A tenant’s duty to pay rent is one of the most obvious obligations in a lease, and the one that most tenants tend to concentrate all of their attention.  It is also the rent provisions that are most near and dear to the heart of the landlord, for that is how the landlord makes money.  Accordingly, it is important that tenants understand how their rent is calculated and what is included, or not included, in that payment.

As a starting point, most commercial leases for dental offices fall into two main categories, based on how the rent is to be determined—Gross Lease, or Net Lease.  A gross leases is the simplest to determine the rental rate.  That’s because in a gross lease the rent is a specific amount and no other payments are generally expected to be made by the tenant. For example, the rent rate per square foot is $20.00, that’s it.

On the other hand, a net lease provides that the landlord transfers a variety of expenses to the tenant through what is often times entitled “Additional Rent.”  Those expenses generally include the tenant’s pro rata share of operating expenses, which can include a share of the: (1) real estate taxes; (2) Common Area maintenance expenses (CAM); and, (3) Insurance expenses of the landlord.  These three additional expenses are the reason for the name “triple” net lease.   For example, the rent rate per square foot for a net lease may be $20.00, but there will be additional periodic payments to the landlord that could be anywhere from $50 to $500 a month or more.

Today, most landlords use a triple net lease.  However, regardless of the lease type, any smart, money hungry landlord will “pass” their expenses on to the tenant in a gross lease too.  In the case of a gross lease, you may not see the expenses broken out like you do in a net lease, that’s because they are rolled in with the base rental rate.  So, when you’re comparing a gross lease rental rate with a net lease rental rate the price for the net lease may seem less, but you need to remember to add the Additional Rent payments.

That brings us to the next item, rent rate per square foot.  Many dentists tend to focus solely on the rent rate per square foot.   However, before you look at just the price per square foot, now you know the first thing to look for is whether the lease is a gross lease or net lease.  The second item you need to be concerned about is the market rate.  That seems obvious, but there are some dentists that just don’t know what the true market rate is for the area.  I don’t blame them, dentists are dentists, not commercial real estate brokers.  For that reason, I recommend using an experienced broker that knows the local market and healthcare practices.  Some brokers don’t even charge you, the dentist, they charge the landlord to find you a place and negotiate the basics of the lease.  That seems well worth the “free” money and time. 

Another important aspect of the square foot rental rate is how the leased space is being calculated.  First, you must understand the difference between rentable and usable square footage.  The usable space is the area actually located within the four walls of the premises, and that which is able to be used for the practice of dentistry.  The rentable space, on the other hand, may include portions of the common areas, i.e. hallways, entrance areas, bathrooms, and utility areas.  For example, your dental office may be 2,800 square feet with 4 or 5 operatories, but your rentable square footage, that which is being used to calculate your rent is actually 3,000 square feet.  There is a significant difference between rentable square feet and usable square feet, particularly in office buildings with common areas.  Another mistake, or trick, that landlords use is when they improperly calculate the space entirely.  So, if you are building out the space, it’s important that your architect provides you with the correct dimensions.  The bottom line…make sure that the leased space is clearly defined, and that you understand what you are paying for.

An additional and often overlooked issue by tenants in the lease, unless they use an experienced attorney, occurs when tenants end up paying for costs that aren’t core to the operating of the building or that extend beyond the life of their lease.  For example, in new buildings a landlord may try to pass through the cost of the water and sewer hookup to the tenant, which can cost $10,000 to $20,000, or more.  Some leases may allow a landlord to put a new roof on the building and charge the entire cost of the roof under operating expenses in a single year as Additional Rent, even though a roof is a structural element which can have a lifespan of 25 to 30 years.  At the very least, expenses associated with capital expenditures like tap fees and the replacement of a roof should be spread out over a number of years, with charges stopping at the expiration of the lease. 

When comparing locations, you need to consider the type of lease, the manner in which the landlord calculates your rent, and whether there are any additional expenses that you are obligated to pay.  Make sure that you are getting a fair market rate for the area and that the calculation for determining base rent is well defined.  Also, don’t forget to consider that “free rent” periods often times do not extend to operating expenses.

Remember, leases are negotiated documents that represent the written culmination of a negotiated transaction.  These “nuggets” of information in this part of the series are just the tip of the iceberg for you and your lease.  Stay tuned for the next part when we discuss maintenance obligations of the tenant and landlord.

