Running a Dental Practice is Expensive
There is a laundry list of costs attributed to running a successful practice including employee wages, dental supplies, equipment purchases, lab fees, insurance fees, etc. Then there’s your rent – you have your base rent, additional rents, and operating costs.
Let’s break it down. We know that base rent is the amount you agreed to pay in your office lease agreement for occupying the space. Additional rent can include municipal taxes, insurance premiums, repair and maintenance costs, and common area utility charges. In any given year, these charges can fluctuate. Lease terms governing these costs are often general in nature because it is not possible to contemplate all of the variables.
What Are Operating Costs?
Operating costs are the expenses related to the operation of the building. Some landlords have been known to take advantage and back charge virtually any expense to their tenants, filing it under the term ‘operating costs’. A great example of this is “Administrative Fees” – in certain cases, landlords add as much as 25% to operating costs to cover these fees.
Reviewing the Charges
It’s perfectly acceptable to request an “itemized receipt” of the operating costs to determine what you’re being billed for. Upon closer examination of the breakdown, many dentists are shocked when they realize what “operating costs” they’ve been paying for over the years.
Are you helping fund the tenant inducements of other businesses in the building? Are you paying for your landlord’s income taxes? Are you paying for operating costs of the building prior to your tenancy? Are you actually being billed your proportionate share? Is the landlord billing ‘travel expenses’ to tenants in the building? In the past we’ve discovered that upon examination of the landlord’s books, “travel expenses” was categorized as anything from traveling to and from the building, to taking the wife and 3 kids to Disneyland for a week!
It’s important to understand that not every landlord is going to take advantage of you, but without the right to review operating cost statements, you will never know for sure what you’re paying for.
The “Right to Review Operating Costs” in Your Dental Office Lease
Before you sign your dental office lease, make sure that you have the “right to review statements of operating costs” included. If you have the right to see exactly what is being charged, it is unlikely that you will be billed for something completely unreasonable. If you don’t have this language in your office lease, make a note to negotiate it into your new lease at renewal time. If you’re not comfortable dealing with your landlord, be sure to contact a dental office lease negotiation firm like Cirrus to explore your rights and options.
If you do have the right to review statements of operating costs in your lease, how can you tell what is fair and what isn’t? Obviously charges related to running and maintaining the building are acceptable, including the replacement of old or dysfunctional systems (i.e. HVAC) to keep quality as it was when you initially moved in.
What Costs Are Unreasonable?
- Improvements to Increase Property Value: You should not have to pay for any improvements or replacements done in order to increase the value of the property; this is a landlord’s cost.
- Repairs or Professional Fees: You should not pay for repairs or replacements of structural components, real estate broker commissions, or professional fees charged that do not specifically relate to your space.
- Interest Charges: You do not need to pay for the interest or principle payments on mortgages or other debt costs unless it is your debt or Tenant Improvement Allowance (TIA).
- Marketing: You should not be required to pay for any marketing costs attributed to attracting new tenants to the building, or general building marketing costs.
- Administration Fees: Make sure that there are no duplications of operating costs on the statement, and that you are not paying extremely high administration fees. “Administration Fees” and “Management Fees” mean the same thing; don’t get caught paying twice.
The above expenses are typical to doing business as a landlord, and are not the tenant’s responsibility. It’s important to understand your rights as a dental tenant. If you are unsure about any language outlined in your dental office lease or in your statement, contact a leasing professional for advice. And remember, any money saved on unfair operating costs can go towards your Disneyland getaway, not your landlord’s.