Amid a recent discussion with an office manager (we’ll call her “Karen”), she recently renegotiated the commercial lease for her doctor’s office. Karen proudly shared that she had negotiated a very good deal. However, our exploration of the terms revealed quite a different story.
Apparently the landlord’s broker (“Mike”) offered Karen a discount on her current rental rate, if she agreed to renew the lease on the spot. This office is about 2,000 square feet and while tidy, its cosmetic aesthetic is dated. The physician (whom we shall call Dr. Alex) had been operating from that location for several years, and had great credit. When Mike stopped in, it was the first time Karen had been offered a rental discount. She was ecstatic!
Now, let’s look at the facts.
Dr. Alex signed his last lease 5 years ago. Assuming the previous lease was not signed at an above market rate, current rates for his neighborhood are down more than 25% from the last time the lease was inked. In addition, commercial vacancy rates are up significantly throughout the vicinity. Let’s look at the numbers. Karen’s landlord (“George”) offered her a 10% decrease in her rent over a 10-year term. The current rate was $25/sf, meaning a decrease to $22.50/sf.
Good deal, huh?
Actually, not so much. One of the many issues with this “deal” is that comparable rates for the market are not $22.50: They are $18 to $19. Because Karen didn’t have an understanding of those factors, Dr. Alex’s office will suffer the following losses over the next decade:
Loss in rent: $86K
Loss in free rent (typically given to tenants as a bonus to sign): $22.5K
Loss in Tenant Improvement (TI) Allowance (typically paid as an incentive by the landlord to update the space or equipment): $30K
Total loss compared to actual year 2014 market conditions: $138.5K
It actually gets worse. This real estate transaction could have been easily avoided had they explored current market conditions. And there are additional factors that can alter the equation. In our experience, over the past 5 years, we have seen doctors in similar circumstances save:
10% off market rental rates
up to 25% in free rent over current market offers
up to 75% in Tenant Improvement Allowance (TI) over current market offers
Reworking the numbers using the minimum benefit typically seen for a successful dental practice, Dr. Alex’s estimated loss is $229K. That’s an awful lot of money for any doctor to give away. Sadly, his situation is not uncommon. Over 10 years, he could have brought in $22.9K of additional profit. With average production numbers, that $22.9K could have translated into double profit growth each year. You have put decades of schooling and countless working hours to make your business successful. How can you stop giving away the money that should be going toward your business?
Real Estate Expertise (both medical and local market)
Christian is the Founder and CEO of GILE Healthcare Real Estate (Formerly Arizona Healthcare Realty) a tenant and buyer representation firm specializing in medical real estate and investment services. A graduate of the United States Air Force Academy, Christian served on active duty in the U.S. Air Force for 10 years in Texas, California and Colorado and an additional 3 years in the reserves. He began his career in Commercial Real Estate in 2004. In that time he has personally negotiated over 1500 medical, dental, and veterinary lease & sale transactions for his clients. His representation and advice continue to result in extraordinary increases in profitability and savings for his clients. He now resides with his family in Scottsdale, Arizona.