Come visit us at Booth #724! Don’t miss out on this convenient opportunity to get free one on one advice. Real estate markets are on the mend. You can’t afford to not educate yourself on how to improve your practice through leveraging your real estate.
Amid a recent discussion with an office manager (we’ll call her “Karen”), she recently renegotiated the commercial lease for her doctor’s office. Karen proudly shared that she had negotiated a very good deal. However, our exploration of the terms revealed quite a different story.
Apparently the landlord’s broker (“Mike”) offered Karen a discount on her current rental rate, if she agreed to renew the lease on the spot. This office is about 2,000 square feet and while tidy, its cosmetic aesthetic is dated. The physician (whom we shall call Dr. Alex) had been operating from that location for several years, and had great credit. When Mike stopped in, it was the first time Karen had been offered a rental discount. She was ecstatic!
Now, let’s look at the facts.
Dr. Alex signed his last lease 5 years ago. Assuming the previous lease was not signed at an above market rate, current rates for his neighborhood are down more than 25% from the last time the lease was inked. In addition, commercial vacancy rates are up significantly throughout the vicinity. Let’s look at the numbers. Karen’s landlord (“George”) offered her a 10% decrease in her rent over a 10-year term. The current rate was $25/sf, meaning a decrease to $22.50/sf.
Good deal, huh?
Actually, not so much. One of the many issues with this “deal” is that comparable rates for the market are not $22.50: They are $18 to $19. Because Karen didn’t have an understanding of those factors, Dr. Alex’s office will suffer the following losses over the next decade:
- Loss in rent: $86K
- Loss in free rent (typically given to tenants as a bonus to sign): $22.5K
- Loss in Tenant Improvement (TI) Allowance (typically paid as an incentive by the landlord to update the space or equipment): $30K
- Total loss compared to actual year 2014 market conditions: $138.5K
It actually gets worse. This real estate transaction could have been easily avoided had they explored current market conditions. And there are additional factors that can alter the equation. In our experience, over the past 5 years, we have seen doctors in similar circumstances save:
- 10% off market rental rates
- up to 25% in free rent over current market offers
- up to 75% in Tenant Improvement Allowance (TI) over current market offers
Reworking the numbers using the minimum benefit typically seen for a successful dental practice, Dr. Alex’s estimated loss is $229K. That’s an awful lot of money for any doctor to give away. Sadly, his situation is not uncommon. Over 10 years, he could have brought in $22.9K of additional profit. With average production numbers, that $22.9K could have translated into double profit growth each year. You have put decades of schooling and countless working hours to make your business successful. How can you stop giving away the money that should be going toward your business?
- Fiduciary representation
- Real Estate Expertise (both medical and local market)
“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.” —William Arthur Ward
It’s that time of year again. At 6 p.m. on a Thursday in January, you dutifully look over the Profit & Loss statement your office manager placed on your desk earlier in the day.
Sales are good, up 10% over last year (plus $50K). Labor is decent, with some overtime, but nothing egregious, considering the increase in sales (minus $15K). Supplies and other expenses are up, but correspond nicely with the bottom line (minus $10K). And rent expenses have escalated 5% over last year, which equates to a .5% increase as a percentage of sales (minus $3K).
Rental expenses. You begin to reflect on the looming lease negotiation with your landlord. Hopefully, all will go down without a hitch and you won’t take a major hit with a substantial increase. Yes, it was a good year, with sales up 10%, profits up $22,000 and the potential to bring in that new associate as your business grows. But there’s always the sense that this one element of your business is out of your control.
lease·hold (noun): the holding of property by lease. “A form of leasehold.”
It’s called leasehold. Real estate gurus will tell you that this is the vehicle of choice for building wealth in real estate. But as a doctor, your primary focus has never been about building wealth in real estate. Perhaps to you, a leasehold simply represents the brick & mortar that encases your dreams, ambitions and your life’s work.
Real estate is an essential component of your business, but it also adds substantial costs to your bottom line. Indeed, real estate can make or break a practice’s profitability. Accountants classify this as a “fixed” cost—one that cannot be affected by a change in operations. For a doctor, it is probably best regarded as a strategic cost. In other words, if your primary business is Medicine, your real estate should complement and help facilitate your success. That means that price is by no means the only factor. Whether you lease or purchase, it has a lot to do with location, signage, lease rate, visibility, demographics, competition and complementary uses.
real estate: (noun) 1. property consisting of buildings and land.
