A recent dental journal article made the case that owner-occupied practices could capture extra value by setting rent above fair market levels before a sale.
The logic looked compelling on paper. If your practice sells at, say, a 4x EBITDA multiple but your building’s real estate sells based on an 8% cap rate (a 12.5x multiple of the building’s net operating income), shifting income from rent into EBITDA, or vice versa, appears to create free value simply by relabeling the same dollar.
Why the Arbitrage Doesn’t Usually Work
In our experience, this arbitrage rarely survives contact with a real buyer.
Sophisticated buyers on both sides underwrite independently. A practice buyer reviewing an above-market, related-party lease will typically normalize it back to a defensible market rate before applying their multiple. An inflated rent expense looks exactly like what it is: a number set by the seller to benefit the seller, not a genuine market transaction.
Likewise, a real estate buyer or appraiser values the building using comparable lease rates in your area—not whatever figure happens to optimize your combined sale price.
What About an Owner-Occupied Practice?
In an owner-occupied rental, we recommend setting your wages lower and your rent higher to draw money out of the practice exempt from FICA taxes.
But when selling the practice and/or building, you should expect the rent to be normalized in the valuation process.