Lease Review 101

Recently I’ve had several people ask more about some of the specifics of the process of securing an office space. Things like what to look for in a lease and how to make sure you don’t get shafted. The best advice I can give as I had hinted previously is to use a realtor and/or commercial real estate lawyer that you can trust and who’s done similar lease reviews in the past. Sometimes this can be a tricky proposition, especially with realtors, as they are usually compensated based on a percentage of your lease, potentially leading to a conflict of interest. I’m not a realtor nor am I a lawyer but I can attempt to shed some insight to the leasing process based on my own personal experiences.

Once you’ve settled on a prospective office space, typically you will ask the landlord for a Letter of Intent (LoI). In this early stage, it is usually advantageous to let the landlord know that you are looking at several different properties (even if you’ve decided on that location) so they have an incentive to give you more concessions to sign a lease with them. The LoI is just a short document outlining the basic terms of the rent, and most importantly, is non-binding. Basically it’s just to let the landlord know that you are serious about renting the space so that negotiations can continue. What this means is that until the final executed lease is signed, you are not obligated to anything. You can back out at any time with no repercussions. Keep in mind that this is not an exclusivity agreement. That means the landlord is free to consider other tenants and can withdraw their offer at any time as well. This is important to remember especially if you are looking at a space that has a high demand. Most of the large items concerning the rent and major conditions are negotiated at this stage. There are usually two components to your rent, base rent and additional rent. Base rent is what you negotiate with the landlord. The rate will vary depending on location, and property and how well you can negotiate. The additional rent portion is typically non-negotiable. This includes the landlord’s taxes, insurance, landscaping, and general building maintenance. By law, the landlord is not allowed to upcharge this amount to the tenants so the expenses are directly passed on to the tenant based on square footage of the lease space. Another important part of the conditions in the LoI is the Tenant Improvement Allowance or similar. This is how much the landlord will reimburse you to facilitate your build-out process, or making improvements to the space. There isn’t really any set standard number for this as it’s mainly something the landlord adds to incentivise signing their lease. Obviously a higher amount is better. As far as negotiating this amount, some things to take into consideration is the condition of the existing space and basic construction of the space. If you are moving into a preexisting space that already has improvements, you may want to try to negotiate a bit more to cover demolition costs (even if you don’t have plans to do any major demolition). Building construction is especially important for dental and medical spaces, mainly with plumbing considerations. Most buildings will be delivered with a full length concrete slab flooring. What this means is during construction, you will likely need to trench through the concrete to lay down your plumbing and repour a significant portion of the concrete. All this means extra labor, materials and money. If you are lucky enough to find a space pre-construction you may have the opportunity to work with the contractor and have them place the plumbing prior to pouring the concrete slab.

Once you’ve loosely agreed to the basic terms of the lease and have signed the LoI, the real fun begins. The landlord will now draft a full lease based on the conditions of the LoI and everything else that goes into leasing out an office space. This is where an experienced lawyer goes a long way with the lease review process. A good lawyer will typically bill around 8-12 hours total for the entire lease review process. They’ll go over the lease and make sure the language in the lease is clear, the terms are fair, and will offer suggestions for any changes they see fit. Every lease is different but there are a couple clauses which I feel are especially important for dentists and medical professions.

Exclusivity: This is huge, especially in a large shopping center. If you’ve ever been on Bellaire/New Chinatown in Houston, you will understand why this is so important. An exclusivity cluase basically states that the landlord will not allow for another practice to rent a space on the property without your approval. That means that if you open a general practice on one end of the center, the landlord can not allow another dentist to set up shop on the other end or next door in the same center without your consent. This prevents the Chinatown problem of having two or three dental offices in the same shopping center/plaza. It is good to note thought that some specialties will have a good synergy with your practice. You may find it helpful to have an orthodontist, endodontist, or oral surgeon next door for quick referrals or consults for your patients. That way patients are still being seen within your circle of influence and don’t feel like they’re being handed off to another doctor across town. Most landlords will have no problem with including an exclusivity clause in the lease.

Parking: Depending on the area this can be an issue. Parking demands are usually self explanatory. You want as many reserved spaces as you can get for your patients and employees. No one wants to have a long walk after they park to get to your front door, especially in the Houston heat.

Subleasing (more for general practices): Depending on the size of the lease space, you may want the opportunity to sublease a portion of your office space to a dental laboratory. Having your own “in-house” lab can greatly decrease your overhead and turnaround time for large cases. You can also work directly with your lab tech and have greater control over the quality of work that you deliver to your patients.

Signage (Storefront and Monument): You know what can put a huge damper on your brand new office? The inability for anyone driving by to see where it is. What good is a sign if it has to look like every other sign and blend in? What good is a sign that is so restricted in size so it is difficult to read from the street? Simply put, signage is very important for the initial health of any practice, both on the storefront and on the monument sign by the road.

Clearly the best advice will come from a professionally qualified realtor or lawyer but hopefully with some more information you’ll be a bit more prepared before diving in head first.

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