Negotiating Real Estate in a Volatile Market

HEALTHCARE REAL ESTATE IN A VOLATILE MARKET

With the recent outbreak of COVID-19 and the steps that our state authorities are taking to slow it’s spread, a majority of our clients are seeing a halt in revenue. One of the most important things that you can do for your business at this time is to optimize your cash flow and start to plan for the new normal. Although we may be entering into a volatile market, several things may be done to allow you to increase your profitability in the long run.

EVALUATE YOUR CURRENT TERMS

One of the first items you need to do is evaluate current terms of your loans. The Fed has cut rates tremendously and although you are not likely going to receive a zero percent interest rate like some people may believe, we are still seeing historically low rates. If you have practice loans, call your lender and ask how they might be able to help. The bank may be willing to defer payments or refinance to a lower rate through debt consolidation. The banks would like to avoid defaults as much as you do.

Get Your EvaluationWe don’t know how long our real estate market will be affected, but we can be certain there will be a lag at the very least. Some of those most adversely affected will be landlords or owners trying to sell their real estate holdings. Landlords will be extremely motivated to attract new tenants and retain existing ones—especially such high-quality tenants as medical practices. Although we are facing unprecedented challenges, we will be entering into a very favorable environment for tenants. Whether you are leasing, looking to purchase your existing leased space or find another location altogether, now is actually a great time for you to evaluate your options. Some of the opportunities include reducing your monthly rent payment, upgrading your office’s appearance through improvement allowances, as well as obtaining free rent and other favorable concessions.

TIMING

Consider having your lease evaluated now, regardless of expiration date, so that you can proactively plan. The ideal timeframe to begin negotiating is 12-24 months before your term ends. One of the keys to a successful negotiation is to take advantage of the free services of a real estate broker or agent. This is important because most landlords are in the business of real estate and typically have the upper hand when negotiating with tenants directly, even when in crisis-mode. Additionally, most landlords hire a real estate broker to represent their interests and provide local market expertise. Though substantial concessions may be available, a specific posture and negotiation strategy are paramount to achieving the best possible terms. In short, hire someone who will be able to create leverage that you cannot as a non-real estate professional.

YOUR OPTIONS

When you begin negotiations, you have two options available to you: You can work with the landlord or landlord’s agent and represent yourself, or you can hire a real estate broker. Here are some things you need to know if you choose to represent yourself in a negotiation. Under state law, a real estate broker can enter into an agreement to serve clients as an Agent. An agent is obligated to serve his or her client’s interests with the utmost good faith, loyalty and fidelity. If you do not bring an agent into the negotiations, no one will be protecting your interests but yourself. If you deal directly with the landlord or landlord’s agent, it is crucial to remember that he or she is not legally or logically in a position to advocate on your behalf, so it is important to exercise discretion with the information you share with the landlord’s agent.

Even if your building’s ownership and management are pleasant to work with, respond to issues quickly, and maintain the building well, their primary interest is maximizing profits. Landlords know that without market knowledge, tenants have no baseline against which to compare a lease offer. Therefore a landlord will most likely offer the highest lease terms that they believe an uninformed tenant will accept.

The only way to know if any offer is truly competitive is to compare it to the market. To do this you need to identify all the available properties which suit your needs, and then tour a significant number of them to determine which ones will be best suited for you and ensure that you don’t miss any opportunities.

You then need to negotiate with the landlord at each property to receive the best offers for a suitable space for your practice. These offers will include terms for the base lease rate and any increases in the lease rate, as well as concessions such as free rent and an improvement allowance. You’ll also need to know the lease terms and concession that new tenants in your current building are receiving from your landlord. At each step along the way, you’ll be dealing with a professional real estate broker who is hired to achieve the best possible terms for the landlord.

Find An Agent

If this sounds daunting to handle yourself, you do have an alternative. You can hire an experienced real estate professional as your agent—to act on your behalf with your interests in mind. He or she can provide you with comparable properties’ lease rates, build out allowances, and other concessions, which can then be used as valuable leverage on your behalf in the negotiations with the landlord. Ideally, you should select an agent with experience representing healthcare practices because they will be able to achieve specific terms and concessions that are not generally available to other types of tenants. Your agent will handle all the research and communication with the landlords, while maintaining a professional negotiating posture on your behalf.

Fortunately for you as a tenant, landlords and sellers pay for an agent’s services on your behalf, so it costs you nothing. Commercial real estate is structured similarly to residential real estate. If you were to sell your home, you might list it with a broker and agree to pay a commission. The commission is split between the listing broker and the broker who represents the buyer. If the listing broker is able to find the buyer directly, then he or she would earn a double commission. The same kind of arrangement is made in the commercial real estate market, and you as a tenant or buyer have access to professional representation at the seller’s expense.

CONCLUSION

Remember that medical businesses are extremely valuable tenant, regardless of what a Landlord might tell you to gain leverage in negotiation. They will need you in their property more than ever in the coming months. Make sure that you are prepared when the time is right to open a negotiation on a building on your next real estate transaction.