Are you a doctor who is in the market for a medical office space; or, a dentist about to negotiate a dental office lease? If so, there are some important things to consider beyond the common requirements such as parking, signage, and design. The language of the lease can either protect you and keep your leasing experience healthy, or it can lead to increased costs and headaches that even you may not have the cure for.
Keep reading to learn the top five mistakes to avoid when negotiating a medical or dental practice lease.
Mistake #1. Not Having a Real Estate Attorney Review the Lease
Whatever savings you’ve calculated by not having a real estate attorney review the lease will likely cost you significantly more in the future when an avoidable issue arises requiring legal services. For example, standard leases do not include compliance sections that are necessary to follow healthcare regulations. A lease for a medical or dental office must be specially created for healthcare tenants.
HIPPA laws require that all information regarding patients be kept confidential and private. This means that persons granted access to your office should not have access to any patient records or confidential documents.
So, your lease should not allow the landlord or other non-healthcare-related persons (such as maintenance workers, brokers, etc.) unrestricted access to your office building. Instead, the lease should restrict the landlord's and other 3rd party access to certain parts of the office; or, limit access to restricted areas when dealing with an emergency.
The lease should make it clear that the landlord must provide adequate advanced notice when scheduling a time to visit, ideally when there are no scheduled patients. The lease should also limit the landlord’s access to the waiting room area and other clinical areas unless supervised.
Standard leases may also not allow for the regular use of biohazard materials and may state that their uses are prohibited. For a medical or dentist's office, biohazard materials are part of the daily routine.
So, be sure that your lease clearly states that it permits the use of biohazard materials and radiation machinery (such as X-ray machines and computed tomography (CT scans)). This clause protects both you and the landlord if something were to happen.
Mistake #2. Not Capping Reimbursable Expenses
There are many ways to structure a lease such as a Gross Lease, Modified Gross Lease, Net (N) Lease, Net-Net (NN) Lease, Net-Net-Net (NNN) Lease, Absolute Net, etc. Essentially they all describe the manner in which the landlord passes on to each tenant (on a pro-rata share) the costs or expenses incurred by the landlord to own, operate, maintain, repair, etc. the building and property. Most expenses fall into three categories, hence the Triple Net or NNN moniker when dealing with a net lease, and they are Taxes, Insurance, and Common Area Maintenance (CAM) which is often a catch-all for CAM expenses and other operating expenses such as management fees, professional service fees, etc.
Generally, a cap on reimbursable expenses includes negotiating an annual maximum expense increase that the tenant would be responsible for paying. This is commonly expressed as a percentage, such as a 5% cap. Common mistakes include not being clear if the cap rate is applied year to year (on the lesser of actual expenses or capped expenses) or applied cumulatively (on the previous year’s cap rate even if the expenses were lower than the cap; or, does the cap apply in aggregate, meaning if actual expenses are lower than the capped amount, the difference can be added to the next year.
Most owners won’t negotiate a cap on expenses they can’t control like taxes, insurance, utilities, etc. Or, they won’t consider a cap because of the perceived “administrative headache” to manage multiple tenants with varying expense caps. However, many owners will agree to a cap on “controllable” CAM expenses. Those expenses can include security, ice and snow removal, trash disposal, pest control, landscaping, general building maintenance or janitorial services, management fees, and more. CAM expenses do not include the cost of capital improvements, including the cost of management office equipment and furnishings, depreciation on Landlord's original investment, the cost of tenant improvements, interest or depreciation on capital investments, etc.
With net leases tenants pay “pass-through” expenses in addition to their base rent; and, after the year they “true up” those expenses paying the difference if what they paid for the year was insufficient to cover the landlord’s total expenses. With a gross lease a tenant will have a “base year” or “expense stop” adjustment, meaning the tenant pays their pro rata share of any expense increase in excess of the base year expense or the agreed expense amount, usually expressed as a $ per square foot (psf).
