Avoiding Pitfalls in Your Next Office Lease Negotiation

Krysia GabenskiFeatured News

By Stephen Strecker and Ryan Nolan
From the Fall 2015 Journal of the Colorado Dental Association

Most dental practices in Colorado lease their office space. The location and impression that their office makes on patients is a huge determining factor in patient referrals and return visits, especially in a competitive marketplace. Additionally, the cost of rent is typically a practice’s second-highest fixed expense after payroll. For these reasons, it is imperative that dentists achieve the best possible lease terms on an ideal location for the office to maximize the practice’s productivity and profitability during the next office lease or renewal negotiation.

There are three common pitfalls many dentists fall into when negotiating their office space.

The first is a lack of market knowledge. In order to achieve the best possible terms, dentists must be familiar with all options that exist in their area. This market knowledge includes available vacancies, recently completed transactions and future spaces that may be coming available soon. This is critical information that a local commercial real estate professional can provide to you at no charge. It would be extremely difficult for a dental provider, an attorney, or an out-of-town “lease negotiator” to know this information as it is not public record, and many available spaces are not listed on online databases. Knowing about other properties that may be more appealing or that offer better value will help you find the best space and ensure that you are not over-paying. Colorado law also requires any lease negotiations to be performed by a licensed real estate broker or attorney, so be sure everyone you work with is properly licensed in Colorado.

The second pitfall is an unawareness of less-common business points in a lease. Most dentists are familiar with the rental rate, length of term, and build-out allowance provided by the landlord. Beyond these, there are other important concessions available to you such as free or reduced rent periods, the right to transfer your lease to another dentist in the future, options to renew your lease after the term, death and disability termination options, exclusive uses and more. There are also landlord-friendly clauses such as relocation provisions, unusual expense pass-throughs, and electrical or mechanical requirements designed for general, non-healthcare users that can impair a dental practice’s ability to operate. It is key to have these points negotiated by a Colorado real estate professional and reviewed by a licensed attorney in Colorado, as these business points can vary from state to state.

Finally, the third common mistake is failing to create a strong posture. The key to an effective negotiation posture is making the landlord understand that you have multiple options on the table and that you are willing to use your options. One of the first questions a landlord will ask its broker is whether the tenant has professional representation. If the answer is no, they will ask if the tenant appears to know the market and is educated on the business points they are seeking. If it is a renewal situation, they will ask if the tenant is seriously willing to leave. If the landlord and its broker sense any weakness in the posture created by the tenant, they will not offer terms that are truly competitive to the tenant. Many landlords also see it as a weakness if a consultant or out-of-state attorney is handling the negotiation for the tenant because there is no local market knowledge. It is also crucial to your posture to begin the negotiations at the proper time—ideally one year before your current lease expires or the time you want to be in a new space. If you wait until there is insufficient time to plan and build-out a space, then the landlord will know your options are limited, weakening your posture.

Strong posture causes the negotiation to be more favorable than merely bartering with a landlord. Leveraging a local real estate professional’s expertise and then dictating favorable terms to a landlord yields consistently more favorable terms to a tenant than simply asking for a price, and then asking for a lower price, etc. Strong posture is not about bluffing or threatening. Having multiple legitimate options and a credible willingness to choose the other property creates an environment where landlords compete to attract or retain quality tenants, and make sure you get competitive terms. Expert representation by a real estate professional is available at no cost to you, because their services are paid for by the landlord or seller as part of the listing agreement with the landlord’s broker.

The current commercial real estate market in Colorado has fully recovered and it is more important than ever to be prepared for your next lease negotiation. Avoiding these pitfalls will help you achieve more favorable terms for your practice and your bottom line.

Carr Healthcare Realty is a commercial real estate company for healthcare tenants and buyers. By not representing landlords or sellers, Carr Healthcare Realty is able to strongly advocate for healthcare providers and avoid conflicts of interest while saving their clients hundreds of thousands of dollars. Carr Healthcare Realty can assist with all types of real estate transactions, including lease renewals, expansions, relocations, startup offices, purchases, and practice transitions.