Renewing Your Lease: 5 Important Things to Know

By Ken Jorgenson, Carr Healthcare Realty

Leases and lease renewals typically are not conducted on a level playing field. After all, the landlord is in the real estate business and most doctors are not. By planning ahead and having professional representation, it is possible to negotiate a lower lease rate and receive a substantial tenant improvement allowance and free rent.

1. How does the lease renewal process work?
An important clause found in a standard lease is the renewal option. This allows you to extend your lease for a predetermined amount of time (often three, five or 10 years) by giving your landlord advance written notice. Renewal options include terms for specific lease rates, concessions such as free rent and tenant improvement allowance, and whether a new base year for operating expenses will be granted. Whether or not a renewal clause exists in the original lease, all of these terms are negotiable and play a large role in the financial structure of a lease renewal.

Renewal negotiations are most effective when conducted in the proper timeframe, by having multiple viable relocation options, and creating a strong posture to maintain the upper hand.

2. When should the process begin?
As a rule of thumb, you should begin to consider the renewal process 12–18 months in advance of your lease’s expiration. This is recommended so that you can compare all relocation options in the market before your current lease options expire. Tenants who miss their lease options incur more risk. Landlords view this as an opportunity to push rents higher as the window of opportunity to relocate closes. If tenants holdover (stay in the space after the lease expires), they often see penalties of 150–200 percent of their last month’s rent and also can incur damages if they holdover without permission. The bottom line is if there is not ample time to relocate if necessary, the landlord has a strong upper hand.

3. What type of cost savings can be achieved through a successful renewal?
If properly negotiated, you can achieve significant rent savings, a build-out allowance, free rent and other concessions. It’s common to start a lease renewal term at a lower lease rate than what you are currently paying. In many markets, landlords are offering aggressive concessions and more attractive lease terms to good tenants to keep their buildings leased and avoid vacancies. The amount of overall savings will depend on the availability of competitive vacancies, the efficiencies of the buildings, and your market knowledge and ability to negotiate business points.

4. What are some common mistakes practices make during the process?
One of the most common mistakes practices make is negotiating without the help of a commercial real estate professional, specifically one who specializes in representing health care providers. Some believe they can save money by not using an agent; but to benefit in real estate, leverage is the key to posture. Landlords are in the real estate business and negotiate with professional guidance. Selecting an expert to represent you provides the leverage needed to receive the best possible lease terms. Further, landlords typically are responsible for paying commissions, so professional representation is available to you at no out-of-pocket cost.

Another mistake practices make when entering a lease renewal negotiation is not being familiar with their current lease terms and risk exposure. Prior to contacting the landlord about a lease renewal, you should be well aware of your current lease terms — including every option and deadline. Most leases contain options that must be exercised within a specific time period, typically six to 12 months prior to the lease’s expiration. If you allow this period to pass, you risk losing all rights outlined in the option, which can cause the negotiations to begin at a disadvantage.

5. How do I calculate what I am currently paying per square foot?
Knowing what you are already paying per square foot is especially important if you are thinking about renewing your lease. What you are paying now versus what buildings are leasing for in your immediate area can be vastly different, especially if your lease has had automatic escalations in the rate over the term of the lease. The way to calculate your price per square foot is to multiply your monthly rent by 12 months and divide it by your square footage. Keep in mind that NNN or CAM charges (operating expenses for the property) also are calculated in the same manner.

Summary
Successfully negotiating a lease renewal is more than bartering, bluffing or asking for a good deal. Landlords and their professional representatives are in the full-time business of maximizing their profits — even if it means taking advantage of uninformed tenants. You can level the playing field by engaging your own professional representation, gaining competitive market knowledge and by having multiple options for your office space. When done properly, a well-negotiated lease renewal can have a dramatic impact on your practice’s profitability.

 

Carr Healthcare Realty is the nation’s leading provider of commercial real estate services for health care tenants and buyers. Every year, hundreds of medical, dental, veterinary and other health care practices trust Carr Healthcare Realty to help them achieve the most favorable terms on their lease and purchase negotiations. By not representing landlords or sellers, Carr Healthcare Realty is able to strongly advocate for health care providers and avoid conflicts of interest while saving their clients hundreds of thousands of dollars. Carr Healthcare Realty’s team of experts can assist with all types of real estate transactions, including lease renewals, expansions, relocations, startup offices, purchases and practice transitions.

