How re-financing the practice premises turned out to be a win-win for all the partners

The client

A fast-growing GP practice in South Yorkshire had more and more patients coming through the doors and the partners decided to extend one of their two surgery sites. The work was financed through a combination of cash in the partnership and a large overdraft facility.

The dilemma

One of the doctors, previously a salaried GP at the practice, agreed to join the partnership. The other partners wanted the new partner to take on a share of the premises in line with his profit share. However, the incoming partner was nervous about the level of borrowing needed to finance his share.

The value of the surgery site was set to increase considerably once the extension and refurbishment was completed. An interest-only mortgage was due to come to term in the next 12 months.

An overdraft was used (along with previous cash reserves) to finance the work on the premises.

Action required

• Refinancing of current mortgage and overdraft.
• Additional finance for incoming partner to cover premises buy-in.
• Reassurance about profitability and cashflow implications of becoming a property-owning partner.
• Part-disposal of property from existing partners with capital gains tax position established.

What happened next?

The case was led by James Steer, medical team leader at Landin Wilcock & Co. He says: “As interest-only loans were not available, the client’s only option was a loan with capital and interest repayments. Before they opened discussions with their bank, we armed them with the questions they should be asking about the interest rate (fixed vs floating), loan length and term length.

“We also advised them that the new loan would have to not only refinance the existing loan, but also repay the overdraft and inject some cash into the business for working capital.”

The partners settled on taking out a substantial loan. James and his team carried out modelling on the different options offered by the bank to help the partners come to a decision.

‘Cashing-in’ equity

The existing partners were holding significant levels of equity in the premises because the outstanding debts were significantly lower than the value of the two surgery sites. “This was a potential opportunity to consider additional borrowings to “cash in” their equity,” says James.

After speaking with their personal financial advisors, two of the existing partners decided to take additional borrowings. “We provided calculations illustrating the maximum additional borrowings they could take, based on their projected levels of equity in the building, along with illustrations to show how the additional repayments would be accounted for,” says James Steer. “This provided assurance to all the partners that the capital and interest repayments on these additional borrowings would be “earmarked” and allocated in the accounts to the correct partner.”

New partner buying in

With the existing partners holding so much equity in the premises, the incoming partner required considerable additional borrowing for his buy-in, as well as taking his share of the new loan.

“He was very nervous about taking on such large levels of debts, to the point he was considering not joining as a partner and remaining a salaried GP, says James Steer.

“We modelled loans under different term lengths and were able to demonstrate the cashflow and profit implications of buying into the property. This reassured him that he could take on the borrowings while still being “cashflow positive” and making additional profit.

“Additionally, as part of this modelling, we were able to advise the incumbent partners about the capital gains tax position on the part-disposal.”

The conclusion

“We meet with the partners at the practice regularly. Every time we visit, the doctor who was the incoming partner at the time of the re-financing tells us he can’t believe he was so worried about everything, and how thankful he is to have joined as a partner and bought a share of the premises,” says James Steer.

“It’s turned into a win-win situation for all the partners.”