A medical practice’s second highest fixed expense behind compensation and benefits is typically its lease or mortgage. Understandably with all the daily demands of managing a practice, once established, not a lot of attention is paid to this very high cost. In fact, this expense is the most negotiable and can provide an opportunity to positively impact a practice’s bottom line.
The opportunity to improve commercial real estate terms can potentially have more of an effect on a medical practice’s profitability than increasing production. Optimizing these strategies can benefit your business, improve patient care, and protect your valuable time.
Below are 4 new ways to think about your medical real estate in a manageable way.
1. Evaluate long term priorities. Look at your big picture to determine whether it makes sense to buy, renew your lease, relocate to a new space, add another office, or none of the above. Evaluate if your space is too big, too small, outdated, and/or has location challenges. Consider your business plan and if the space allows you to grow at the pace you anticipate with flexibility for expansion, if needed.
2. Negotiate. When renewing or extending a current lease, it is imperative to take full advantage of the opportunities afforded in today’s commercial real estate market. Landlords are offering concessions to tenants (lower rental rates, free rent, Tenant Improvement Allowances) that if negotiated correctly can be a windfall for the practice. The current state of the market has afforded tenants and buyers of real estate to lock in rental rates before they continue to increase or purchase property at good values. If your lease expires in less than 18 months, it is time to take action! If you are planning on staying in the space or will consider relocating, having more time equals more leverage.
3. Boost economic factors. There are many economic factors that can affect a lease. Depending on the needs of the practice perhaps free rent, a lower base rate, or lower annual escalations can improve the cash flow of the practice. Tenant Improvement Dollars from the landlord could help update and modify the space to be more current. Depending on the type of lease and building, an updated base year should be reviewed.
4. Mitigate risk factors. There are risk factors in a lease that should be analyzed. Was there a personal guarantee that was originally signed with the lease? With each lease renewal another lease renewal option should be negotiated. Make certain there are assignment language and subletting language in the lease that is favorable to the tenant.
I know, there’s barely enough time in the day to see all your patients, much less worry about real estate. The biggest mistake practice owners make is to take this on alone. Just like you don’t want patients to treat their disease on their own, it is wise to have an experienced professional help you navigate this process to get the best results. Look for an advisor that works exclusively on your behalf to solely represent your interests and not the interests of both you and the landlord. A tenant only broker is compensated by the seller/landlord so you don’t have to pay for their services and yet benefit from them greatly. Medical offices have their own unique requirements that differ from other tenants. It is important to enlist the expertise of a real estate professional that has experience with healthcare providers and understands your industry, patient flow, and the specific needs of your practice. With the right advisor on your side to leverage the market on your behalf, you could literally add thousands of dollars to your bottom line. Without one (or the wrong one) the opposite could happen.
If you are considering renegotiating your existing lease (or even if you are not), ask a healthcare real estate specialist for a complimentary lease review. Then, think about what you could do with all the money you’ll save.
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