The real question isn’t just how much your lease costs, it’s whether the deal you’re getting is truly competitive in today’s market. Too often, tenants hyper-fixate on base rent when evaluating a lease. They assume that if the rate is low, they’re automatically getting a good deal, so they sign without a second thought. But in doing so, they overlook other financial and non-financial components of their lease and miss out on thousands of dollars in potential savings.
This is why tenants need to pay attention to the full scope of lease economics. The good news is that understanding lease economics doesn’t have to be complicated or overwhelming. Let’s break down some key aspects in plain language.
What Is Fair Market Rate?
An important tool for evaluating your lease is the
fair market rate, which reflects what tenants are actually paying for comparable properties. This number is shaped by a variety of factors:
- Location: Is the space in a desirable area? Is the nearby market saturated with competitors, or are there businesses that will drive more traffic to you? Is the space accessible by public transit and major roadways? Is it easily visible, or tucked away?
- Building Type: Has the building been recently renovated? Does it meet ADA standards? Does it include the specialized features your practice needs?
- Building Appeal: Is the property well maintained? Do the lobby and common areas reflect the professionalism and overall feel of your practice?
To get an accurate view of the fair market rate for the space you’re evaluating, you need to benchmark against comparable properties. This is where a specialized commercial real estate broker can be invaluable. Their experience and market knowledge can make all the difference when measuring fair market value.
Tenant Improvements
It’s rare to find a space that perfectly meets your needs from the start. Whether it’s repainting, or installing lead-lined walls for X-ray rooms, some level of renovation is almost always required. Many leases include what’s called a
Tenant Improvement (TI) allowance to help offset these costs. This is funding provided by the landlord to customize the space for your needs, and it can make a huge difference in reducing your upfront expenses when opening your doors.
If you’d like to dive deeper into how TI allowances work, we’ve published an entire blog post that explains everything you need to know. [Click here to read it.]
Abated Rent
Signing a lease isn’t the end of your worries when opening a new practice. Before you can start generating cash flow, you have to get through the build-out and move-in period, which can become very expensive very quickly. Paying rent on a space before your doors even open can sink a practice before it ever starts.
This is why some leases include a period of
Abated Rent, which gives you free rent on the space for a set number of months.
Other Concessions
So far, we’ve focused on the financial side of lease economics, but there are also non-financial concessions that can impact the profitability of your practice. These need to be carefully evaluated when measuring how strong a lease really is. Here are a few key examples:
- Signage Rights: What rights do you have to place your sign on the property? Will your practice be featured on freestanding signs near the road or entrance? This affects visibility to passing traffic and how easily clients can find you. Will your name appear on building directories or lobby signage to help guide clients to your space?
- Parking Allocation: Do you have reserved parking for your patients and staff, or is it shared with the rest of the tenants? If it’s shared, is there enough parking available to meet your needs?
- Sublease/Assignment Flexibility: It’s important to think about the long-term future of your practice. What happens to your lease when you’re ready to retire or relocate? Does your lease allow you to sublease the space or assign the lease to another party?
Each of these factors can positively or negatively affect the operations, visibility, and long-term flexibility of your practice. That’s why they should be evaluated alongside the financial terms of the lease.
Conclusion
Every detail of lease economics can have a significant financial impact on your practice. These terms are often nuanced and interconnected. No single factor is more important than the others. Instead, lease evaluation should take a holistic approach, where every clause is carefully weighed in context and negotiated to achieve the best possible outcome for your practice.
