The Hidden Lease Costs That Impact Your Practice’s Bottom Line

One of the biggest mistakes physicians make is budgeting for rent the same way you would for a mortgage. They treat base rent like a fixed, predictable payment. What often gets overlooked is the complexity of costs that come with leasing a space. There are several layers of expenses beyond your monthly rent check that can catch you off guard. Escalations, CAM charges, and NNNs are hidden line items that can quickly change your financial picture.

Escalations

Leases often include a clause that allows for annual increases in base rent, called an escalation. These increases are usually tied to a percentage of the base rent or an inflation index like the Consumer Price Index (CPI). Landlords use them to offset rising ownership costs or to keep rents aligned with the market.

Escalations aren’t inherently good or bad, but they’re something you need to watch closely when budgeting. For practices in Arizona, an annual escalation of about 3% of base rent is typical. Even if yours is lower, failing to plan for rising rent can have a major impact on your practice’s profitability.

CAM Charges and NNNs

To offset their expenses, landlords often pass through the cost of items like landscaping, security, and janitorial services to tenants. These are known as CAM (Common Area Maintenance) charges.



If you have a Triple Net (NNN) Lease, you’ll also pay your proportional share of CAM, property taxes, and insurance. Tenants usually sign these leases in exchange for a lower base rent. Instead of one lump payment covering rent, CAM, taxes, and insurance, a NNN lease breaks these out and gives tenants more transparency into where their money goes. The tradeoff is losing the stability of a single fixed rent amount. These extra line items can fluctuate significantly from year to year, and if a practice owner isn’t prepared, it can create real challenges for their bottom line.

Reconciliation

Tenants are billed monthly for CAM/NNN charges based on the landlord’s cost estimates. The actual expenses, though, may differ from the estimates you’re quoted. Tenants have the right to request a reconciliation of these charges. This process allows you or your CPA to audit the landlord’s books and compare the estimated charges against the actual expenses. Doing so helps ensure you only pay what you truly owe. Keep in mind, though, that requesting a reconciliation may come with a small cost since the landlord has to take time to provide the documentation.

Conclusion

The cost of leasing your practice space is often more than just base rent. Variable expenses such as escalations, CAM charges, and NNN costs can have a major impact on your margins. The challenge is that these line items are often tucked into the lease and easy to miss. That’s why it’s smart to work with a commercial real estate broker who understands your industry and can help you avoid financial blind spots. When it comes to budgeting, knowledge is power. The more you understand potential expenses, the better prepared you’ll be to handle them and safeguard your practice’s financial health.