Five Myths Your Landlord Wants You to Believe

By Stephanie Daniels, CARR

2021 Alliance Sponsor feature article courtesy of CARR

It can be difficult to discern fact from fiction when dealing with landlords. A misunderstanding of these key issues can have serious consequences for your practice. The following information should help dispel some common myths and prevent costly mistakes in your next lease negotiation.

Myth #1: The landlord is on your side

Many landlords attempt to befriend their tenants, making it difficult for tenants to remember the landlord’s primary goal is financial gain. They are seeking to secure a lease with the tenant paying as much as possible. Even the friendliest landlord wants to make the maximum profit on his space, just like the nicest tenant seeks the lowest possible lease rate so his business can thrive. Financial burdens quickly arise for tenants who place undue trust in their landlord and fail to properly negotiate their lease. By having representation, you can learn how your lease compares to the market and ensure you are getting the best possible terms.

Myth #2: You are not entitled to representation

Some landlords employ intimidation, instead of friendliness, to achieve their goal. The intimidation tactics may include telling tenants they are not allowed to have representation. This is not true. Lease negotiations are different than negotiating the price of a car or trying to haggle for a better price at a flea market. They are complex transactions, layered with hidden opportunities for landlords to take advantage of anyone not represented by an expert. Landlords are professionals who are aware of these complexities. If a landlord says you are not allowed to have representation, that is a clear signal they do not respect your desire to be treated fairly.

Myth #3: You are already getting the best possible rate for your space

There are many conditions that factor into lease rates for a commercial space. Things such as current building vacancy, length of the lease, amount of tenant improvement allowance, building condition and many other considerations impact the appropriate rate for a particular space. Several of these considerations are specific to spaces for healthcare tenants, highlighting the need for a real estate professional who has expertise in healthcare. Healthcare practices are often told they are getting the best possible rate for their space, yet they can receive a much better offer from the landlord when an expert assesses these mitigating factors.

Myth #4: Your renewal is not negotiable

Most leases provide an option for the tenant to renew their lease when it expires, and may even detail the exact terms of the renewal. However, it is important to understand that your renewal is negotiable, even if you have renewal terms specified in your current lease. A landlord who says you cannot renegotiate the terms for your renewal is usually doing so because they can get you to pay more by exercising the option to renew instead of negotiating new terms. The only way to be certain you have the best possible terms for your renewal is to compare those terms with current market rates in the area, a vital step often missed by healthcare professionals entering this process alone.

Myth #5: You have no other options; the landlord has many

This common myth might be the most important to address, because it is fundamental to how landlords operate. The landlord wants you to believe that his property is the only suitable location for your practice. The truth is there are likely several other properties that would fit the needs of your practice, and the landlord should be competing to keep you in his building.

The landlord also wants you to believe he has several potential tenants ready to occupy your space if you don’t take it. This position is used to force a tenant to rush into signing an unfavorable lease, when, in fact, it usually takes months or years to fill a commercial space. Each leasing situation is unique, and a healthcare real estate professional who knows your strengths as a tenant can help you understand what type of leverage you have.

This information represents a few of the many misconceptions involving landlords in healthcare real estate transactions. Using a real estate professional with expertise in healthcare will help protect you from falling victim to these and other common landlord myths.

CARR is the nation’s leading provider of commercial real estate services for healthcare tenants and buyers. Every year, thousands of healthcare practices trust CARR to achieve the most favorable terms on their lease and purchase negotiations. CARR’s team of experts assist with start-ups, lease renewals, expansions, relocations, additional offices, purchases, and practice transitions. Healthcare practices choose CARR to save them a substantial amount of time and money; while ensuring their interests are always first.

Visit CARR.US to learn more and find an expert agent representing healthcare practices in your area.

Why Landlords Love Lease Renewals

By Stephanie Daniels, CARR

2020 Alliance sponsor feature article courtesy of CARR

Commercial real estate landlords operate their buildings like any savvy business owner operates their company – with a focus on maximizing their profitability. One of the top ways they maintain and increase profitability is through lease renewal negotiations. A landlord’s goal during renewal negotiations is to maintain annual escalations of 2.5-3%, prevent any vacancy, provide the least amount of concessions and increase the lease rate. To accomplish this, landlords use specific tactics to keep tenants in the dark, uneducated, and often backed into a corner.

Renewals are rich deals for property owners and present an opportunity they work very hard to capitalize on. It’s when landlords make the most margin on a tenant, and it’s the most common opportunity for renewal rates to be above market. Landlords often fight the hardest on lease renewals too, because when lease rates go down, so does their building’s value. However, the typical concessions offered to tenants in lease renewal scenarios are often a mere fraction of the profits realized by the Landlord – further highlighting why most landlords love renewals.