In either lease, if the landlord’s expenses are more than they estimated then the tenant will reimburse the landlord the additional expense. It’s this increase that you want to negotiate a cap. For a basic example, if the estimated expenses paid (as in a net lease) or expense stop (as in a gross lease) was $6 psf and included a 5% cap but the actual expenses were $7 then tenant would only owe $.30 instead of the full $1. $6 plus the 5% cap equals $6.30. The cap, therefore, limits the tenant’s expense increase to $.30 and the landlord absorbs the difference. It may not seem like a lot of money, but it is. In this example, you saved $.70 psf, and if your office is 3,000 sf that’s $2,100 in expenses you kept in your pocket.
Mistake #3. Not Including Exclusive Use Provisions
Given the choice, you probably don't want the competition right next door. And you can avoid this by including an “exclusive use” provision in your medical or dental office lease.
An exclusive use provision can protect your practice by restricting the landlord’s ability to lease space to a competing business or practice in the same building or property. It can also limit other types of businesses at the property from offering services or procedures that may be similar to yours. For example, a salon that begins offering teeth whitening procedures that may violate the exclusive right of the general dentist in the same building to offer those services. Of course, the lease should be clear on what constitutes a violation, how potential violations will be monitored or confirmed, and most importantly, the landlord’s obligations to compel violators to cease and desist.
Mistake #4. Not Understanding Who Is Responsible For Repairs
Dealing with repairs and trying to determine who is responsible can be one of the most frustrating parts of any lease. While who is responsible for what is negotiable, generally, the landlord is responsible for maintaining the exterior of the building, including anything structural such as the roof or foundation, and the common areas. Tenants are responsible for maintaining everything in the leased space, especially any tenant improvements, including plumbing, HVAC, doors, windows, etc. So here is where things can get tricky…if you’re leasing space in a retail shopping center with a plate glass window storefront and the window breaks, who is responsible for the replacement? Or, if you have a plumbing issue, such as a clog or blockage, and your plumber suspects the blockage may be in the main line or possibly related to another tenant. So a camera needs to be inserted into the pipe for physical inspection. Who pays for that? Who and what caused the blockage? Or, if rainwater is seeping in from under your exterior door? Are these landlord or tenant repairs? You can see how finger-pointing and assigning blame can escalate quickly, not to mention both parties interpreting ambiguous repair provisions that put the responsibility on the other party.
Spending some time upfront, when you're negotiating the lease, on repair and maintenance provisions can and will save you a lot of time and emotional distress, and possibly some money when repairs or maintenance are needed. And they’re always needed. Before we move on, check out the major benefits of leasing.
Mistake #5. Forgetting That Everything (Well, More Like “Anything”) Is Negotiable.
First, everything really is negotiable and the basic rule of negotiating is “if you don’t ask, you don’t get.” Secondly, because everything is negotiable, doesn’t mean everything should be negotiated. All you’d end up doing is annoying the other party and put the deal at serious risk. So you need to know what’s important to you and what you want to fight for. So, knowing everything is negotiable means that anything can be important and worthy of meaningful negotiation.
Now, I could write an entire article on how to successfully negotiate real estate leases or purchase contracts, and I just might do that, but here is a key point to remember when negotiating a lease agreement.
A commercial lease agreement is drafted to protect the owner, not so much the tenant. Accept it. If you were the owner of a multi-million dollar building you’d want the lease to weigh heavily in your favor too. So a successful negotiation for the tenant is to simply make the lease more fair so that it more evenly protects both party’s interests. A very successful lease for a tenant is getting additional or enhanced concessions (financial or non-financial incentives to lease the space), changing or adding provisions that can save the tenant money in the future (such as repairs or when vacating the space), or provide more flexibility with the practice or business (like subletting or assignment, etc.).
When you’re preparing to start lease negotiations, remember to hire professionals. I had a dental client who offered some advice to his peer. He simply stated, “this is not a game for dentists, let the pros handle it.” Sage advice no doubt.
Avoid These Medical and Dental Office Lease Mistakes With Our Help
Now that you know the medical and dental office lease mistakes to avoid, you don't have to go at it alone. Lease review and negotiating is a tough business. That's why we are here to help!
At RCA Global, we offer real estate consulting and advocacy. We make sure our clients are protected and don't spend more money than necessary. Check out all of our services here, and contact us today to speak with one of our consultants.