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Purchasing the real estate you already occupy, or even a new space or building, could be a great opportunity to impact your future finances and significantly build your net worth.
The largest expense of your healthcare practice is primarily non-negotiable: payroll. However, the second highest expense in your practice is completely negotiable. Think about that. Payroll, equipment, technology, interest rates, marketing—there are a dozen categories of overhead to evaluate when running your healthcare business, but the second highest expense after payroll is likely one of the only truly negotiable line items: the cost of real estate.
What’s flexible about healthcare real estate? Whether you’re leasing new office space or renewing your current lease, you have a say in the economic terms, such as the length of the lease, as well as desired concessions, including tenant improvement allowances, free rent periods, your actual lease rate, annual rate increases, any build-out periods, and many other provisions.
Each one affects your bottom line. But the majority of corporate tenants and healthcare practices simply don’t have the time and expertise in commercial real estate to make the most of these negotiations—most view real estate as a necessary evil rather than an incredible opportunity to increase profitability, reduce expenses, and improve the quality of their patients’ experiences. So, here’s what you need to know to plan ahead and achieve significant savings in your next commercial real estate transaction.
1. Real Estate Favors the Healthcare Industry
The real estate market tends to favor medical providers. Why is that? Because of their long-term stability and success rate. Even in a post-COVID-19 market, healthcare providers are considered lower-risk tenants and are able to achieve better leases because landlords want their tenancy. Additionally, medical providers prefer longer lease terms—as do landlords. Providers can also get a better deal today than prior to the pandemic, which is something to keep in mind as you consider future purchase or lease decisions.
2. Timing Is Everything
Whether you’re renewing a lease or looking for new space, a good rule of thumb is to begin the process 12–24 months before your lease’s expiration. Why so far in advance? First, most leases likely contain options that must be exercised within a specific time period, typically six to 12 months prior to its expiration. Second, even if you’re planning on renewing your lease, you’ll need multiple relocation options to create a strong posture. Ensuring your landlord knows you have the option to purchase or relocate is critical to negotiation success, as landlords don’t offer meaningful concessions unless they believe you have other realistic options—all of which take significant time to procure.
3. Leverage + Posture
In any negotiation, leverage means you’re holding a perceived advantage—one that just might help you get to an agreement you desire. But to create leverage and posture, bringing multiple real estate options to the table is necessary. Limiting yourself to one property puts your negotiation at the mercy of the owner, and since most landlords and sellers negotiate professionally, it’s not typically hard for them to spot a tenant without other viable options, or who doesn’t know what they are doing.
An experienced healthcare real estate agent (hired as your exclusive agent at the expense of the landlord or seller) can provide you with the best pre-qualified, comparable properties’ lease rates, build-out allowances and other concessions, as well as the concessions and lease terms new tenants in your own building are being offered, which can then be used as valuable leverage on your behalf in negotiations. The only way to know if a landlord’s lease renewal offer is truly competitive is to actually compare it to the market.
Comparing renewal and relocation options takes time, and when there’s not ample time to relocate (or prove your relocation options), the landlord has the stronger hand. Which leads us to the next important consideration: Just like most business, commercial landlords, even if they’re a customer or patient at your dental practice or medical center, are in the full-time business of maximizing profits.
4. Level the Playing Field
One of the most common mistakes healthcare practices make is negotiating without the help of a commercial real estate professional, specifically one who specializes in representing healthcare tenants and buyers.
Sure, your building’s ownership and management might be pleasant to work with—let’s hope they are! But when negotiations begin and their professional representatives are present, their interest will always be profitability. Landlords know that without market knowledge, tenants have no baseline against which to compare a lease offer.
This means that a successful negotiation for a lease will be far more than bartering or bluffing or asking for better terms. You can level the playing field by engaging your own professional representation, gaining competitive market knowledge and finding other favorable options for your space.
5. Now Could Be a Good Time to Buy
Unsure of your next real estate move? Happy in your current space? Lately, many landlords are willing to sell their buildings to healthcare tenants with term remaining on their lease, or even condo spaces that once were only available to lease. Purchasing the real estate you already occupy,
or even a new space or building, could be a great opportunity to impact your future finances and significantly build your net worth. Additionally, with interest rates at all-time lows, many healthcare providers are able to purchase properties they previously didn’t think they could afford.
Whatever your next move, remember that when done properly with the right representation, a well-negotiated lease or purchase can have a dramatic impact on your practice’s profitability.
Colin Carr is the founder and CEO of CARR, the nation’s leading provider of commercial real estate services for healthcare professionals. Colin has been involved in commercial real estate for over 20 years and has personally completed more than 1,000 transactions. He trains and advises thousands of healthcare professionals, administrators, investors and students throughout the country on an annual basis through national meetings, conventions, study clubs, associations, universities, webinars, and more.