When a tenant vacates, there are substantial costs a Landlord realizes to backfill the space. The Landlord has to market the space, cover all the operating expenses while the space is vacant with no rent coming in, and then typically invest in updating the space or fund the next tenant’s build out. In most scenarios, this represents a 6-figure loss spread out over 12-24 months of vacancy.

It is vitally important to understand this dynamic during renewal negotiation and hire a tenant’s broker to represent you and execute a strategy to competitively procure your renewal option. Together, this will ensure you’re getting the best possible terms on your lease renewal and tip the scales back in your favor.

It’s also critical regardless of whether you are currently paying above or below the fair market value of your space. Let’s review both scenarios.

Below Market Value

If you are paying below market rent at the time of your renewal, you can expect the landlord will try to raise rates at least to a market rate. They may even try to raise rent beyond a market rate to make up for lost time. This could impact your practice’s bottom line profits by six to seven figures over the next ten years, so creating the maximum negotiation leverage is both paramount and urgent.

Above Market Value

If you are already paying above market for your lease, the landlord will still probably push to increase your rate. They are relying on the assumption that you do not know the market lease rate for your space and won’t take the time to hire someone to represent and educate you. They are also relying on the fact that it usually takes a compelling reason for a healthcare practice to move out of their current space and will assume you aren’t willing to relocate. The secret is knowing what’s in a renewal (or a vacancy) for the Landlord and leveraging this information to your advantage. When you are overpaying on your lease, a landlord will have a much harder time getting a new tenant to pay the same rate as you currently pay. This gives you even more leverage to get an improved deal.

Timing is Everything

You may not need to move, or even have the desire, so it’s understandable that even the process of discussing and exploring relocations can feel disruptive. The question becomes, “Why take a shot in the arm if you’re not even sick?” However, this “side-effect” is more tolerable than a financial blow to your profits and is a needed step in the process to create a true posture that you have other viable options.

In order to avoid the greater consequence of a significant increase to your real estate expenses, remaining committed to the plan your agent puts forth allows you to rattle the landlord’s confidence that they have complete control. Additionally, by negotiating legitimately better economic terms for at least one other location, even if only as a back-up, will allow you to hold the building owner accountable to the fair market competition. These alternative options are only realistic and believable to your landlord if you have the correct lead time and position to negotiate. The minute the Landlord knows you’re staying, the opportunity for receiving any additional or substantial economic concessions is lost.

A typical lease negotiation timeline is:

• Negotiations: 60-90 days
• Legal review: 30-45 days
• Design, permitting, build out: 120-180 days

Peace of Mind & Your Best Possible Terms

The goal in a renewal negotiation is to achieve the best possible terms and walk away with the peace of mind that you capitalized on the opportunity. The best deal often isn’t the cheapest one. By conducting a competitive procurement process, your healthcare real estate expert will help you discover your value as a tenant in your market and obtain the context needed for evaluating an offer from your current landlord versus your other top property options. This process will account for your unique circumstances, needs and offerings.

Strategy and Next Steps

The timeline above is designed to position you to achieve the best terms possible. Starting too soon or too late can jeopardize the terms or concessions you could receive. Space planning, negotiations with the landlord and subsequent legal review could easily take 3-5 months. To maintain the best negotiation posture, which is that you ‘could’ elect to move, it’s critical to conclude renewal negotiations before your landlord knows you are nearly out of time. In addition to losing leverage for your best possible terms, delaying the renewal process could be very costly because your current lease may have a holdover clause requiring you to pay as much as double your base lease rate for any occupancy after the term’s expiration.

Time is of the essence. A lease renewal represents one of only a few events in the life of your practice where profits can be realized or lost by six to seven figures.

Prior to negotiating terms, your agent should be able to help you decide how much space is needed for future years by making introductions to architects and general contractors to provide help with space planning and to test-fit options for best utilizing the available space.

An expert healthcare real estate agent is uniquely qualified to navigate every nuance of each scenario and consideration above. They will save you a significant amount of time and money while providing you peace of mind during this process.

CARR is the nation’s leading provider of commercial real estate services for healthcare tenants and buyers. Every year, thousands of healthcare practices trust CARR to achieve the most favorable terms on their lease and purchase negotiations. CARR’s team of experts assist with start-ups, lease renewals, expansions, relocations, additional offices, purchases, and practice transitions. Healthcare practices choose CARR to save them a substantial amount of time and money; while ensuring their interests are always first.

Visit CARR.US to learn more and find an expert agent representing healthcare practices in your area.