commerical – Beyond the Bite

Renewing Your Lease: 5 Important Things to Know

by Florida Dental AssociationAugust 24, 2017Leave a comment

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 Florida Dental AssociationAugust 3, 2017Leave a comment

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.

7 Tips for Successfully Renewing Your Commercial Lease

by Florida Dental AssociationDecember 17, 2015May 31, 20171 Comment

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.