- Your Term and Your Options to Renew. If you are acquiring another practice, it is a critical time to be negotiating a new 10-year term with 2 X 5-year options. Many groups mistakenly assume the seller’s lease agreement without giving much thought on how to leverage term for better rates and less risk. Secondly, be aware of “personal options”. Most lease agreements with options to extend the lease become null and void when the lease is assigned from the seller or with a change of control.
- Your Use Provision. Consider whether the language in your lease accounts for the expansion of your service menu later on, ensuring utmost flexibility to the development of your business plan. Does your lease allow you to practice in specialty areas, or at least allows for the incorporation of that service later on? Ultimately, does your lease allow you to develop your business later on with minimal to no restrictions or intervention from your landlord?
- Your Rights to Remain. According to your lease, is your landlord able to relocate your practice to another location during the term of your lease, or, worse, terminating your lease on short notice, with minimal (or no) moving expenses covered? When considering the cost of uprooting and relocating a dental practice, it’s important to ensure protection to avoid significant logistical and financial headaches later on.
- Your Exclusivity. Have you thought about your competition? Have you protected yourself from other dentists moving into your building or retail plaza? How much of a competitive protection can you negotiate into your lease? The connection between your lease agreement and business development is truly a thought worth considering, particularly if it impacts the practical realities of traffic into your clinic.
- Your Assignment Provision. Have you considered the impact of your lease portfolio on your sale or capital event? Does your lease allow you to have a change of control and easily assign your agreement to a future purchaser of your group? And more importantly, what kind of landlord-friendly rights are embedded? More often than not, assignment provisions constitute rights in favor of your landlord which may significantly affect your exit strategy.
- Your Critical Dates. Who in your group is tracking all your critical lease dates? Time is leverage for negotiations. Most groups do a poor job at proactively engaging the landlord two years prior to the lease expiry. Key dates and information to keep track of are: Commencement Date, Term of the Lease, Lease Expiry Date, Remaining Options, and Option to Renew Deadline Date.
It’s always a challenge keeping group practice costs to a minimum.
Paying close attention to the finer details in your dental office lease agreement when starting a practice from scratch, or approaching your lease renewal or expiry date is important for keeping practice costs low, and protecting yourself from financial disasters down the line. Here are 5 lease negotiation tips a dentist can follow to help control practice costs, and avoid financial traps in the long run.
- 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 when you open your practice, or at renewal time, will help you remain profitable as your practice grows. Try to protect rental rates and unreasonable escalations by negotiating a cap on annual rental escalations with your landlord.
- Research Market Rental Rates
Do your due diligence to research 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 proposed lease rates are fair or not. Cirrus Consulting Group has access to commercial market real estate data such as vacancy rates and rental rates. If you’re curious about your rental rates, and how they compare to similar properties in your neighborhood, schedule a complimentary rent analysis with us.
- Options to Extend
The “option to extend” provision in the dental office lease provides tenants the ability to extend their tenancy in the building under the same agreed upon terms in the lease agreement. The “extension deadline” is the last day that you may exercise your option to extend the lease term. Negotiating “options” into your lease is beneficial because they can protect you from rental escalations and provide you with the flexibility to stay in your space, 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 for. Unfortunately, some landlords have been known to pass on various unreasonable expenses to their tenants, filing them under the term “operating costs.” Here are some examples of unreasonable expenses:
- Improvements made to the property to increase its value that doesn’t affect you.
- Building repairs.
- Real estate broker commissions.
- Professional fees that are unrelated to your unit.
- Interest or principal 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 – ensure you’re not overpaying in administration fees. Anything over 5% is unreasonable. Also, be aware that “administration fees” and “management fees” mean the same thing; make sure you’re not being charged twice.
- “Surrendering” the Space
Any dentist who has built out a dental clinic from scratch knows firsthand that converting an empty space into a functioning dental practice is expensive. 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 later.
Eric Pook manages the Healthcare Leasing Team at Cirrus Consulting Group, North America’s preeminent commercial real estate and office lease negotiation firm for dentists. Eric has been consulting small businesses since the late 90’s with an emphasis on revenue creation and cost mitigation. He grew up in a medical entrepreneurial environment and continued that passion by starting or growing businesses throughout North America. Eric advises Doctors each day on how to successfully leverage the dental office lease agreement to maximize practice value while reducing risk and liability.