Timing Your Next Real Estate Transaction

By Ken Jorgenson, Carr Healthcare Realty

Every commercial real estate transaction has an ideal time frame to begin the process. Most dental professionals understand that starting a new office or relocating an office doesn’t happen overnight, but many are not aware of the ideal time frames for each type of transaction. Different types of problems arise when starting a transaction too early or too late, and both need to be avoided.

Too Early

If you start the process too early, it creates a scenario where you spend your valuable time looking at properties and evaluating options, working with lenders and other members of your team, only to find out the landlords or sellers won’t negotiate with you yet. Many landlords and sellers won’t take their spaces off the market for extended periods of time while waiting for the tenant or buyer to be ready to transact because there is too much time before the transaction will take place.

Or, if they do negotiate, they won’t be willing to offer you even close to their best terms since they are going to lose income on holding a space vacant for an extended period. On the other hand, if they will put forth reasonable terms, it is predicated upon you moving forward immediately, which can leave you stuck paying for a space you can’t occupy for a period of time or paying unnecessary rent on your former space if you leave early.

Too Late

When starting a transaction too late, an entirely new set of problems arise. To start, most people underestimate how long a commercial lease or purchase transaction takes. They imagine it is similar to buying a home or leasing an apartment, which unfortunately is not the same as a commercial transaction timeline.

Simply identifying the top options and then negotiating a mutually agreeable deal can take several months. The legal process of reviewing contracts and finalizing details with lenders, architects, contractors, and equipment and technology providers comes next; this portion also can take months.

This is followed by the build-out process if renovations are required. While you can build-out a new space in six to 10 weeks depending on the size and scope of the project, you first have to design the space, then get construction documents and engineered plans created, then submit for and receive permits to start the build-out. After construction, you need to leave time for installing furniture, fixtures, equipment and technology, final permitting and approvals, while also leaving room for uncontrollable delays and change orders.

If you are relocating from a previous office and you don’t vacate your former space prior to the lease expiring, you’ll likely pay between 125 to 200 percent of your last month’s rent based on a provision found in most leases called a “holdover.” This allows the landlord to charge you a higher month-to-month lease rate as a penalty for not vacating or signing a new lease.

Just Right

If you only had two choices, starting too early is definitely better than starting too late, but it is by no means your top option. Fortunately, there is an ideal time frame to start each type of transaction and you don’t have to choose between the lesser of two mistakes. You can set yourself up for success by understanding the requirements of each type of transaction and how long each process takes.

Although there are many additional details needed to ensure each type of transaction is handled properly, let’s start with the correct timing for the primary types of transactions that health care professionals will engage in:

  • startup or new office: 10-12 months in advance
  • relocation: 10-12 months in advance
  • purchasing an existing building or condo: 10-12 months in advance
  • buying land to develop a new building: 18-24 months in advance
  • buying a practice and getting a new lease or purchasing the building: 60-90 days in advance

Every type of transaction starts with a specific approach and detailed game plan that is aimed at maximizing the opportunity. Getting the best possible deal and terms is extremely important, but so is making sure you don’t waste valuable time that could have been spent in your practice. If you lose the equivalent of 20-30 hours of your time — which is what an average commercial real estate transaction requires to be handled properly — how much money would that cost you in lost production?

Equally as important as saving time and money is avoiding costly mistakes that people make all too often when they don’t understand the nuances of health care real estate. The old adage, “If I knew then what I know now …” can easily be avoided by hiring licensed professionals who specialize in real estate for health care practices. The reason patients come to see you is because you are trained in a specific skillset that offers skill and expertise that they require and that few people have. The same is true for real estate professionals who can help you identify your top options, negotiate the most favorable terms, save you a substantial amount of time and avoid common pitfalls.

The first step to maximizing any commercial real estate transaction: Start the process at the right time.

 

Carr Healthcare Realty is the nation’s leading provider of commercial real estate services for health care tenants and buyers. Every year, hundreds of medical, dental, veterinary and other health care practices trust Carr Healthcare Realty to help them achieve the most favorable terms on their lease and purchase negotiations. By not representing landlords or sellers, Carr Healthcare Realty can strongly advocate for health care providers and avoid conflicts of interest while saving their clients hundreds of thousands of dollars. Carr Healthcare Realty’s team of experts can assist with all types of real estate transactions, including lease renewals, expansions, relocations, startup offices, purchases and practice transitions.

