By Dan Gleissner
From the Spring 2017 Journal of the Colorado Dental Association
The commercial real estate market is dramatically affected by the economy. This has resulted in a very favorable environment for tenants, as landlords are extremely motivated to attract new tenants and retain existing ones—especially high quality tenants such as dental practices. Some of the current opportunities for tenants include reducing your monthly rent payment, upgrading your office’s appearance through an improvement allowance, as well as obtaining free rent and other favorable concessions.
One of the keys to a successful negotiation is to take advantage of the free, yes free, services of a real estate broker or agent. This is important because most landlords are in the business of real estate and typically have the upper hand when negotiating with tenants directly. Additionally, the majority of landlords hire a real estate broker to represent their interests and provide expertise. Though dramatic concessions are available, a specific posture and negotiation strategy are paramount to achieving the best possible terms.
When the time comes to evaluate your current lease situation, you’ll need to consider the pros and cons of renewing the lease in your current location versus relocating to a new property. Since economics and concessions will have a dramatic impact on the decision, it is essential to understand all of your available options and implement a strategy to leverage them. It is critical to the success of your negotiation that your landlord knows that you have the option to relocate, which means that you need to begin negotiations well in advance of your lease’s expiration—ideally 9-24 months before your current term ends.
When you begin negotiations, you have two options available to you: You can work with the landlord’s agent and represent yourself, or you can acquire the services of a real estate broker.
Under state law, a real estate broker can enter into an agreement to serve clients as an agent. An agent is obligated to serve his/ her client’s interests with the utmost good faith, loyalty and fidelity. Clearly, it is not practical for an agent to act with utmost loyalty to two parties on opposite sides of a transaction, meaning the landlord or landlord’s broker should not also represent your interests.
Simply put, if you do not bring an agent into the negotiations, no one will be protecting your interests but yourself. If you deal directly with the landlord or landlord’s agent, it is crucial to remember that he/she is not legally or logically in a position to advocate on your behalf, so it is important to exercise discretion with the information you share with the landlord’s agent.
Even if your building’s ownership and management are pleasant to work with, respond to issues quickly, and maintain the building well, their primary interest is maximizing profits. Landlords know that without market knowledge, tenants have no baseline against which to compare a lease offer. Therefore a landlord will most likely offer the highest lease terms that they believe an uninformed tenant will accept.
Here are some things you need to know if you choose to represent yourself in a lease negotiation. The only way to know if any offer is truly competitive is to compare it to the market. To do this you need to identify all the available properties that suit your needs, and then tour a significant number of them to determine which ones will be best suited for you and ensure that you don’t miss any opportunities.
You then need to negotiate with the landlord at each property to receive the best offers for a suitable space for your practice. These offers will include terms for the base lease rate and any increases in the lease rate, as well as concessions such as free rent and an improvement allowance. You’ll also need to know the lease terms and concession that new tenants in your current building are receiving from your landlord. At each step along the way, you’ll be dealing with a professional real estate broker who is hired to achieve the best possible terms for the landlord.
If this sounds daunting to handle yourself, you do have an alternative. You can get help from an experienced real estate professional as your agent—to act on your behalf with your interests in mind. He/she can provide you with comparable properties’ lease rates, build out allowances, and other concessions, which can then be used as valuable leverage on your behalf in the negotiations with the landlord. Ideally, you should select an agent with experience representing dental practices because they will be able to achieve specific terms and concessions that are not generally available to other types of tenants. Your agent will handle all the research and communication with the landlords, while maintaining a professional negotiating posture on your behalf.
Fortunately for you as a tenant, landlords and sellers have agreed to pay for an agent’s services on your behalf, so it costs you nothing. Commercial real estate is structured similarly to residential real estate. If you were to sell your home, you might list it with a broker and agree to pay a commission. The commission is split between the listing broker and the broker who brings the buyer. If the listing broker is able to find the buyer directly, then he/she would earn a double commission. The same kind of arrangement is made in the commercial real estate market, and you as a tenant or buyer have access to professional representation at the seller’s expense.
Most dental professionals have plenty to do serving their patients and running a successful practice. Spending hours on end making sure your lease renewal is competitive and handled properly is typically not the best use of your time. Since professional representation does not cost you anything as a tenant, it makes a lot of sense to let a licensed real estate professional review your lease, represent your interests in your negotiations, and then help you capitalize on the current market conditions so you can achieve the best possible terms.
About the Author: Dan Gleissner is a broker for Carr Healthcare Realty. By not representing landlords or sellers, Carr Healthcare Realty is able to strongly advocate for healthcare providers and avoid conflicts of interest.
