It’s increasingly challenging to keep costs low when managing a dental practice; controlling expenses should be a high priority. Reducing overhead by improving efficiency, maximizing revenue, and cutting unnecessary expenses is a good place to start; but what happens if you’ve already addressed these areas?
Most dental professionals aren’t aware of the potential cost-drivers and expensive risks hiding in the details of their dental office lease. A dentist could save hundreds of thousands of dollars over the life of their tenancy by taking the time to review these details before signing their lease. Amendments can typically be made to the lease at startup or renewal time to control costs and protect your practice from financial traps in the long run.
Dental Office Lease Costs and Other Fees
“Annual Base Rent” in the lease is the amount a dental tenant agrees to pay the landlord for occupying the space. Securing reasonable rates initially will allow you to remain profitable as your practice grows. Aim to protect rental rates and unreasonable escalations by negotiating a cap on the annual escalation.
You should also do your due diligence to research rental rates for competing spaces in the area; and learn what the landlord is asking for other comparable vacant spaces in the building/center to ensure that the proposed lease rates are fair.
Operating costs are the expenses related to the operation/running of the building. Due to the fact that occupancy costs such as property taxes or insurance are fixed in nature, an explicit dental office lease outlining the impact of these costs plays a key role. Non-fixed costs (i.e. maintenance) must be closely audited to ensure you are not overpaying for your proportionate share.
Know What You’re Being Charged For
Many landlords have been known to back charge expenses by filing them under the term “operating costs.” It’s important to ensure you have the “right to review statements of operating costs” included in your dental office lease in order to determine exactly what you’re being charged for.
There are a number of operating expenses that are unreasonable for the landlord to pass along to the tenant, including:
Improvements made to increase property value
Building repairs or replacement of structural components
Real estate broker commissions
Professional fees not relating to your space
Interest or principle payments on mortgages or debt costs, unless it is your debt or “Tenant Improvement Allowance” (TIA)
Marketing association fees that are not driving traffic to the building or helping your business
Keep in mind that operating costs can often be controlled or reduced at lease negotiation time by setting up percentage formulas or by capping costs at certain thresholds.
Common Area Maintenance (CAM) Charges
CAM charges fluctuate from year to year depending on factors such as insurance premiums and property taxes. It is critical to ensure you have the legal right to audit CAM charges and that the lease clearly states the landlord is responsible for paying the CAM charges on vacant space in the building.
Ensure that you are not paying high administration fees to your landlord (anything over 5% is unreasonable). Also, be aware that “administration fees” and “management fees” mean the same thing; ensure you’re not being charged twice.
Tracking Critical Office Lease Dates
Take proactive measures to avoid unexpected financial disasters by tracking and managing your critical dates aggressively. If you miss your dental office lease expiry date, you are automatically a month-to-month or “overholding” tenant and have lost the security of your practice location.
When in overholding, your landlord has the right to terminate the lease and evict you by providing only 30 days’ notice. The cost to demolish, renovate, relocate, and rebuild a dental clinic from scratch can easily cost $200,000 or more; not to mention any practice downtime faced and lost patients as a result of the move.
Double the Monthly Rent
Many lease agreements state that as soon as your lease expires, the landlord has the right to charge you twice the normal monthly rent. Check the “overholding” clause in your lease to see what your penalty rent will be.
The “Option to Renew” Provision
The “option to renew” provision in the lease provides the ability for tenants to extend their tenancy in the building. The “extension deadline” is the last day that you may exercise your option to extend the lease term. Negotiating “options” into your lease is beneficial because they can protect you from rental escalations and provide you with the flexibility to stay even if the landlord has other plans for the space at the end of your term.
The Power of Negotiation Time and Lease Language
It is always a challenge to control occupancy costs for a dental practice; and language in the lease can easily drive costs up. Dentists can save hundreds of thousands of dollars over the life of their tenancy by tracking critical dates, taking action at least 18-24 months before renewal time, and reviewing the details of their dental office lease at startup time.
The best way to ensure your lease is fair and affordable is to have the agreement reviewed professionally by commercial real estate and dental office lease negotiation experts.
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