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16 May

Real Estate: The Second-Highest Expense in Your Practice

Posted by Mark McGaunn on Monday, May 16, 2016

 By Dave Miller
Carr Healthcare Realty

When it comes to managing expenses in your practice, there are dozens of categories to evaluate: equipment, technology, loan costs and interest rates, sundries, marketing, and on and on they go.

Many practice owners are quick to shop-out what they believe are the most obvious expenses, but few understand the impact of one of the largest expenses and how it can be dramatically reduced to increase profitability. The highest expense for most practices is payroll, followed by real estate. Real estate encompasses your monthly rent or mortgage payments, along with the property’s operating expenses, maintenance fees, utilities, and janitorial costs.

If you consider these top two expenses, payroll and real estate, only one of them is really negotiable. With payroll, you can either pay people their value or they usually find another job that will. You may decide that you can cut staff, but if you need people you need to pay them what they deserve or they will eventually leave.

Real estate however, is 100% negotiable. You have the choice of leasing or owning, as well as being in an office building, retail center, a stand-alone building, or large medical complex with many other providers. You can choose the size of your space, the design, and the landlord you want to work with—or to be your own landlord. And if you do own, you get to decide whether to buy an existing building, an office condo, or to develop your own building from the ground-up.

When negotiating the economic terms of a lease, you get to have a say in the length of lease, the desired concessions including build out period, tenant improvement allowance, free rent, lease rates, annual rate increases and many other provisions.

With this many choices to evaluate and understanding that each one affects the final economic outcome, why is it that so many practices fail to capitalize on their real estate opportunities? The short answer is that most practice owners and administrators simply don’t have the knowledge and expertise in commercial real estate to understand how to make the most of these opportunities. They view real estate as a necessary evil instead of an incredible opportunity to improve profitability, reduce expenses and improve the quality of their patients’ experience. When the correct approach is taken, you may actually look forward to it instead of dreading your real estate negotiation.

Let’s take a look at three key ideas that will help you make the most of your next real estate transaction.

1. Timing

Every type of transaction has an ideal timeframe to start the process. When starting too early or too late, you communicate to the landlord or seller that you don’t really know what you’re doing. When that message is communicated, it hurts your ability to receive the best possible terms. For example, don’t wait for your landlord to approach you on a lease renewal negotiation. Start by consulting with a professional so you can understand the ideal timeframe to start your transaction, come up with a specific game plan for what you want to achieve, and then you be the one to approach your landlord with renewal terms.

2. Representation

Landlords and sellers prey on unrepresented tenants who don’t really know the market or what their options are. If the tenant was a Fortune 500 company, the landlord would approach them with a high level of respect, expecting that they either have a real estate broker hired to represent them or have a team of professionals internally that are well equipped to handle the transaction.

In contrast, when a landlord or seller starts speaking with a tenant who isn’t represented, and who they don’t believe knows the market as well as they do, that tenant is not going to get the same level of respect through the process. This is because the landlord senses an opportunity to take advantage of a small tenant who is not an expert, doesn’t have a full complement of real estate knowledge and skills, and who doesn’t have adequate representation.

When you understand that commissions are paid in commercial real estate just like they are in residential real estate—they are set aside in advance for two parties, not just one—then you understand there aren’t any savings by not having a broker. And if there aren’t any savings by not having a broker, then showing up without one only further detracts from your credibility.

3. Leverage and Posture

It is nearly impossible to emerge victorious from a negotiation without leverage and posture which are created by having multiple options in the market. If you limit yourself to one property, you are at the mercy of that owner. Since most landlords and sellers negotiate professionally, it is easy for them to know when you don’t have other viable options.

Simply telling a landlord that you have a proposal from another landlord won’t give you a strong enough posture. Most landlords look at unrepresented tenants and assume they do not know the market, do not understand all their options, and are not really serious about making the landlord compete for their business. Leverage and posture are created when you have the right timing, professional representation, an understanding of all your available options, and a detailed game plan of what you want to accomplish in order to capitalize on the market.

These three key ideas are the first of many factors that allow healthcare tenants and buyers to reduce their second highest expense which dramatically impacts profitability and cash flow.

Carr Healthcare Realty is the nation’s leading provider of commercial real estate services for healthcare tenants and buyers. Every year, hundreds of medical, dental, veterinary, and other healthcare 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 healthcare 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. www.carrhr.com



23 Nov

Renewing Your Lease: Important things to know

Posted by Mark McGaunn on Monday, November 23, 2015

By Dave Miller
Carr Healthcare Realty

Leases and lease renewals are not typically 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.

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 ten 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.

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% of their last month’s rent and can also incur damages if they holdover without permission. The bottom line is that if there is not ample time to relocate if necessary, the landlord has a strong upper hand.

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 is very 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.

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 healthcare 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 are typically responsible for paying commissions so professional representation is available to you at no out of pocket cost.

Another mistake practices make when entering into 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 twelve 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.

