Leasing and Renewing Your Lease: Important things to know

February 20, 2012

Leasing and lease renewals are not typically conducted on a level playing field. After all, the landlord is in the real estate business and most doctors are not. By planning ahead and having professional representation, you can negotiate a lower lease rate and receive substantial tenant improvement allowances and free rent.

How does the lease renewal process work?

An important clause found in a standard lease is the renewal option. This allows you to extend your lease for a predetermined amount of time (usually five or ten years) by giving your landlord six to twelve months’ written notice. Renewal options include terms for specific lease rates, concessions such as free rent and tenant improvement allowances, and whether a new base year for operating expenses will be granted. All of these terms are negotiable and play a large role in the financial structure of a lease renewal.

How do I calculate what I am currently paying per square foot?   

Knowing what you are already paying per square foot is especially important if you are thinking about renewing your lease. What you are paying now versus what buildings are leasing for in your immediate area can be vastly different. We have seen a substantial decrease in lease rates over the last two years. The way to calculate your price per square foot is to multiply your monthly rent by 12 months and divide it by your square footage. Keep in mind that NNN or CAM charges (operating expenses for the property such as real estate taxes, building insurance, and common area maintenance) are also calculated the same manner.

What type of cost savings can be achieved through a successful renewal?

If properly negotiated, you can receive significant rent savings and build out allowances. It is very common to start a lease renewal at a lower lease rate than what you are currently paying. As the economy continues to struggle, landlords are offering aggressive concessions and more attractive lease terms to good tenants to keep their buildings leased. The amount of overall savings will depend on the availability of competitive vacancies, the efficiencies of the buildings, the market knowledge of the broker and the broker’s ability to negotiate business points and reduce overall exposure.

What are some common mistakes doctors make during the process?

One of the most common mistakes doctors make is negotiating without the help of a commercial real estate professional, specifically one who specializes in representing healthcare professionals. Some doctors believe they can save money by not using a broker; but to benefit in real estate, you need leverage. Landlords are in the real estate business and negotiate with professional guidance. Selecting an expert to represent you provides the leverage needed to receive the best possible lease terms. Further, landlords are responsible for paying commissions, not tenants, so professional representation is available to you at no out of pocket cost.

Another mistake doctors make when entering into a lease renewal negotiation is not being familiar with their current lease terms and exposure. Prior to contacting the landlord about a lease renewal, you should be well aware of your current lease terms including every option and deadline. As mentioned, most leases contain options that must be exercised within a specific time period, typically six to twelve months prior to the lease’s expiration. If you allow this period to pass, you risk losing all rights outlined in the option, which can cause the negotiations to begin at a disadvantage.

When should the process begin?

As a rule of thumb, you should begin to consider the renewal process 12 – 18 months in advance of your lease’s expiration. This is recommended so that you can compare all relocation options in the market before your current lease options expire. Tenants who miss their lease options incur more risk. Landlords view this as an opportunity to push rents higher as the window of opportunity to relocate closes. If tenants holdover, they often see penalties of 150 to 200 percent of their last month’s rent and can also incur consequential damages if they holdover without permission. The bottom line is that if there is not ample time to relocate if necessary, the landlord has a strong upper hand.

This article was written by Roger Hernandez and Colin Carr, with Carr Healthcare Realty, where they specialize in representing Healthcare Professionals with all real estate needs. They have successfully negotiated over 750 lease and sale transactions. You can reach Roger at (719) 339-9007 or roger@carrhr.com.

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