Real estate. We live, work, shop and vacation in it. Most of us have a basic knowledge of real estate. How difficult can it be? Two parties, one document, one space… But then again, real estate is typically among the top three expenses for a doctor. Most other expenses in a practice can be improved methodically over time, either through better scheduling or control of inventory. But your property is different. Real estate lease rates & terms are only adjustable once every several years.
Real estate lease expenses represent a contractual line item on your P&L and require no oversight or management—but because it is a contractual expense, you most likely have escalations built into your lease. Unchecked, your real estate costs will steadily and inexorably increase over time. Although the economy is showing signs of improvement, we remain in a tenant’s market. It’s common today that a correctly negotiated lease can decrease a doctor’s total real estate expense by more than 30%, resulting in cost savings exceeding $300,000.
Amazing, right? Unfortunately, many fail to take advantage of these savings.
Sharon Kingsley, a health care professional, checks her email first thing when she gets into work. Amidst the many work emails and advertisements is an invitation to dinner with her good friends Dr. Mark Steinbeck, who runs a hospital on the other side of the city and Dr. Jason Gould, who was named best dentist in the county. She gladly accepts the invitation and then continues on to the rest of her emails. One of which is a reminder that the building’s real estate lease has less than two years on it. Since it is the second largest single line item on their profit and loss statement, and can only be negotiated once every several years (which Sharon is in charge of getting completed), she feels like someone just dropped 100 lbs on her shoulders. The stress distracts her from her work for the rest of the day. Not until the day is nearly over and she has the dinner to look forward to, do the creases in her forehead relax.
“Hello, gentlemen,” Sharon addresses to her friends as she sits down at the table.
“Hi,” says Dr. Steinbeck, “I was just telling Jason that I’ve been trying to get in contact with my landlord today to schedule a lease negotiation and to ask if he has a broker I could use. Then Jason proceeded to save me from making a huge mistake. Apparently the brokers that landlords provide don’t actually look out for our interest, but the landlord’s. Seems obvious now, but it had never occurred to me before.”
“Really? I have to start preparing for lease negotiations as well, I usually do it myself, but I can hardly ever keep up with it all so I was actually thinking about asking for a broker as well. I guess I’ll just have to cross my fingers that I don’t screw up too bad, then,” Sharon’s face turns sour.
Dr. Gould jumps in, “ Actually, Sharon, as I was just about to tell Mark, you can hire fiduciary representation. I just finished up my lease negotiations a few months ago, although the expert did most of the work for me. If I hadn’t hired them my landlord would have charged me 30% over the market rate, and I wouldn’t have been the wiser. In fact, if I had done the negotiations myself or used the landlord’s broker, the overage would have been worth at least 2 to 3 crowns a month down the drain.”
“Wow, that’s incredible,” Sharon instantly lights up, “maybe we can actually expand our practice this time. Last time we couldn’t get a loan and cash flow wasn’t great so we couldn’t expand the company like we had wanted to. Since real estate is such a large line item, the savings will make a huge difference.”
“Sounds like these expert negotiators will end up saving us time, money and stress,” Dr. Steinbeck adds.
“Definitely,” Jason concurs, “The best part is that you don’t even pay for the expert broker. Landlords have to set aside a commission for just this, but they’d never tell the tenant that. It’s all part of the contract.”
Sharon and Mark look at each other, eyebrows raised in shock and amazement that they have been missing out on this.
While the illustration above my not be your exact circumstance… we meet doctors every day who are struggling with their real estate negotiations. The good news is you don’t need to do it alone! We are Arizona Healthcare Realty and we are here to help you! Our commitment to you is that our services will save you time, stress, and a lot of money. You can’t afford to pass up help when negotiating your lease.
“An expert is a person who has made all the mistakes that can be made in a very narrow field.” —Niels Bohr, Danish physicist and Nobel Prize winner
As industry experts know, real estate is both a science and an art. The attrition rate for commercial brokers entering the business is more than 70%. Of the remaining 30%, only 10% are considered successful by industry standards. Real estate brokerage has long been considered a commodity by consumers and even governing boards. Historically, the populist take is that real estate has a fixed value, and a broker simply facilitates the transaction.
This couldn’t be further from the truth—especially in commercial real estate. As illustrated in our scenario, there are multiple points of negotiation in any transaction. Many of them don’t even come up amid negotiations unless a broker is a true expert in a particular type of transaction.