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) are also calculated 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 healthcare tenants and buyers. Every year, hundreds of medical, dental, veterinary, and other healthcare 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 healthcare 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. www.carrhr.com

06 Nov

Leveling the Playing Field in Your Next Office Lease Negotiation

Posted by Mark McGaunn on Friday, November 06, 2015

By Dave Miller
Carr Healthcare Realty

The current commercial real estate market has been dramatically affected by the economy in the past several years. This has resulted in a very favorable environment for tenants, as landlords are extremely motivated to attract new tenants and retain existing ones—especially high quality tenants such as healthcare practices. Some of the current opportunities include reducing your monthly rent payment, upgrading your office’s appearance through an improvement allowance, as well as obtaining free rent and other favorable concessions.

One of the keys to a successful negotiation is to take advantage of the free services of a real estate broker or agent. This is important because most landlords are in the business of real estate and typically have the upper hand when negotiating with tenants directly. Additionally, the majority of landlords hire a real estate broker to represent their interests and provide expertise. Though dramatic concessions are available, a specific posture and negotiation strategy are paramount to achieving the best possible terms.

When the time comes to evaluate your current lease situation, you’ll need to consider the pros and cons of renewing the lease in your current location versus relocating to a new property. Since economics and concessions will have a dramatic impact on the decision, it is essential to understand all of your available options and implement a strategy to leverage them. It is critical to the success of your negotiation that your landlord knows that you have the option to relocate, which means that you need to begin negotiations well in advance of your lease’s expiration; ideally 9 – 24 months before your current term ends.

When you begin negotiations, you have two options available to you: You can work with the landlord’s agent and represent yourself, or you can hire a real estate broker. Here are some things you need to know if you choose to represent yourself in a lease negotiation.

Under state law, a real estate broker can enter into an agreement to serve clients as an Agent. An agent is obligated to serve his or her client’s interests with the utmost good faith, loyalty and fidelity. Clearly, it is not practical for an agent to act with utmost loyalty to two parties on opposite sides of a transaction, meaning the landlord or landlord’s broker should not also represent your interests.

Simply put, if you do not bring an agent into the negotiations, no one will be protecting your interests but yourself. If you deal directly with the landlord or landlord’s agent, it is crucial to remember that he or she is not legally or logically in a position to advocate on your behalf, so it is important to exercise discretion with the information you share with the landlord’s agent.

Even if your building’s ownership and management are pleasant to work with, respond to issues quickly, and maintain the building well, their primary interest is maximizing profits. Landlords know that without market knowledge, tenants have no baseline against which to compare a lease offer. Therefore a landlord will most likely offer the highest lease terms that they believe an uninformed tenant will accept.

The only way to know if any offer is truly competitive is to compare it to the market. To do this you need to identify all the available properties which suit your needs, and then tour a significant number of them to determine which ones will be best suited for you and ensure that you don’t miss any opportunities.

You then need to negotiate with the landlord at each property to receive the best offers for a suitable space for your practice. These offers will include terms for the base lease rate and any increases in the lease rate, as well as concessions such as free rent and an improvement allowance. You’ll also need to know the lease terms and concession that new tenants in your current building are receiving from your landlord. At each step along the way, you’ll be dealing with a professional real estate broker who is hired to achieve the best possible terms for the landlord.

If this sounds daunting to handle yourself, you do have an alternative. You can hire an experienced real estate professional as your agent—to act on your behalf with your interests in mind. He or she can provide you with comparable properties’ lease rates, build out allowances, and other concessions, which can then be used as valuable leverage on your behalf in the negotiations with the landlord. Ideally, you should select an agent with experience representing healthcare practices because they will be able to achieve specific terms and concessions that are not generally available to other types of tenants. Your agent will handle all the research and communication with the landlords, while maintaining a professional negotiating posture on your behalf. 

Fortunately for you as a tenant, landlords and sellers have agreed to pay for an agent’s services on your behalf, so it costs you nothing. Commercial real estate is structured similarly to residential real estate. If you were to sell your home, you might list it with a broker and agree to pay a commission. The commission is split between the listing broker and the broker who brings the buyer. If the listing broker is able to find the buyer directly, then he or she would earn a double commission. The same kind of arrangement is made in the commercial real estate market, and you as a tenant or buyer have access to professional representation at the seller’s expense.

Most healthcare providers have plenty to do serving their patients and running a successful practice.  Spending hours on end making sure your lease renewal is competitive and handled properly is typically not the best use of your time. Since professional representation does not cost you anything as a tenant, it makes a lot of sense to let a licensed real estate professional review your lease, represent your interests in your negotiations, and then help you capitalize on the current market conditions so you can achieve the best possible terms.

Carr Healthcare Realty is the nation’s leading provider of commercial real estate services for healthcare tenants and buyers. Every year, hundreds of medical, dental, veterinary, and other healthcare 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 healthcare 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. www.carrhr.com