The Power of Understanding Terminology in Healthcare Real Estate
Language is our primary means of communication. It’s used to shape thoughts, to encourage ideas, to evoke emotions, and even affect the perception of reality. So it’s no surprise that if used efficiently, it can be very powerful. When it comes to the language you may find in a lease, your basic understanding of the terms can either cost or save you thousands.
Evaluating the terminology used in leases can be daunting for even seasoned professionals. Unlike residential real estate, where industry-recognized purchase templates are common, commercial real estate leases differ drastically from property to property—there’s no standard format, structure, or length, and you can expect most agreements to be drafted in favor of the landlord.
That’s why understanding variations in lease structures as well as the lingo present within them is vital to ensure you’re not making costly mistakes. The money you make or lose on a lease is more than a lease rate (it’s negotiating tenant improvement allowances, build-out periods, free rent, lease and rent commencement dates that support your design, permitting and construction timelines, and more). Far too many times, a client will focus on getting the lease rate down by 50 cents but fail to focus on clauses, concessions, and other language that can cost the practice tens to hundreds of thousands of dollars over the term of their lease.
To move forward confidently with a lease decision, check out our glossary below and consider hiring a healthcare real estate professional to ensure you’re maximizing profitability on your next lease.
Lease Structures
NNN vs FS: The most common commercial lease structure, Triple Net Leases (NNN) feature costs associated with operating the property (taxes, property insurance, and operating expenses) as a separate monthly expense from the base rent. You add the two numbers together to get the total lease rate; but many times, the NNN costs are hidden, or underquoted.
Another structure you might come across is a Full Service Lease (or Gross Lease), which combines the base lease rate and operating expenses (property taxes, insurance, and common area maintenance) into one monthly number. Questions when looking into a FS Lease include: are utilities or janitorial expenses included, or are they billed separately? How will increases in operating expenses be passed through to you, the tenant, in subsequent years? These are questions your real estate agent will ask on your behalf and often negotiate.
Lease Clauses
Escalation: Does your lease have an Escalation Clause or an Annual Increase Clause? You might see an Escalation Clause referred to as an Annual Increase or Annual Rent Increase, and it allows the base rent amount to be increased each year by the Landlord. This can be a set percentage increase or tied to a Consumer Price Index. Understanding which scenario is best and negotiating minimal escalations can be handled by your healthcare real estate agent. While annual increases are a fairly standard concept in most leases, the difference in the amount of annual increase can affect your total rent significantly.
Death and Disability: One way to protect your practice and those around you from potential liability is with a Death and Disability Clause, which states that if a healthcare practice’s primary practitioner dies or is no longer able to practice because of a disability, the tenant can be released from the lease under certain circumstances. You will want to be sure your real estate attorney is confident with the language to protect you in the case of needing to exercise the clause.
Lease Assignability: This is another fully negotiable clause, and a great addition if your goal is to one-day sell your practice as an exit strategy (retirement or earlier). It’s critical that your office lease won’t affect the sale by prohibiting you to assign the lease to a new owner, or come with exorbitant fees and requirements to transfer. Negotiating a lease that also releases you from the personal guarantee, or limits the amount of guaranty, is important as well.
Lease Concessions
The process and specific real estate strategies and negotiation tactics used by real estate agents are highly specialized and very unique to your lease. For instance, incentives, discounts, or benefits given by the landlord to a tenant (known as concessions) are often found in a lease transaction and are very specific to your medical practice. Whether you’re a prospective tenant or one renewing a lease, concessions are deal points negotiated along with the lease rate and could include free rent periods, lower lease rates, substantial tenant improvement allowances, free installation of new HVAC systems, electrical upgrades, personal guaranty burn-offs, and more.
These are just a sample of the 50-plus clauses and terms in a lease that, if overlooked, can cost the practice substantially. Additional terms you might want to know include “force majeure” and “personal guarantee” clauses, “cold gray shell” vs. “warm vanilla shell”, as well as “demising walls”, and more. These terms, and more, can be found on the Glossary page on our website at CARR.us.
As you evaluate real estate opportunities for your practice, hiring a professional who knows this terminology—and how to negotiate properly using it—allows for the most informed leasing decisions.
Landlords Have the Upper Hand in Negotiation
The first question a landlord asks its agent is whether or not the tenant is being represented professionally, and if not, whether they appear to have market knowledge (or in a renewal situation, if they’re willing to leave). If the answer is no, the landlord’s negotiation strategy changes immediately. When working with an unrepresented tenant, landlords will often make an offer that contains margins they’re comfortable with. That way, when a tenant inevitably counters, the landlord doesn’t lose much. But the tenant walks away thinking they’ve successfully negotiated, even at an over-market price point.
Without representation, no one is protecting a tenants’ interests. If any of the above sounds daunting, healthcare tenants always have the option to hire an experienced commercial real estate professional at the landlord’s expense. And as a practice owner or manager, tens of thousands of dollars are on the line, which means it makes the most financial sense to have a professional represent your interests in negotiations and help you find a space that meets your needs and saves you significant money.
CARR is the nation’s leading provider of commercial real estate services for healthcare tenants and buyers. Every year, thousands of healthcare practices trust CARR to achieve the most favorable terms on their lease and purchase negotiations. CARR’s team of experts assist with start-ups, lease renewals, expansions, relocations, additional offices, purchases, and practice transitions. Healthcare practices choose CARR to save them a substantial amount of time and money; while ensuring their interests are always first.
Visit CARR.US to learn more and find an expert agent representing healthcare practices in your area.