April 6, 2023
For most of us, real estate is the biggest expense in our personal financial portfolio. For a medical practice, real estate is often the second-largest expense, behind only payroll. That makes lease negotiations extremely important.
Negotiating your lease properly can help increase profitability, reduce debt, and get a nicer and more effective office in the bargain. But if negotiations are not handled properly, you can overpay dramatically, shrink profitability and receive less than what you need. In many cases, negotiations go poorly because doctors fall prey to common mistakes.
At CARR, we specialize in healthcare real estate and have represented thousands of healthcare professionals in the last decade. To help you avoid industry pitfalls, we selected some of the most common mistakes we see during lease and purchase negotiations. Here are three of the most common mistakes to avoid:
Landlords and sellers are in business to make money. They are no more likely to voluntarily reduce lease rates than you would be to voluntarily reduce your reimbursement from an insurance company or cut your fees without good reason.
To get the best price from a landlord, you need to truly understand the market, enter the negotiation with multiple options and have some professional guidance. Trusting a landlord or seller without the help of professional representation can be costly.
For example, if you were about to sell your home and a fair price was $400,000 but your agent told you a buyer would pay $500,000, which listing price would you choose? Would you list it for the “fair” price of $400,000 or the market rate of $500,000? You would sell it for the most you could—and your landlord will respond the same way.
A professional who understands the market can cut through the spin and help you quickly arrive at a fair price.
Several years ago, we were reviewing the lease terms of a doctor who had been in a building for 20 years. The lease said he was paying $30 per square foot and did not receive any free rent or tenant improvement allowance in his last negotiation. When we asked if he thought that was a good deal, he said that it was.
“There are four other healthcare practices on this floor. We all know each other and talk about our leases,” he said. “We are all paying $30 per square foot and the landlord has told all of us they don’t give free rent or tenant improvement allowances.”
It sounds reasonable, right? The problem is that we had recently handled a lease with a brand-new tenant on the first floor of that building who paid $21 per square foot—an $1,800 per month savings—and had obtained both 3 months of free rent and a tenant improvement allowance of more than $100,000.
The landlord got away with convincing five different practices that the market was far higher than it really was and that they didn’t deserve concessions. Imagine finding out that you have been overpaying by $1,800 per month for years and that you had forfeit money that could have completely renovated your space?
The lesson here is that fellow tenants are almost never experts in the market. It is not a bad thing to see what your neighbors are paying, just don’t mistake that for market expertise or high-quality research. Many of your fellow tenants negotiated their leases with no posture, no knowledge of the market and none of the leverage that comes with representation. That is not a path to follow.
The better scenario is to secure professional representation who can deliver real market expertise and professional-quality research. It’s the best hedge against misinformation and deception.
Successful negotiation begins with understanding the options you have for office space, how they compare to one another and how each can be executed. That takes some work—perhaps even multiple negotiations—but the benefits are well worthwhile.
Many healthcare providers try to bluff, but an experienced landlord can usually see through it. There are many problems with that approach. It tells the landlord that you are too busy, don’t know who to hire and are not aware of what you can achieve in a negotiation. In short, you get less respect. Often, overly aggressive offers or unrealistic requests compound the problem, as do emotional responses to the conflict inherent in most high-dollar negotiations.
If you are going to be successful, it is essential to understand market availability and comps. This is where successful negotiations start. You can hire representation to do this for you, or you can invest the time—many days of work—to arm yourself with the information you need. When you understand your options and the market, you can negotiate with confidence.
Of course, there are many other mistakes that medical practices often make, but most can be avoided by getting professional representation that ensures you won’t be taken advantage of during your next purchase or lease negotiation. Professional representation can level the playing field, start the transaction at the proper time, cultivate multiple options, negotiate with multiple landlords and provide the market knowledge needed to ensure a successful outcome.
Remember that this is likely your second-largest expense, and it is difficult to adjust after a lease has been signed. There are likely tens of thousands of dollars—sometimes hundreds of thousands of dollars—on the line.
This is not the place to take a DIY approach. Professional representation is a solid investment.
CARR is the nation’s leading provider of commercial real estate services for healthcare tenants and buyers. Nitra cardmembers get a free lease evaluation. Visit CARR.US to learn more.