Lightbulb Moments with NDH-REIT
In this second of two blogs, we are taking a deeper dive into Real Estate Investment Trusts (REIT). There is a wealth of opportunity within these investment vehicles and not a lot of individuals know about their potential.
When you join a REIT, you become part of a larger pool of investors. While each REIT has its own exposure and diversity, they tend to specialize in one sector of the marketplace. There are REITs in office, industrial, medical and retail spaces but National Dental Healthcare REIT is the first healthcare REIT focused exclusively on the dental industry
One thing we urge individuals to study is the cap rate or capitalization rate. In short, the cap rate is the ratio between the net operating income produced by your property and the original capital cost or its current value. The capitalization rate is used to indicate the rate of return that is expected to be generated on a real estate investment property. We point to larger real estate funds within the healthcare industry, medical offices specifically, to compare cap rates. Because this is what creates value forthe individual investor.
In many conversations we have with interested partners, we go over a cash flow analysis. The purpose of this analysis is to show interested parties what they are giving up when they sell their property to our National Dental Healthcare REIT and what they expect to receive in return.
Watching the lightbulb go off for potential investors when we explain the cash flow analysis, is one of the highlights of this position. At some point this potential investor will realize, “Oh! Wait! I'm not giving up any cash flow. I'm going to make more money in the REIT on just a cash operational basis. Plus I have this other upside where I still generate income from the property without doing all the work I have been this whole time!”
Every time that happens, you can hear the excitement and see the light bulb turn on. When you sell your property to National Dental Healthcare REIT, you also sell your responsibilities for property management. This includes the cleaning, maintenance, liability and other associated tasks and risks.
We hear a lot of war stories from dentists about the headaches their property causes. A dentist in Denver we spoke with, once said, “Listen, I don't want to sell my building, but I don't want to own it anymore either.”
The National Dental Healthcare REIT fits that perfectly. Managing a medical property along with the risks and liabilities that come from that can take your concentration and time away from your patients and your loved ones. In a property owner’s situation, there is always a risk hanging over you. Getting these property owners out of their part of these leases frees their time. They all love it. And they still own real estate as a shareholder through the REIT.
When you partner in National Dental Healthcare REIT, we ask that you bring your leases up to date. Before you do, we have some helpful tips. We try to get the leases as close to an absolute triple net as possible, which just means that the tenant is responsible for everything.
If a dental practice is part of a DSO, there might be some additional issues we can discuss that a property owner might not consider. Namely, the risk of bargaining against yourself when the dental property owner is leasing to the DSO. Giving the DSO too favorable of lease terms might hurt the valuation of your property when it comes time to sell to a REIT. Feel free to contact us with any questions you may have.
Another advantage to joining a REIT is the dividend income. The high dividend payout requirement for REITs (requirement that all REITs distribute a minimum of 90 percent of their income to shareholders in the form of dividends) means that a larger percentage of returns comes from dividends when compared with other investment opportunities. Many financial advisors consider REITs to be an excellent fit for investors seeking a reliable income stream, as well as for long-term investors seeking both income plus capital appreciation. Further, REIT dividends have historically been higher than the average yield of the S&P 500 Index.
The National Dental Healthcare REIT provides revenue with less responsibility and we have not even discussed the most beneficial part of a RIET yet: tax shelter. One of the most beneficial aspects of joining a REIT is the tax advantages. Due to the unique structure NDH REIT offers, you are allowed to roll equity into the REIT as part of your transaction so there are no capital gains. It’s all deferred. Very similar to a 1031 exchange in real estate (Note: 1031 gets its name from the Internal Revenue Service code 1031 dealing with business or investment properties which allow capital gains to be deferred). The mechanism in which the REIT operates forces the REIT to give out at least 90% of its revenue.
Anything that the REIT gives out which exceeds its taxable income would be a return of capital. And that's also tax-deferred.
If you have heard horror stories about REITs divesting themselves of properties and leaving their owners to suffer the capital gains tax, we have good news. The National Dental Healthcare REIT created a “Tax Protection Agreement”. What this contract states is the National Dental Healthcare REIT will not sell your dental property for a term of three years. And if we do, we will pay the tax bill for the sale. There are bad actor stories out there and we have heard them too. That’s why we wanted to assuage potential client fears by creating the Tax Protection Agreement. It gives our partners a piece of mind and it puts us at the forefront of ethical modeling for the REIT industry.
The attention to ethics does not come lightly. The Thurston Group has been at the forefront of the dental investment industry. They take pride in the relationships and connections they built in that space. Since our REIT was started by Thurston, we continue practicing those same ethical principles because we understand the importance of this community and standing behind your word. The Tax Protection Agreement is just one way in which the National Dental Healthcare REIT honors those relationships and supports the dental community. We also believe in giving all of our partners their own lightbulb moment so they can understand how we can put their property to work for them. If you would like to discuss the National Dental Healthcare REIT in more detail, explore your options or have your lightbulb moment, we invite you to contact us here.