 

5 Myths Your Landlord Wants You to Believe

By Ken Jorgenson, Carr Healthcare Realty

​It can be difficult to discern fact from fiction when dealing with landlords. Misunderstanding these key issues can have serious consequences for your practice. The following information should help dispel some common myths and prevent costly mistakes in your next lease negotiation.

Myth #1: The landlord is on your side.

Many landlords attempt to befriend their tenants, making it difficult for tenants to remember the landlord’s primary goal is financial gain. They are seeking to secure a lease with the tenant paying as much as possible. Even the friendliest landlord wants to make the maximum profit on his space, just like the nicest tenant seeks the lowest possible lease rate so his business can thrive. Financial burdens quickly arise for tenants who place undue trust in their landlord and fail to properly negotiate their lease. By having representation, you can learn how your lease compares to the market and ensure you are getting the best possible terms.

Myth #2: You are not entitled to representation.

Some landlords employ intimidation, instead of friendliness, to achieve their goal. The intimidation tactics may include telling tenants they are not allowed to have representation. This is not true. Lease negotiations are different than negotiating the price of a car or trying to haggle for a better price at a flea market. They are complex transactions, layered with hidden opportunities for landlords to take advantage of anyone not represented by an expert. Landlords are professionals who are aware of these complexities. If a landlord says you are not allowed to have representation, that is a clear signal they do not respect your desire to be treated fairly.

Myth #3: You are already getting the best possible rate for your space.

There are many conditions that factor into lease rates for a commercial space. Things such as current building vacancy, length of the lease, amount of tenant improvement allowance, building condition and many other considerations impact the appropriate rate for a particular space. Several of these considerations are specific to spaces for health care tenants, highlighting the need for a real estate professional who has expertise in health care. Health care practices often are told they are getting the best possible rate for their space, yet they can receive a much better offer from the landlord when an expert assesses these mitigating factors.

Myth #4: Your renewal is not negotiable.

Most leases provide an option for the tenant to renew their lease when it expires, and may even detail the exact terms of the renewal. However, it is important to understand that your renewal is negotiable, even if you have renewal terms specified in your current lease. A landlord who says you cannot renegotiate the terms for your renewal is usually doing so because they can get you to pay more by exercising the option to renew instead of negotiating new terms. The only way to be certain you have the best possible terms for your renewal is to compare those terms with current market rates in the area — a vital step often missed by health care professionals who enter this process alone.​

Myth #5: You have no other options; the landlord has many.

This common myth might be the most important to address, because it is fundamental to how landlords operate. The landlord wants you to believe that his property is the only suitable location for your practice. The truth is there are likely several other properties that would fit the needs of your practice, and the landlord should be competing to keep you in his building.

The landlord also wants you to believe he has several potential tenants ready to occupy your space if you don’t take it. This position is used to force a tenant to rush into signing an unfavorable lease, when, in fact, it usually takes months or years to fill a commercial space. Each leasing situation is unique, and a health care real estate professional who knows your strengths as a tenant can help you understand what type of leverage you have.

This information represents a few of the many misconceptions involving landlords in health care real estate transactions. Using a real estate professional with expertise in health care will help protect you from falling victim to these and other common landlord myths.

Carr Healthcare Realty is the nation’s leading provider of commercial real estate services for health care tenants and buyers. Every year, hundreds of medical, dental, veterinary and other health care practices trust Carr Healthcare Realty to help them achieve the most favorable terms on their lease and purchase negotiations. By not representing landlords or sellers, Carr Healthcare Realty is able to strongly advocate for health care providers and avoid conflicts of interest while saving their clients hundreds of thousands of dollars. Carr Healthcare Realty’s team of experts can assist with all types of real estate transactions, including lease renewals, expansions, relocations, startup offices, purchases and practice transitions. For more information, go to carrhr.com.

Real Estate: The Second-highest Expense in Your Practice

By Ken Jorgenson, Carr Healthcare Realty

When it comes to managing expenses in your practice, there are dozens of categories to evaluate: equipment, technology, loan costs and interest rates, sundries, marketing, and on and on they go.

