6 tips to improve your leasing arrangement

April 25, 2011

From the day we sign our first lease, most of us in business are intimidated by our landlords.

1 PROFIT FROM ANOTHER'S MISFORTUNE

Knowing what's going on in your community could be your ticket to big rent savings. For example, one multidisciplinary internal medicine practice was looking for larger quarters and was tipped off to some ultra-deluxe space in Beverly Hills, California. It seems the former occupant had spent much money making improvements to a huge suite in one of the most expensive buildings in the state. The prior tenant rode its optimism into bankruptcy. Meanwhile, the landlord sat on the empty space for more than a year with no takers.

2 DON'T LIMIT YOURSELF TO MEDICAL BUILDINGS

There was a time when management consultants uniformly advised physicians to "be where the doctors are." That's still smart in some specialties. If you have a solid marketing plan and the self-confidence that comes with a successful practice, however, moving into nontraditional quarters can save money without harm.

Medical buildings are more expensive because they are designed with special amenities, but you may not need them. A large primary care group in Southern California made a great deal on a closed automobile dealership. The practice turned the property into its main office and went on to become a dominant force in the county. A dentist in Cincinnati rehabbed an abandoned Catholic school into a giant clinic. The result was a cheap and distinctive office.

Maybe a car lot or school is too ambitious for you, but office space in industrial parks often has plenty of convenient and free parking, easy freeway access, and a low base price that makes living on managed care reimbursement a lot easier to take.

3 REMEMBER, THERE'S NO SUCH THING AS A "STANDARD" LEASE

Since the dawn of word processing, any part of a "standard" lease can be changed quite easily. The only thing that makes a standard lease unalterable is a compliant renter.

Lease agreements often contain objectionable clauses that favor the landlord. For example, office space leases often call for the landlord to provide air conditioning and heating services. But if you've ever had trouble regulating the temperature of your office, you'll know that this vague language is useless if you're trying to get a landlord to live up to his or her obligation.

We favor adding specific language such as "air conditioning and heating sufficient to provide tenant-controlled temperatures between 70° and 85° F throughout the leased space, 365 days of the year." This language will solve the problem of air conditioning that's turned off too early in the fall or a heating plant that's not run on the Saturdays you want to work.

4 RENT SHOULDN'T GO UP

When your lease is about to expire, you may become anxious, wondering just how much the rent will increase with your new lease. Many leases even contain clauses that cause the rent to increase each year during the term of the lease. Usually, the rent is indexed to some cost of living escalator with a minimum figure.

A consulting client's lease we recently reviewed calls for an annual rent escalator equal to the consumer price index, with a minimum 5% increase. Inflation has been well below that percentage for several years, so why should landlords get these raises?

We don't understand what causes rent to increase at all. At the end of a 5-year lease, the building is 5 years older, the suite of offices 5 years more shopworn, and the parking lot 5 years more pot-holed. In many areas, new office spaces are available, with more modern facilities and (sometimes) more competitive offers.

Rent should decrease each time you renegotiate a lease, as the building deteriorates. If used at all, cost-of-living escalators should be applied only to the portion of your rent that reflects actual costs to the landlord: taxes, insurance, utilities, and maintenance. They shouldn't be applied to the portion of the rent that covers the landlord's principle and interest payments on the mortgage or his or her investment profit. And, when used in this way, these rent escalators should be applied as a maximum increase, not as a minimum increase.

x