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Matt LaMaster, Esq., is the founder and principal attorney of the LaMaster Law Firm, which is committed to delivering legal services to dental professionals and their practices. For more information about dental-specific legal services, please visit www.lamasterlaw.com.
This article includes information about legal issues. Such materials are for informational purposes only and may not reflect the law in your jurisdiction. These informational materials are not intended, and should not be taken as legal advice on any particular set of facts or circumstances. You should contact an attorney for advice on specific legal problems

The post Office Lease Negotiations – Part 2 appeared first on The LaMaster Law Firm, PLLC..

Signing a commercial real estate lease is an important decision for any business, especially a dental practice.  Whether you’re, moving into your first space, expanding your practice, or renewing your lease, an office lease is a significant investment.  That’s true even if your practice does not require a huge space.  For example, a 2,500 sq. ft. practice with a 10-year lease at $3,125 per month ($15 sq. ft.) means that you are committed to paying at least $375,000. And, in many instances you may have personally guaranteed that payment and many other obligations (more on that in Part 4). 

With such a substantial commitment and sum of money on the line, it’s important for you to understand your lease and properly negotiate the terms. While this series discusses seven common pitfalls, it is important to remember that no lease is created equal. Leases are negotiated documents that represent the written culmination of a negotiated transaction. There is no “standard form” lease that is appropriate for all situations. Having a representative who is familiar with the leasing process, lease documents and their hidden traps is the best way of ensuring that your transaction will go as smoothly as possible and that the lease accurately represents your understanding and expectations, and protects your interests. 

This series will identify and discuss seven major areas that are common traps in leases for dental practices. Over the next several weeks we will discuss each of the following areas.

1. Location and Relocation
2. Rent Obligation
   
3. Maintenance Obligation (Tenant and Landlord)
   
4. Personal Guaranty
   
5. Term and Renewals
   
6. Assignment and Subletting
   
7. Improvement Allowance

This week along with the introduction we will discuss #1 on the list, Location and Relocation.

Location and Relocation

Everyone has heard the saying “location, location, location” is the most important part of any real estate decision. While you may understand this concept, many tenants fail to really see what makes the location desirable. For dental practices, visibility, easy access, and the inviting nature of the spaceis of critical importance.

Being located in an old building down in the basement may be an okay place for dental lab, but it’s not a place for a dental practice. You want to have visibility of the practice when you drive by; and, at the very least, visibility of a sign. What if you had good visibility and a nice up-kept complex when you first singed your lease, but now it’s hidden by a tree or the sign is not lit any longer? Those types of issues come up often and can easily be handled in the lease with provisions that require certain maintenance obligations by the landlord. However, the landlord seldom places any true obligations on themselves in their draft of the lease (more on maintenance in Part 3).

In addition to visibility, easy access is crucial. Depending on the type of practice, proximity to referring providers can also be convenient and desirable. But, be careful, there are times when complexes contain direct competitors. In order to prevent this, it’s important for you to request an exclusivity clause for the type of services that you provide to limit unwanted competition. Generally this is not something that the landlord discusses with you upfront. You will need to ask for this provision and ensure that it is broad enough to protect you if your practice starts to add specialties. 

Once the location of a practice has been determined and you’re happy you may be in for a major surprise to find that in your lease the landlord reserved the right to relocate you to a different space in the building. Although it is preferable to delete this provision, this is not always possible; however, you can often address the provision in other ways. Assuming that you are willing to live with relocation, there are several issues to address, such as: (1) when may you be relocated; (2) how much notice is required before relocation; (3) where may you be relocated; (4) whether you have the right to terminate the lease instead of relocating; (5) who pays the costs associated with the relocation; and, (6) if the landlord is paying for the relocation, and how much.

Remember, leases are negotiated documents that represent the written culmination of a negotiated transaction. These “nuggets” of information in this article are just the tip of the iceberg for you and your lease. Stay tuned for the next part when we discuss your obligation to pay rent.

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The author, Matt LaMaster, is the Principal Attorney of The LaMaster Law Firm, PLLC, a boutique style law firm committed to delivering legal services to dental professionals and their practices.  For more information about Matt LaMaster and The LaMaster Law Firm, PLLC, visit www.lamasterlaw.com.

This article includes information about legal issues.  Such materials are for informational purposes only and may not reflect the law in your jurisdiction.  These informational materials are not intended, and should not be taken as legal advice on any particular set of facts or circumstances.  You should contact an attorney for advice on specific legal problems. 

The post Office Lease Negotiations – Part 1 appeared first on The LaMaster Law Firm, PLLC..