Negotiating a medical office lease can often be confusing and intimidating to the inexperienced. As a doctor, you are a knowledgeable professional, and yet when it comes to getting a good deal on medical office lease, it is important to know the key items to deal with.
The leasing process for medical practices are largely similar to leases for non-medical retail or office space, but with more patient safety and regulatory requirements to consider. Negotiating a medical office lease involves certain risks too. It is best to plan for the long term to avoid surprises, and lease agreements have to be flexible enough to accommodate for change as the practice evolves and grows.
Consider future expansion plans before you sign
Perhaps most important is to think seriously about whether you plan to expand your medical practice to include other doctors in the future. If you think you are going to expand, then you should include in your negotiations for the lease the option to lease additional space at the rate you are paying at the time you exercise the option.
You may also want to include the right of first refusal to a certain number of square feet that are connected to your space, if that area becomes available.
Know the difference between rentable square feet and usable square feet
This is a key variable to know about. ‘Rentable square feet’ equal the basis for your rent, whereas ‘Usable square feet’ equals the actual square footage of your office. The difference between usable and rentable square feet is typically a pro rata share of the building’s common areas: public hallways, the lobby area, public restrooms, etc.
By dividing your rentable square feet by your usable square feet, you can calculate the load factor (sometimes also called the core factor), which helps you assess what percent of the building is allocated to unusable space.
Understand what a rent escalator is and why is it important
The term ‘rent escalator’ represents the amount your rental rate will increase by an inflation factor. This is generally between 2 to 4 percent annually. When negotiating a rental agreement, aim to keep the escalator as low as possible.
Know what is and is not included in your rental agreement
It is important to when comparing and negotiating a medical office lease. For example, in a ‘triple net’ lease, the renter will typically pay the expenses of property taxes, property insurance, and common area maintenance for items such as cleaning, landscaping. It is critical to get an estimate of these expenses upfront. If possible, try to negotiate a cap on your common area maintenance.
Understand what a Tennant Improvement Allowance is
The Tennant Improvement allowance, (also known as a ’T.I. allowance’ or ‘upfit allowance’), is a payment from the landlord towards building improvements. It does not cover all of the costs of construction, but it does offset much of this expense. For lease renewals you can also negotiate a small Tenant Improvement Allowance to pay for re-carpeting, re-painting, and other upkeep expenses.
Consider whether you need an evergreen clause
Most leases include an automatic renewal, commonly know as an ‘evergreen clause’. If you do not let the landlord know in writing of your intention to not renew the lease, the lease is often extended automatically for another year or longer. Typically, you need to give the landlord 90 to 180 days advance notice (this is clearly explained in the lease) of your intent to not renew when an evergreen clause exists.
Most of these decisions you have to make in finding a medical office location,deciding what size medical office you need, and negotiating a medical office lease will end up costing you money. For this reason, it makes sense to look at the pros and cons of each option.
If you make wise and well-informed decisions, you will not have to waste time later undoing problems you could have avoided.
