription services to help us find everything that’s available. We make sure that no stone is left unturned.

DSOPro: What other types of sites are you developing?

We’re now doing grocer-anchored tenant studies and other “competition” studies. The average family goes to the grocery store 2.4 times per week, so from a patient perspective, you can’t beat that for visibility. The problem is a lot of big DSOs, like Heartland for example, have exclusivity with some of the big grocer-anchors 2 years in advance. So, you can’t put a dental user in their plaza, but we’ll try to get as close as we can without encroaching on their exclusivity clause.

While grocer-anchors make good tenants, not all Walmarts and Whole Foods are created equal. So, we analyze each grocery store in the trade area and determine which is best. This Publix, not so much, but that Aldi will be perfect for serving your ideal clients.

DSOPro: What else can you tell us about how you attract new clients?

We have a podcast that brings in some new clients. We attend large events and network. But mostly, just serving the needs of the client. If a private equity backed DSO is growing by acquisition and the real estate is a component, private equity often does not want to or cannot buy the real estate, which creates a bottleneck. But we can buy it, so that’s another way to find new clients.

Not many people are doing new construction development nationwide, simply because it’s hard. We may be the only company in the DSO space that will do a project in any of the 48 contiguous states. We haven’t done any in Alaska or Hawaii, yet. We have a really good nationwide partner we’ve worked with on over 150 construction projects across the country.

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DSOPro: What kind of trends are you seeing in the DSO space?

Recently, a lot more people seem to want to buy the real estate. Usually, our recommendation is that you should not own the real estate because it’s going to be more difficult to get the same return on your time and equity from that than it is with your dental practice. Your DSO will probably be the best return for your time and money. There are always exceptions to that, but if you’re looking to grow at more than two locations per year, you might be shooting yourself in the foot by trying to acquire the real estate.

Now of course, if you’re okay growing at one location every other year, you may manage to do both. Just be aware of the tradeoff you’re making. There is security in real estate and it is risky to start a DSO, but the ROI is typically much better in your practice. If you’re trying to grow, we recommend finding a partner like us that can acquire and manage the real estate. That allows you to continue to focus on your core business. A lot of people think “I might as well buy my real estate; I’m buying my business.” But it can end up taking up a lot of your attention and capital. Also, the banks may look at your real estate debt and, in some situations, slow down the ability to issue you more debt for acquiring or starting a practice.

I don’t know if this is a trend, but there is obviously the rising interest rate environment right now. We’re seeing that slow down a lot of potential deals and it has caused some deals to get scrapped.

The higher interest rates are causing the price of the practice acquisition to go down. The multiple is plateauing and leveling off. In some cases, it’s even going down. This could be good or bad depending on where you sit. If you’re looking to do a lot of acquisitions, the trend is probably good for you. You’re going to pay more in interest rates, but the multiples are going down or at least are not rising.

If you’re looking to sell, the timing is probably not great right now as they continue to hike interest rates. I think it will get a little harder before it gets easier. Of course, deals are always happening, they’re always getting done. But back in January 2022, we thought “We’re to the moon, nothing’s going to stop it, get in now, because the multiples are going up!” We’re not seeing that anymore. We’re seeing the multiples of EBITDA level off and even go down. They will grow at some point, but I think it’s going to be a while for it to hit equilibrium.

Also among the trends we’re seeing in commercial real estate, we’re surprised that cap rates have not been more negatively affected by the interest rate hike. We would not have been surprised to see the value of commercial real estate take a little hit, but so far, it’s proven to be strong and will continue to stay at about this level. We don’t see the cap rate improving, but I’ve been surprised at the resiliency of commercial real estate for healthcare.

DSOPro: Any additional advice?

It’s really tempting for people to either (a) try to do it themselves or (b) hire their golfing buddy, cousin, or brother-in-law to represent them as their broker in commercial real estate. We always recommend finding an expert, somebody who has done 10 to 20 deals in your specific industry. It doesn’t cost you anything to have a good, expert broker help. If you end up in the wrong spot, it’s going to be a really expensive mistake and you may never recover from it.

A typical competition/demographic analysis can cost anywhere from $5,000 to $10,000, but for DSOPro readers, Leaders Real Estate will waive that fee provided we’re protected to earn brokerage fees.

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About Austin Hair


Austin has gone from professional wakeboarder to real estate investor to American Ninja Warrior. He is host of the Commercial Real Estate Secrets podcast, a show that focuses on helping healthcare organizations scale by interviewing successful entrepreneurs and diving into actionable strategies. Leaders Real Estate helps all types of healthcare organizations grow by developing creative real estate strategies, identifying the best locations, and providing capital for building purchases.

Leaders Real Estate

Leaders Real Estate is a Commercial Real Estate brokerage specializing in Tenant Representation. Over the years, we’ve noticed the lack of support businesses have in identifying the right location for their business. We’ve developed tools that can help small and large businesses alike in providing the numbers behind the “feeling.” Has real estate ever bottlenecked an acquisition? Leaders will purchase the real estate for a leaseback to the DSO.

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