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.

7 Tips for Successfully Renewing Your Commercial Lease

By Ken Jorgenson, Carr Healthcare Realty

If you love your space, location and yes — even your landlord — start setting yourself up for a seamless lease renewal today. Renewing commercial leases can become a nightmare fast when tenants fail to pay attention to important renewal details. Early action is everything. Use these seven simple steps to save money and your space.

1. Start the process early.
Even if you’re not sure that you want to stay at your current location, you should begin the renewal process at a minimum of 12 months before your lease’s expiration. Then, whether you decide to stay or not, you will have done the research and preparation, and have multiple options. Having options is your greatest asset in lease negotiations. The longer you wait to begin the process, the fewer options you will have, and the more power you’ll give the landlord. So, start early and give yourself plenty of time to create a substantial list of possible locations.

2. Know the conditions of your lease renewal clause.
Oftentimes, leases incorporate renewal clauses as a safety net; if you have the clause, your landlord must allow you to renew your lease according to its terms. Depending on the market, using the lease renewal clause will either benefit or harm you financially. First, find out if you have a renewal clause. If you do, study its conditions (rate increases, notification time frame, etc.) and determine whether you want to act within the clause or start new negotiations.

3. Study your lease.
Before researching other locations, you really need to know the terms and conditions of your own lease. What kind of lease do you have? Is it a gross lease or net lease? Is it a triple net or full service? Also, what are you paying per square foot? Not to overwhelm you with questions, but these all are important factors for you to know when entering negotiations. Along with your rent, you also should take note of what, if any, concessions were afforded to you at the start of your lease.

4. Research the market.
Knowing your market can be a bit of a challenge because commercial real estate listings are not open to public access like residential listings. Multiple listing services (MLS) for commercial properties require expensive subscriptions that typically only real estate agents purchase. When going it alone, the best place to start is within your own building complex and immediate surroundings. Find out what new tenants in your area are paying. Do the rates appear to have dropped? Gathering this information may require making several cold calls, but it will equip you with the information you’ll need to be effective in negotiations.

5. Find alternatives.
While researching your market, you should compile a list of locations that would be viable options for your business if you had to move. Remember, having other options is essential for negotiating a better lease at your current location. Don’t give your landlord the upper hand. It’s essential that you walk into the renewal negotiations equipped with other locations to show your landlord that, while you want to stay, you have other options and can leave if the new terms are unreasonable. Set yourself up to save money and receive other accommodations.

6. Negotiate with everyone.
After creating your list of potential locations, you should begin negotiations with all of them, not just your current landlord. Use your market research, current lease conditions and potential alternative locations to negotiate for favorable lease terms with each landlord. While you may not actually want to move, getting great lease terms with a location comparable to your current location will provide leverage for you to negotiate a successful lease renewal, which equates to money saved for your practice.

7. Rewind and get an agent.
As you may have noticed, like the creation of a lease, the lease renewal process requires extensive and time-consuming work. Negotiating a successful lease renewal demands a lot of research, in-depth market knowledge and strong negotiating skills. Most businesses do not have the time or the desire to become experts in commercial real estate. If you would prefer to have an agent take care of the vast majority of the last six steps for you, then start your successful lease renewal process by contacting a commercial real estate agent.

Ken Jorgenson is a commercial real estate associate with Carr Healthcare Realty, representing only tenants and buyers, and exclusively working in the health care real estate space. Carr Healthcare Realty offers expert advocacy without conflict of interest. They understand the unique real estate needs of health care professionals and their vast experience saves their clients time and money. Learn more and get a free lease or purchase evaluation at carrhr.com.