Veterinarians Selling the Clinic Building to a Corporate Buyer

The consolidator's offer has three parts, and only the building can go into an exchange

Corporate groups buy the practice entity's assets and goodwill, sign the veterinarians to employment agreements, and take a covenant not to compete. Section 197(d)(1)(E) and (F) list the covenant and any franchise or trade name among the intangibles the buyer amortizes over fifteen years. None of it is real property, and the practice price is allocated with the buyer under section 1060 on a schedule that binds both of you once it is in writing.

The hospital is different. Land, the building, its plumbing and run walls are real property under Reg. section 1.1031(a)-3, and a building your own practice occupied was "held for productive use in a trade or business" under section 1031(a)(1). The veterinary clinic property page lists which fixtures count; this page is about the deal you cut with the buyer and what it does to the exchange you will run later.

Most groups prefer to lease. That suits a seller who wants rent during the employment years and an exchange after them, provided the lease is written for the investor who will eventually buy it.

Write the lease as the asset it will become: term, guaranty, escalations and the thirty-year line

An investor or a DST sponsor buying your hospital is buying the lease. The term decides how long the income is contracted; a parent-company guaranty decides whose credit stands behind it when a local hospital is merged or closed; fixed escalations decide whether the rent keeps pace. Ask for all three in the practice negotiation, when you have leverage, rather than at the building sale, when you have none.

Keep the total term under thirty years. Reg. section 1.1031(a)-1(c) treats a leasehold of a fee "with 30 years or more to run" as like-kind to real estate, so a lease of that length behaves like a sale of the building for tax purposes. The long initial terms consolidators ask for sit under the line: a fifteen-year term with two five-year renewals, for example, totals twenty-five.

Think ahead to the trust that may buy it. Under Rev. Rul. 2004-86 a DST loses its status if the trustee can "renegotiate the lease with Z or enter into leases with tenants other than Z" or make more than minor non-structural changes. A hospital lease with the rent, the renewals and the tenant's repair duties fixed in advance is one a trust can hold; one that depends on the landlord re-trading every few years is not.

Rollover equity and your employment agreement can turn the buyer into a related party

Groups often pay part of the practice price in equity of the buyer or its parent. That stake matters to the building sale. Section 1239 treats gain on depreciable property sold to a "controlled entity," a corporation more than 50% of whose stock or a partnership more than 50% of whose capital or profits you own, as ordinary income. A 10% or 20% rollover stake does not reach that line; a joint venture in which you keep a majority does.

The same threshold runs through section 1031(f), which undoes an exchange with a related person if either side disposes of the property within two years. If the buyer offers to purchase the building and you hold a majority interest in it, sell to an unrelated investor instead.

Your employment agreement does not affect the real estate, but it does set the calendar. Most sellers exchange the building when the employment term ends and the practice is no longer theirs to watch, which is why the lease has to carry itself.

A special-use building leased to one tenant is the risk the exchange is meant to spread

A veterinary hospital is built for one use: floor drains, isolation wards, kennel runs and a layout that does not convert to offices cheaply. Investors price that by leaning on the guaranty and the term, and they discount buildings in markets where the group already has a second hospital nearby. The value of your building is, in effect, the value of a single tenant's promise.

That is the argument for spreading the proceeds. A sale to an investor turns one lease into cash; an exchange turns that cash into interests in several properties with different tenants, which is what a DST portfolio is built to do. Whether that is worth more than holding the lease depends on the rent you are giving up, the guaranty's strength and your own appetite for one tenant.

Worked model: a $1,800,000 hospital, a twelve-year lease and a sale in year three

These figures are hypothetical and rounded. A veterinarian's LLC owns a hospital worth $1,800,000 with a $600,000 loan and a $500,000 adjusted basis. The consolidator buys the practice, signs a twelve-year lease at $140,000 a year with a parent guaranty, and employs her for three years.

• Years one to three: $420,000 of rent, taxed as it comes, while the practice sale's goodwill and non-compete are taxed in the year of closing.
• Year three: the LLC sells the leased hospital to an investor for $1,800,000 with nine years of lease remaining. Gain of $1,300,000, of which the prior depreciation would be unrecaptured section 1250 gain at up to 25% under Topic 409 on a cash sale.
• Full exchange: reinvest the $1,200,000 of net equity and replace the $600,000 of debt, either through a financed DST whose non-recourse loan is allocated to the interest or by adding cash. Gain deferred in full.
• Compare the nine years of remaining rent against DST income on $1,200,000 of equity, and have your CPA confirm the basis and the debt figures before you list the building.

The replacement is usually a financed or all-cash DST, chosen by whether the hospital carried a loan

A hospital with a mortgage needs replacement debt, and a financed traditional DST supplies it through a loan the trust already carries, without a personal guarantee. A debt-free hospital points to an all-cash trust. Medical office DSTs keep the proceeds in healthcare real estate with the same fixed-rent structure you negotiated; net-lease trusts across other tenants spread it further. DST interests cannot be sold on demand, the sponsor controls when the property is sold, and the property can lose value, so the principal is at risk.

A veterinarian who wants to keep control of the exit can take title through a direct title security with management in place. From business owner to passive investor covers the transition more broadly.