It’s always a challenge keeping dental practice costs to a minimum. Here are five lease negotiation tips a dentist can follow at startup or renewal to help control practice costs and avoid financial traps.
- Capping Rental Escalations
Your “Annual Base Rent” is the amount that you agree or agreed to pay your landlord for occupying the dental office space. Securing reasonable rental rates at renewal time or when you initially open or opened your practice will help you remain profitable as your practice grows. Try to protect rental rates from unreasonable escalations by negotiating a cap on annual rental increases with your landlord.
- Research Market Rental Rates
Research average rental rates for buildings in the neighborhood of your practice, and try to find out what the landlord is asking for other comparable vacant spaces in the building/center. This will help you better understand whether your lease rates are fair.
- Option to Extend
The “option to extend” provision in the dental office lease can provide tenants the ability to extend their tenancy in the building under the same agreed upon terms in the lease. The “extension deadline” is the last day that a doctor may exercise their option to extend the lease term. Negotiating “options” into your lease is beneficial because these options can protect you from rental escalations, and provide you with the flexibility to stay in your unit even if the landlord has other plans for the space at the end of your term.
- Understanding Operating Costs
Operating costs are the expenses related to the operation and running of the building. It’s important to ensure that you have the “right to review/audit statements of operating costs” written into your lease agreement, affording you the transparency of knowing exactly what you’re being charged. Here are some examples of unreasonable operating expenses:
- Improvements made to the property to increase its value that does not affect you.
- Building repairs.
- Real estate broker commissions.
- Professional fees that are unrelated to your unit.
- Interest or principle payments on mortgages or debt costs (unless it is your debt or TIA – tenant improvement allowance).
- Common Area Maintenance (CAM) charges on vacant space in the building.
- Marketing fees that do not increase traffic to the building, and are not helping your business.
- Administration Fees –Anything over 5% is unreasonable.
- “Surrendering” the Space at Sale Time
It is typical for dentists to spend up to $150 dollars per square foot to build out a new dental office, easily amounting to hundreds of thousands of dollars. Now thinking long term, when you decide to relocate, retire, or sell the practice, the Surrender clause in your lease agreement will dictate how you are to leave the space when you exit the premises. To avoid the expensive costs related to the demolition and construction of the space, try to negotiate the wording of the “Surrender of Premises” clause in your lease to release you from the liability of having to restore the space back to its original shell condition (base building standards) when you vacate.
These are just some of the ways to lower lease costs and protect yourself from expensive traps in the dental office lease. However, the best way to ensure that your lease is set up with economic and risk-free terms is to have the agreement reviewed by professional Dental Office Lease Negotiators before you sign or renew it. Negotiating a healthy lease now could prevent you from paying more in the future.
Alain Sabbah is a principal at Cirrus Consulting Group, a firm devoted to office lease negotiation and review services for dentists. Alain has extensive experience in commercial real estate consulting, focusing on dental tenant representation.