Real estate is the second-highest expense behind payroll for most physician practices. The benefits of capitalizing during lease negotiations can include increased profitability, reduced debt, a nicer office and more. On the other hand, if negotiations are not handled properly, the results can be decreased profitability; resulting in the need to produce tens to hundreds of thousands of additional dollars just to maintain the practice’s financial position.
While there are many key concepts and strategies to be aware of prior to and during any lease or purchase negotiation, there are an equal or greater number of mistakes to avoid. Having represented thousands of healthcare professionals over the last decade, we have gathered some of the most common mistakes healthcare professionals make during lease and purchase negotiations with the goal of helping others avoid the same miscues.
Here are three of the most common mistakes:
Mistake 1: Believing the landlord/seller will simply offer the best terms
Landlords and sellers are in business to make money. They are no more likely to voluntarily reduce lease rates or give up any extra money through concessions than you would be to reduce your reimbursement from an insurance company or cut your patient fees if you didn’t have to. While it sounds pleasant to hear a landlord talk about giving a fair deal or reasonable price, your odds of getting either are bleak without truly understanding the market, entering the negotiation process with multiple other options and having capable guidance. Trusting a landlord or seller without the help of professional representation will most likely result in the loss of tens to hundreds of thousands of dollars that could have stayed in your checking account.
Mistake 2: Determining market value by asking what your neighbors pay
Several years ago, we were reviewing the lease terms for a doctor who had been in a building for 20 years.
In looking at his lease, we saw he was paying $30 per square foot (SF), and had not received any free rent or tenant improvement allowance in his last negotiation.
When we posed the question, “Do you believe $30 per SF with no concessions is a good deal?” His response was: “I believe so.” When we asked why, he responded: “There are four other healthcare practices on this floor. We all know each other and talk about our leases. We are all paying $30 per SF and the landlord has told all of us they don’t give free rent or tenant improvement allowances.”
We told him, “We understand the logic behind that approach, but what if we told you we just did a lease with a new tenant at $21 per SF, while also obtaining three months of free rent and over $100,000 in tenant improvement allowance?”
The bottom line is that landlord got away with convincing five different practices the market was far stronger than it really was and that he couldn’t provide any concessions. This scenario happens every day to uneducated tenants who consult with other uneducated tenants and compare terms that were the result of having no posture, no knowledge of the market and not applying leverage through representation.
Mistake 3: Not knowing market availability and comps
The foundation of any successful negotiation starts with understanding what your other viable options are, how they compare to each other and how to execute on them. When dealing with landlords or sellers, many doctors try to bluff their way into and through negotiations. A savvy landlord or seller can often read a bluff from a mile away.
If you are going to be successful in your next negotiation, understanding market availability and comps is the first place to start.