It certainly requires tried-and-true knowledge, strategy and expertise to be successful. A broker needs to be an expert in real estate types and values, local market conditions, specific industries, negotiating, and in collaborating with other industry experts. True real estate expertise means having an understanding of multiple factors and then utilizing that knowledge strategically in favor of the client. It’s easy enough to find a broker who will merely facilitate a transaction for you with a “suitable” result. But search out that 10% broker. He or she is the individual that will bring you the expertise to get a fiduciary result—not just a satisfactory result.
I offer the following guidelines to help you choose the right firm and broker to represent your interests:
- Find a Tenant/Buyer representation firm and/or require a strict buyer agency agreement. A number of reputable firms are available locally and nationally. If a broker represents even one property, it is a conflict of interest.
- Find a company that has, at a minimum, training and best practices in place in the following areas:
- Commercial real estate expertise: This should include standards for the most favorable time to negotiate a lease. If you are too close to the end of your lease, the Landlord has the advantage. If you are too far from the end of your lease, you could end up carrying double rents or out-of-market rents (or TI’s).
- Negotiation strategies and training for all brokers: Does the company hire people that can withstand intense negotiations? A broker needs to be able to put the needs of the client above his own need for approval.
- In-depth market knowledge: Does the brokerage have in-house training so that brokers understand complementary and competing uses in the dental industry? Do the brokers understand the inherent hazards of overbuilding an area? Does the brokerage have tools and research to support their brokers in determining the best locations?
- In-depth medical real estate knowledge: Does the broker or firm provide medical- and dental-specific real estate training? Often the strength of a medical tenant can add up to several thousands of dollars in a negotiation.
“Whenever you find yourself on the side of the majority, it is time to pause and reflect.” —Mark Twain
In real estate, there are two distinct parties with distinct goals:
- Landlord: builds wealth through increased rents and stable tenants
- Doctor: builds wealth through reduced costs and patient growth
Brokers who represent both sides of a transaction—or have the potential to represent the opposing party on a future transaction—complete more than 90% of today’s real estate transactions. This is called dual representation, and the majority of real estate firms come under this type of agreement. In other words, most firms both list properties and represent tenants and buyers. Under dual representation, your broker becomes a mediator, as opposed to a negotiator.
Consider this (even) more sinister scenario, where a landlord offers to have his broker “help you” with your real estate transaction. A landlord’s broker is under contract to the landlord to represent his interests and is paid based on how lucrative the deal is for the landlord. His job is to ensure that the landlord gets as much money out of your leasehold as possible. This is the power of an agency agreement working against you.
The Cornell University Law department defines Fiduciary Duty as follows: “a legal duty to act solely in another party’s interests.”
When you hire a broker, it is naïve to think he has your best interest at heart. And thus, an agency agreement that defines the relationship with your broker is indispensable. Just as you wouldn’t hire an attorney that decides to represent your opponent at some point during your case, you should never enter into a real estate negotiation with a broker unless you are certain his fiduciary duty is to you.
The U.S. financial markets have experienced similar conflicts over the past several years. When a broker sells investments to an individual from a fund he manages, his responsibility to the investor is under a “suitability” standard. So as long as the deal is “suitable” for the investor, the broker has done his job. In truth, his duty is to his employer (the managed fund or bank). Conversely, the fiduciary standard is a requirement that the broker is performing solely on behalf of the investor. You can imagine that once investors recognized that their financial interests were not being represented, the popularity of fiduciary firms skyrocketed.
A similar real estate trend is that many states now require by law a fiduciary standard when a real estate broker represents a client. The notion that a firm representing both the landlord and tenant can effectively fairly represent both parties is being challenged by multiple lawsuits across the country.
In an article in Inman.com Financial Reporting titled “Broker-client relationship is key to level of service,” authors Matt Carter & Andrea Brambila note: “Consumers shouldn’t assume that their broker or agent is obligated to represent their interests, and their interests alone, until they have seen a written disclosure describing the agency relationship under which services are being provided to them.”
Alongside, in January 2015, California passed a law requiring deeper and more thorough disclosures of dual agency requirements. These evenly pertain to brokers representing tenants and buyers who work in the same office, where another broker lists properties. In other words, if two distinct brokers working in the same office represent both the tenant and the building owner, this is considered “dual agency,” because the completion of that deal is still in the best interest of the employing broker.
