By Guest Write Stefan Zelich, President/Founder of FOCUS Healthcare Realty
Rent is typically a dental practice’s 2nd or 3rd highest expense behind payroll, but it’s also one of the most negotiable. This ability to negotiate one of the highest expenses to a practice allows doctors to improve their overall profitability significantly. I typically find most practices could save a significant amount of money by approaching their expiring lease with the proper amount of leverage.
How does the math work?
Let’s say that you have a 2,500 SF practice, and you’re looking at signing a 5-year extension. The practice has been there for ten-plus years and needs some updates. Many landlords are willing to provide generous tenant improvement allowances for a long-term lease because it represents a direct investment into their space. An allowance of $20 per SF comes to $50,000 and will likely cover new flooring, paint, and lighting for the practice.
If the practice can reduce its rent by $3 per SF, that’s $7,500 per year and another $37,500. Suppose you take that savings and invest it into an investment account at a 7% rate of return. That amount jumps to $45,000, which brings your total savings to $95,000. Then it’s just a matter of getting the landlord to return a piece of the original security deposit to get you to the total of $100,000 in savings.
How to accomplish the savings?
The scenario outlined above is not uncommon, but it can only be achieved by maximizing your leverage with the landlord. There are three keys to maximizing your leverage in a lease negotiation.
- Timing – You must have enough time to move your practice. If you don’t have enough time, your landlord will not be worried about you leaving and will not be willing to offer their best terms to get you to stay.
- Secure multiple offers – In any negotiation, it’s always the person with the most options that come out on top, so it’s critical that you go out and secure offers to move your practice elsewhere.
- Hire a real estate broker – The call/voicemail to your landlord goes like this: “Hi Mr./Mrs. Landlord, my name is Stefan Zelich, I’m a commercial real estate broker, and I’ve been hired by your tenant ABC Dental to help them decide what to do when their lease expires in 12 months. They’ve received offers on a couple of other properties and would be willing to sign an extension if we can agree on some new terms. We’ve drafted a letter of intent outlining those terms that I’ll send shortly. Please let me know if you have any questions.” This approach gives the idea of you leaving significantly more creditability than if you were to call the landlord on your own. The best part is that the landlord will pay your real estate broker’s fee in addition to the concessions, so you don’t come out of pocket for anything.
A significant amount of money is tied up in most practices’ real estate leases. Unlocking that money usually comes down to applying the three keys outlined above. Most doctors will only have one or two, maybe three, opportunities to negotiate new terms with their landlords. If handled correctly, the potential for future savings can be in the hundreds of thousands of dollars. By hiring a broker well versed in the healthcare space, the doctor can focus on what they do best and let the real estate expert focus on what they do best.
Stefan Zelich, President/Founder
FOCUS Healthcare Realty