Robert Lowther
President
To many, reviewing a commercial lease can be an intimidating task. All of the legal language can make one feel uninformed. While most of the section of a commercial lease are self explanatory if one takes the time to read them carefully. And with further focused evaluation of the dental lease, it becomes even more approachable. Below are a list of ten items to consider when reviewing a lease for a dental office. Whether a new start, a renegotiation or an acquisition. As all with all legal documents, it’s very important to stress that we advise having a qualified attorney licensed in your state to review any legal documents.
Before we get started on what to look for, it’s also important to set appropriate expectations. Keep in mind as you negotiate your lease that you are essentially brokering a marriage between your dental practice and the Landlord. Ensuring that anything verbal agreements are codified into the lease in writing is very important. We highly recommend using a process call Letter of Intent or LOI, to track your conversations with the Landlords broker and yourself. Here are some key areas to consider when contemplating a lease agreement.
1. 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. A great way to track this part of the conversations is to use a Net Present Value Worksheet. Your broker should be able to provide this. It is a tool that tracks the economics conversation of any lease agreement. That was you can see where the Landlord is moving towards you and what you are having to give up in return. This should also show the value of the lease. Meaning the cash flow of the lease agreement.
2. 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? You can also consider doing bi-annual rent escalations or even longer. Never assume that the answer will be no.
4. 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. Try to think longer term, if a new start, we strongly suggest a 10 year base term with 2 five year renewals, same applies for a relocation if you plan to practice for at least 10 years.
3.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.
It’s important to understand how this allowance works, what amount you will get and what documentation the landlord will require before they pay it. This often becomes operating capital for most practices as the loan is typically consumed with initial construction costs as well as equipment and the like.
Free rent period is just as important. Not having to cover base rent or additional rent costs while working on construction plans, permitting, bidding and construction is really important. We attempt to get the Landlord to agree to not starting the free rent period until after building permit is issued. This isn’t always easy to do, but if you don’t ask you don’t get.
5. Funding Contingency – We highly recommend that in advance of starting your site search and before putting in a Letter of Intent that you consider getting your loan approved and in place. Your loan my cap what you can spend on occupancy costs, so knowing that can really keep you out of trouble.
Normally this clause is included as way to get out of the lease if you are not able to get your loan. If you already have your loan in place, you don’t need this. AND more importantly, it give you more leverage in negotiation of better terms. The Landlord wil know that once the lease is signed they can move on to the next deal and not wait 30 days to see if the deal will go through due to funding. This can result in significant concessions from the Landlord.
6. 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.
You can also often get the Landlord to provide warranty periods for things like HVAC and roof maintenance. But make sure that language is included in the lease.
7. Dedicated Parking – This is always a great “get” if you are able to get it from the Landlord. Especially if you are working with kids or if you provide IV sedation dentistry. There is often a cse to be made to the Landlord to justify the need.
Keep in mind, you will have to pay for the posts and signs and the Landlord will not likely let you enforce it, but it’s still nice to have.
Make sure the Landlord include a parking plan that designates which spots are going to be included.
8. 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.
We recommend requesting at least 10 business days for all notices of default and make sure you don’t waive notice. Meaning that the Landlord has to notify you if there is an issue.
9. 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.
If you are lucky enough to score an endcap and there is street view, make sure you can put signage on the back of the building as well. Be sure to check with the local municipality zoning department to confirm they type and size of signage allowed.
10. 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. It also goes a long way in increasing the value of your practice. This will ensure you have some say in other dental services offerings in the center or office building.
There are many sections and complexities to a commercial lease, and every lease is different. The above is just a sampling of some highlights of a commercial lease to take into consideration. There is absolutely no substitute for you—and your advisor—reading the entire document word-for-word, from cover-to-cover on every daft. Missing something tucked into the lease can have dramatic effects on you years from now.
Be aware, although you may have a real estate broker on your team, many brokers do not advise on anything but the basic economic terms of a lease—either because they are trying to limit their liability, or they are just not completely knowledgeable about dental construction and practice operation issues. Attorneys too, though well versed in legal considerations, are not always the best ones to depend upon to advise you on lease terms, responsibilities, and constraints that may be unique to the dental profession. This is Owner Representative on your team, whose loyalty is only to you, will be invaluable in advising you on how best to negotiate a lease that you can live with for the next ten or twenty years of your practice’s life.
As always, we advise dental practitioners to do your upfront research and assemble the right team of advisors from the beginning. Doing such will save your project from many problems in the future. Remember, a lease agreement will be with you for the next five, ten, or twenty years. Be sure you understand its terms, have negotiated the best provisions possible, and have it allow you to operate your practice in the way you want…both today and years from now.