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How to renegotiate your building lease

Medical Economics JournalMedical Economics November 2022
Volume 99
Issue 11

More than 80% of health care providers lease their office space, which means more lease renewals occur annually than any other commercial real estate transaction. Unfortunately, it also means that health care providers tend to lose more money in lease renewal negotiations than any other commercial real estate transaction.

For the majority of practices, real estate is the second highest expense behind payroll. So it’s imperative to approach every lease renewal negotiation with an intentional strategy and the goal of reducing overhead while improving cashflow and profitability. It’s crucial to stop and take a few minutes to understand how to swing the pendulum in your favor, which means getting a step up on your landlord.

You can use plenty of strategies to strengthen your odds, but let’s look at one simple negotiation tactic that puts you in the driver’s seat.

Do not ask your landlord for a proposal

Although not asking for a proposal may seem highly unusual, the logic is there. By asking, “What are you willing to offer if I renew my lease?” you’re telling your landlord that you don’t know the current real estate market, haven’t done your due diligence and aren’t currently negotiating on multiple other properties. You’re making it clear that you haven’t hired an expert agent to advise you and handle the process. And you’re allowing the landlord to set the tempo, signaling that you’re likely willing to accept inferior terms.

Stop and compare that approach to one of a national corporation with an upcoming lease renewal negotiation. Here’s how they handle an upcoming transaction: A minimum of 12 months prior to an expiring lease, they would hire an expert commercial real estate advisor who understands their needs and has significant experience representing similar businesses.

The advisor would take that company to the market and negotiate on multiple properties. What could they achieve if they were to relocate to a new property, and what top properties are available? The advisor would show them property options to lease and purchase, giving them maximum control of their future. The end result: a savvy company that knows exactly what they would be willing to pay if they stayed and renewed their lease or if they relocated to a new property (as well as the types and amounts of concessions they should expect to receive from their current landlord if they renewed).

Next, the company’s advisor would contact the landlord — before the landlord contacts them. This speaks to intentionality and being ahead of the curve, not behind it. When the advisor informs the landlord that their client has multiple properties vying for them as tenants, the playing field is a bit more level.

The landlord is now competing with the market and no longer able to dominate negotiations. Most importantly, if the current landlord doesn’t bring a competitive offer, they’ll likely be faced with vacancy.

Health care providers are blue-chip tenants (ones that have less than a 1% chance of defaulting on a lease), so the end result is often a decrease in lease rate — landlords don’t want to lose you. Most leases include an annual increase that outpaces inflation, and most leases expire at lease rates that are higher than the landlord is currently leasing new spaces at to new tenants. Additionally, landlords provide legitimate concessions even on lease renewals to existing tenants — when they know they have to be competitive. When a landlord knows they’re negotiating with an expert, they’re willing to bring the lease rate back down to a market number, resulting in monthly rent savings.

That’s one simple step (not asking the landlord to send you a proposal) that can change the entire dynamic of the negotiation. Your goal during any commercial real estate transaction is to capitalize on every opportunity. Start by hiring an expert health care real estate advisor who will protect you, put your interests first and ensure you’re not taken advantage of during lease renewal negotiations. Bottom line, your advisor should always be the party who submits the first offer.

Colin Carr is the CEO of CARR Inc., the nation’s leading provider of commercial real estate services for health care tenants and buyers. Send your financial questions to medec@mjhlifesciences.com.

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