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Tag: Carr Healthcare Realty

Commercial Real Estate Fundamentals

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By Ken Jorgenson, CARR Healthcare Realty

For most health care practices, real estate is the second highest expense behind payroll. The difference between a properly or poorly negotiated transaction can benefit or cost a practice tens to hundreds of thousands of dollars over a 10-year period. Additionally, you typically get only one opportunity every five to 10 years to take advantage of a new negotiation. With this much at stake, every transaction is paramount to maximizing profitability. Being educated on commercial real estate fundamentals can increase the potential to make your practice a success. The following are key considerations to understand:

Square Footage Needs

There are many property considerations to evaluate when choosing an office space for your practice. One of the most important considerations and first question to be asked is: What size space are you looking for?

Choosing the proper square footage for your new office space is a balancing act between size and money. You need to choose between how much space you need right now and how much space you will need in the future, say in five years from now or as you grow your practice. You also need to understand the cost of what you can afford now compared to what you can afford in the future.

If you play it too safe, you can end up limiting your upside and ability to grow your practice. On the other hand, if you acquire too much space, you can dramatically hurt your profitability in your first few years.

In an ideal scenario, you can find a space that gives you a healthy amount of room to grow, but also allows you to successfully manage your budget and profitability both at the beginning of the lease and through the completion of the term. Your goal is to be profitable as soon as possible, but not to the detriment of future profitability, which comes through growth.

Each real estate location and market also impacts the size you can afford. The real estate market in San Francisco, Calif. is completely different than the real estate market in Omaha, Neb. or even Denver, Colo. The more competitive the market and current economy is, the more limited your choices will most likely be.

If you are borrowing money from a lender, they may require your total monthly rent to be below a specific amount during the first few years of the lease or set a cap on the average monthly mortgage payment if you are purchasing. The specific amount of money these numbers are typically based upon is derived from the lender’s underwriting guidelines and are aimed at keeping the monthly payments to a manageable amount, especially in the first few years.

The best way to understand how to choose between the ideal amount of space and budget, is to work with several partners who can each help you balance the two decisions. A lender will tell you what your maximum budget is. An architect or general contractor can help you determine how much you can build inside the space and at what cost. An experienced health care real estate agent can make sure you evaluate your top options that best fit your requirements, and then how each option compares to the others — both financially and through other important business considerations.

Selecting the proper square footage for your new office is an extremely important decision that you should make based upon market knowledge, current and future needs, and most importantly — budget.

Parking

Another vital property consideration for your office space is parking, for both your staff and your patients. When evaluating the parking needs for your patients, you have three groups to consider: patients who are coming to your office, patients who are already inside your office and patients who are leaving your office.

Depending on your schedule, there can be a high demand on the parking allotted to your space due to other tenants sharing your parking lot. While most medical office buildings and retail centers have a higher parking ratio for this reason, its important to make sure the property you are considering has ample parking both for your needs and the needs of other tenants that ebb and flow throughout the day.

While some landlords allow specific tenants to have a few reserved parking spaces, the majority of landlords do not grant exclusive parking spaces for patients. This means it’s important to ensure the locations you are considering can accommodate your current practice and future growth.

Visibility and Signage

Two of the most requested property considerations for new offices are strong visibility and exterior signage, either on the building itself or on a prominent monument sign in front of the building. These requests also are two of the most important items for nearly every national retail tenant. Large, national retailers count on the visibility and signage of their locations for marketing, brand awareness and most importantly, driving business to their stores.

Since the early 2000s, more and more health care providers have been seeking the same benefits that come from the positive exposure of both visibility and signage. It helps patients find your location and provides built-in marketing and brand awareness.

That being said, visibility and signage usually come with a higher price tag. In the majority of commercial real estate markets, landlords charge a premium for high visibility properties, spaces and signage. Landlords understand the value that visibility and signage offer, and properties that benefit from them typically are priced higher than similar properties that don’t have the same exposure.

