Top 10 Things to Consider When Reviewing a Commercial Lease for a New Dental, Medical, and Veterinary Office
To many, reviewing a commercial real estate lease is intimidating. But it need not be. Most of the sections are self-explanatory if one takes the time to read them carefully. And with a further focused evaluation of the lease, it becomes even more approachable. Below is a list of top ten issues which should be considered when reviewing a lease for a new dental, medical, or veterinary practice space. As with all legal documents, we advise consulting an attorney before signing any lease.
- Understand All Lease Costs – Check the TOTAL cost of the lease—not just the base rental rate but make sure you understand the costs of your share of utility expenses, common area maintenance (“CAM”), taxes, insurance, security, parking, etc.
- Rental Escalations – What are the annual rental rate escalations, if any, of the lease? How are they determined each year: absolute amounts stated in the lease, or using a formula to recalculate the new rate each year?
- Lease Term – What is the length of the lease, and do you have the right to future renewal options (at pre-determined rental lease rates or using a stated formula)? If you are planning to remain at this location long-term, you may want to negotiate your future lease renewal options and rental rates now—it is not unusual to do this for the next ten, fifteen, or twenty years. This will lock in rates, and allow you to do better long-term fiscal planning.
- Tenant Improvement Dollars and Free Rent – Negotiate for the maximum Tenant Improvement (TI) dollars and free rent concessions that are appropriate for prevailing market conditions in the area you are planning to locate. A good real estate broker or site search consultant (i.e., Owner Representative) should be able to advise you properly in this realm.
- Right to Depreciation – Be sure to retain in the lease your right to depreciate the TI on YOUR tax returns (although landlords give you TI dollars, they sometimes try to retain the right to depreciate all leasehold improvements themselves). This will help you obtain the largest income tax benefits for you, and will help compile a future Cost Segregation Study (which can be assembled by a qualified Owner Representative).
- Future Capital Improvements – Understand any major future expenses for which you might be responsible—e.g., roof repairs, replacement of roof-top HVAC units, broken window replacement, etc. Engage a professional to provide an “Existing Conditions Report” on your potential new location to determine what major repairs might need to be addressed in the next five years. Negotiate or have your professional Owner Representative negotiate these costs as either TI dollars or as rental concessions from the landlord.
- Restrictions – Does the lease have “use restrictions” on the space that could impede the operation of a medical office; is there the right to use med gas on premises; are you restricted from displaying an “open” sign in your front window?
- Right to Cure Defaults –You as the tenant should have reasonable time and methods for addressing any unforeseen defaults that might occur during the term of the lease. If you do not, you could find yourself in serious default in the future over some seemingly small petty issue that your lease nevertheless restricts.
- Signage – Make sure you have signage potential visible, if possible, from major intersections/arterials, and negotiate the right to have both building AND street monument signage for your practice.
- Exclusive Rights – If you are locating in either a retail center or commercial building, try to get the exclusive right to be the only dental office allowed to locate there now or in the future. This will protect from any unforeseen competition down the road.