Many practice owners are quick to shop-out what they believe are the most obvious expenses, but few understand the impact of one of the largest expenses and how it can be dramatically reduced to increase profitability. The highest expense for most practices is payroll, followed by real estate. Real estate encompasses your monthly rent or mortgage payments, along with the property’s operating expenses, maintenance fees, utilities and janitorial costs.

If you consider these top two expenses, payroll and real estate, only one of them is really negotiable. With payroll, you can either pay people their value or they usually find another job that will. You may decide that you can cut staff, but if you need people, you need to pay them what they deserve or they will eventually leave.

Real estate however, is 100 percent negotiable. You have the choice of leasing or owning, as well as being in an office building, retail center, a stand-alone building or large medical complex with many other providers. You can choose the size of your space, the design and the landlord you want to work with — or to be your own landlord. And if you do own, you can decide whether to buy an existing building, an office condo or to develop your own building from the ground up.

When negotiating the economic terms of a lease, you have a say in the length of lease, the desired concessions, including build-out period, tenant improvement allowance, free rent, lease rates, annual rate increases, and many other provisions.

With this many choices to evaluate and understanding that each one affects the final economic outcome, why is it that so many practices fail to capitalize on their real estate opportunities? The short answer is that most practice owners and administrators simply don’t have the knowledge and expertise in commercial real estate to understand how to make the most of these opportunities. They view real estate as a necessary evil instead of an incredible opportunity to improve profitability, reduce expenses and improve the quality of their patients’ experience. When the correct approach is taken, you may actually look forward to it instead of dreading your real estate negotiation.

Let’s take a look at three key ideas that will help you make the most of your next real estate transaction.

1. Timing
Every type of transaction has an ideal timeframe to start the process. When starting too early or too late, you communicate to the landlord or seller that you don’t really know what you’re doing. When that message is communicated, it hurts your ability to receive the best possible terms. For example, don’t wait for your landlord to approach you on a lease renewal negotiation. Start by consulting with a professional so you can understand the ideal timeframe to start your transaction, come up with a specific game plan for what you want to achieve, and then you be the one to approach your landlord with renewal terms.

2. Representation
Landlords and sellers prey on unrepresented tenants who don’t really know the market or what their options are. If the tenant was a Fortune 500 company, the landlord would approach them with a high level of respect, expecting that they either have a real estate broker hired to represent them or have a team of professionals internally that are well-equipped to handle the transaction.

In contrast, when a landlord or seller starts speaking with a tenant who isn’t represented, and who they don’t believe knows the market as well as they do, that tenant is not going to get the same level of respect through the process. This is because the landlord senses an opportunity to take advantage of a small tenant who is not an expert, doesn’t have a full complement of real estate knowledge and skills, and who doesn’t have adequate representation.

When you understand that commissions are paid in commercial real estate just like they are in residential real estate — they are set aside in advance for two parties, not just one — then you understand there aren’t any savings by not having a broker. And if there aren’t any savings by not having a broker, then showing up without one only further detracts from your credibility.

3. Leverage and Posture
It is nearly impossible to emerge victorious from a negotiation without leverage and posture, which are created by having multiple options in the market. If you limit yourself to one property, you are at the mercy of that owner. Since most landlords and sellers negotiate professionally, it is easy for them to know when you don’t have other viable options.

Simply telling a landlord that you have a proposal from another landlord won’t give you a strong enough posture. Most landlords look at unrepresented tenants and assume they do not know the market, do not understand all their options and are not serious about making the landlord compete for their business. Leverage and posture are created when you have the right timing, professional representation, an understanding of all your available options and a detailed game plan of what you want to accomplish in order to capitalize on the market.

These three key ideas are the first of many factors that allow health care tenants and buyers to reduce their second-highest expense, which dramatically impacts profitability and cash flow.

 

Carr Healthcare Realty is the nation’s leading provider of commercial real estate services for health care tenants and buyers. Every year, hundreds of medical, dental, veterinary and other health care practices trust Carr Healthcare Realty to help them achieve the most favorable terms on their lease and purchase negotiations. By not representing landlords or sellers, Carr Healthcare Realty is able to strongly advocate for health care providers and avoid conflicts of interest while saving their clients hundreds of thousands of dollars. Carr Healthcare Realty’s team of experts can assist with all types of real estate transactions, including lease renewals, expansions, relocations, startup offices, purchases and practice transitions. For more information, go to carrhr.com.