Even government agencies, such as real estate assessors, recognize this when valuing properties. You can expect the majority of properties that offer high visibility and signage to be assessed with higher property taxes and as a result, will have higher operating expenses. It’s important to weigh the increase in your real estate evaluation and, if applicable, evaluate if the increase in monthly rent or mortgage will benefit your practice proportionately. There are many times that the exposure and signage is worth the added expense. An alternative and potentially stronger position could be to select a property that would save you more money on a monthly basis and use the savings to invest in a targeted marketing strategy.

Last, there are some specific types of practices that are 100% driven by referrals of other practitioners, where little benefit is obtained or needed from either visibility or signage. If the vast majority of your new patients are coming at the recommendation of a referring doctor, paying the premium for signage and visibility may not be worth it.

As with most financial decisions, a detailed evaluation provided by your agent should help you weigh the difference between cost and benefit.

Access

Another main consideration alongside visibility and signage is access to your office. In other words, if a patient is driving to your office, what is the closest major intersection to your property? Where do you turn to get into your property’s parking lot? Does the property have great visibility but challenging or poor access? That problem can occur when the primary access point to a property is a location you need to turn into before you can actually see the building. When that happens, a new patient drives by the building and sees your office, but then has to pull a U-turn or make multiple turns to get back to the main access point of your location. Thankfully, the majority of new patients will rely upon GPS and mapping software on their phone to find your office the first time. However, the easier the access is for the patient to get to your building and the more recognizable the major intersections or known landmarks are to your property, the more ideal the patient’s experience is in finding your office. Thus, the more likely patients or referral practices will recommend you.

Anchor Tenants and Complimentary Practices

The next property consideration we are going to discuss is the impact of what are commonly referred to as anchor tenants as well as complimentary health care providers. This often is an overlooked but important consideration when it comes to commercial real estate fundamentals.

Anchor tenants are most commonly found in large shopping centers and areas that are located nearby your office space or in the same building or complex. Anchors often are identified as grocery stores, warehouse clubs, depots, large retailers and other prominent tenants that drive a significant amount of foot traffic into stores and shopping areas. Anchor tenants attract other businesses and retailers who desire to be located nearby for the same reasons. Overall, anchor tenants increase the number of customers or clients in a specific area.

Anchor tenants also can be smaller in size, as long as they drive significant traffic to a property. For instance, a prominent coffee shop might bring several hundred visitors to a property in a single day. Other restaurants or retailers with a smaller size also may be able to attract a noteworthy amount of potential new patients.

A health care practice within an office building, medical office building or on a hospital campus that has complimentary practices located in the same building or campus can have a huge impact on the success of your practice. For instance, if you are pediatric dentist, being in a building with a pediatric physician could have a huge impact on the number of new patients you see. Many health care providers will seek out buildings or campuses that allow themselves to be surrounded by other providers who are both complimentary and can provide tangible opportunities for referrals.

In summary, there are pros and cons to nearly every property, and each consideration needs to be weighed. The space you are the most excited about might be the most expensive or above your budget. The center that has the most traffic and visitors per day might have the most challenging parking if you are competing for parking against other busy tenants. A property that is priced the most competitively might not offer the visibility and signage you would ideally like.

It’s incredibly important to truly understand all the property options that meet your requirements. To do this, you should hire professional representation and make sure you are evaluating and negotiating with multiple owners whenever possible. This allows you to compare multiple spaces, buildings, landlords and offers against the other options, so you are able to make the best decision possible. Real estate will make a major impact on your practice’s profitability. Make the most of every opportunity.

CARR Healthcare is the nation’s leading provider of commercial real estate services for health care tenants and buyers. Every year, thousands of health care practices trust CARR to achieve the most favorable terms on their lease and purchase negotiations. CARR’s team of experts assist with startups, lease renewals, expansions, relocations, additional offices, purchases and practice transitions. Health care practices choose CARR to save them a substantial amount of time and money, while ensuring their interests are always first. Visit CARR.US to find an expert agent representing health care practices in your area.

 

Renewing Your Lease: 5 Important Things to Know

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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

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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

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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.