Office Lease Renewal Effective negotiation can lower your overhead

by Evan Reynolds The Reynolds Company

Medical practitioners searching for ways to cut their overhead cost may not realize the opportunity to significantly reduce one of their largest operational costs. This opportunity—an office lease renewal—usually comes around only every five or 10 years.

Most physicians wait until they have just a few months or weeks left on their lease to discuss renewal terms with the building owner. The friendly building owner usually offers the busy physician a “preferred renewal rate,” and that generally ends the negotiations. The busy physician believes he got a good deal, and the building owner is certain he cut a great deal for himself.

This scenario is common to the vast majority of medical tenants. Most physicians do the opposite of what they should when they are renewing their lease, and, in the process, leave tens of thousands of dollars in the building owner’s pocket. A physician who leases 2000 square feet easily can forfeit $30,000 to $50,000 over the term of a typical medical lease by failing to effectively negotiate the lease renewal.

The business objectives of building owners are diametrically opposed to those of physicians. They are in business to maximize rental income, and physicians want to minimize rental cost. For a physician to effectively negotiate a lease renewal, he must approach it as if he absolutely were going to move his practice to a new location. By identifying, evaluating, and negotiating with relocation alternatives, the physician will convince the current building owner that he is serious about moving and thereby will maximize his negotiating leverage.

Medical tenants are at a huge disadvantage in the world of commercial real estate. They often have to sink large dollars into their space for build-out and usually are hesitant to move because of potential patient confusion and the hassle of moving. The building owner views a medical tenant as largely captive, and is aware of his tendency to stay where he is for a long time.

Some commercial real estate brokers specialize in working with medical tenants to manage the process and lead negotiations, and begin this relationship at least nine months before the lease expires. Little of the physician’s time is required if an experienced broker manages the process. The physician can be certain that the broker exclusively represents the physician’s interests and is paid by the building owner. Many building owners tell tenants that if they hire a broker, their rent cost will be higher. This is a myth promoted by the building owner to discourage you from hiring representation, even though the building owner probably has a broker representing him. Owners love to negotiate with tenants directly. The tenant broker’s commission is a small fraction of the overall savings that can be generated by effective representation. Hiring a broker also demonstrates to the building owner that the tenant is serious about evaluating alternatives.

In addition to the cost savings that can be captured during a lease renewal, other aspects of the lease can be improved. Physicians potentially can eliminate a personal guarantee that was required in the original lease, get the security deposit refunded, or change other terms of the lease that need alteration.

Effectively negotiating the lease renewal can save significant dollars, and the opportunity comes around only a few times during a physician’s career. Be sure to take advantage of this opportunity and put more money in your pocket instead of in the building owner’s.