The difficulty in providing a fiduciary service for both sides of a real estate transaction within a dual agency is becoming a legal quagmire. The new dual agency legal requirements make recommending a lower offer than list price a near impossibility, since it does not represent the fiduciary interests of the seller. Now, any advice given to the opposing parties in the transaction must first be approved by the other side—effectively eliminating any chance of favorable negotiation for either party.
To summarize, when finding representation, it is essential to require an agency agreement that clearly defines your broker’s fiduciary duty. If the firm cannot guarantee you full fiduciary representation, then at the least, search out firms that have solid separation between tenant and landlord representation. Optimally, find a firm that only provides separate tenant and buyer representation. The broker representing you should never be allowed to also to list properties.
Are you paying too much rent for your practice? How much is too much?
Have you considered moving to a more suitable location? Yet not sure where to start? Who to lean on? (Where do I start?? Who will help me?)
How do you find competitive market rates, value for your investment, location, accessibility, tenant mix, parking, the right neighborhood, access, and good exposure?
Does your lease expire within the next 3 years and you want more value for your money?
Do your upcoming lease negotiations leave you feeling uneasy?
Will you know what to say to your landlord? (What will I say to my landlord?)
Did you know there are many items landlords tend to exclude in the negotiation process that can potentially leave you and your practice vulnerable?
For most practitioners, lease negotiations are an uncomfortable reality. Because it takes them away from what they do best: taking care of patients.
Welcome to Arizona Healthcare Realty. Our business is built on taking sides, your side. That means we will NEVER represent a landlord. And by providing real estate and advisory services only to doctors, dentists and medical professionals, we are your advocate. Representing you and only you shows that we have your best interest in mind, ALL THE TIME. In just the past 4 years we have been involved in over 600 medical negotiations.
Our job is to make the move to your new practice easy. Office rent is a big expense and long term. Our expertise has already saved practitioners just like you millions of dollars.
Here at Arizona Healthcare Realty we are medical real estate experts. We are expert negotiators in your field. We have successfully negotiated hundreds of leases in our clients favor. We specialize in medical and dental real estate. We drill down to the details. Including industry specific build out requirements. We are experts in the local market. Our extensive market research is much more that computer searches. Long before we take you to a building, we have evaluated your potential location against numerous criteria specific to your practice requirement and have personally previewed them for suitability.
We only represent the tenant, no landlords, no building sales. There are no conflicts of interest when you work with us. When we negotiate on your behalf there is never the possibility that our future client is across the negotiation table. Would you hire an attorney that also represented your opponent? Well of course not.
We have a proven process to save you money. The best part: these services are always free to you, the practitioner.
Lease negotiation is an essential component to your profitability. Here at Arizona Healthcare Realty we take your business and needs seriously. Bottom line: we work for you and we care about your success.
How can we help you?
In our experience we have found that negotiations for TI’s and free rent can range anywhere from 40% -to 60% and we have seen rents flexible from 10% to 45% in cases where the markets have been hardest hit by the economy. Calculate your potential range of savings by taking your current rate and multiplying by these high and low factors.
TI low = Current rate x 40%
TI high = Current rate x 60%
Free rent low = Current rate x 40%
Free rent high = Current rate x 60%
Rent low = 10%
Rent high = 45%
Low range of total savings = TI low + Free rent low + Rent low
High range of total savings = TI high + Free rent high + Rent high
What are your numbers? Like those potential savings? Let us save you money as your broker.
Take Your Practice to the Next Level of Profitability!
Why should you upgrade your practice? Come learn how an upgrade to your physical office, processes, and marketing can increase your profits. Find out what increases you can expect to see in revenues as a result of a practice upgrade (ROI). Learn how to find free fund to pay for part of your upgrade. Learn about the best ways to finance and upgrade, so it makes sense in the long term. Finally, learn how to put all the pieces together for an effective and profitable upgrade plan.
Location: The Henry Restaurant
4455 E Camelback Rd, Phoenix, AZ 85018
Cost: $25 per attendee, includes food and wine pairing
RSVP: Visit http://ce.azda.org/ to complete your registration or contact Sharon Scronic at 480.344.5777 x324
Christian Gile – Founder, Arizona Healthcare Realty
Karl Frye – Business Development Manager, Wells Fargo
Amy Deschamps – Principle, Arizona Healthcare Realty
Mike Shoun – President and CEO, Affordable Image
Steve Anderson – Owner, Denco Construction
Arizona Healthcare Realty for Dental Professionals