One of the key steps in starting or opening a dental practice is selecting an office location and negotiating the terms in the dental office lease presented by the landlord.
Lease terms can have a huge impact on the finances of your dental practice both in the short-term and long-term. It is important to be aware of common pitfalls and to take steps to protect your business. Below are a few dental office lease negotiation tips to keep in mind for startups.
Research Rental Rates
It is not uncommon for landlords to quote higher rental rates for dental practices. Research average rental rates in the area for similar type properties (i.e. retail) and for the particular building. Make sure that you are paying fair rental rates. Further, you should be clear on whether or not your rates are fully inclusive; or if you will be paying your proportionate share of operating expenses.
Protect Against Increases
There are two common provisions related to rent increases: overholding and annual escalations. The overholding clause contains the rental rate charged to you when your office lease expires but you still remain in the space. In some cases, the amount listed can be double the normal rent.
Annual escalation provisions allow for percentage increases in rent each year. Negotiate these amounts in your dental office lease and include a cap to avoid dramatic increases in your rent.
Plan for Future Changes to Your Business
Your dental business will likely change over the years as you grow and/or adapt. You may desire to expand your practice, bring in associates, or collaborate with other dental professionals in a cost sharing environment. It is important that your lease agreement accommodate such changes without stiff financial penalties from your landlord. Check the definition of your “use” clause and ensure it is structured broadly to provide flexibility for the practice.
Closely Review Future Changes to Your Business
Fixed Fees – Dental office leases often include a wide range of fixed charges such as management fees. Make sure that you know exactly what each fee pertains to and that you are not double paying for items that may be entered under different descriptions. These fees are typically found in the “Additional Rent” section of the lease agreement.
Variable Fees – Variable fees are inherently uncertain and risky, so you should take some extra precaution if your lease includes any (such as common area maintenance costs). Specify that you have a right to audit any expenses for which you are charged. Ask your landlord for a list of all possible expenses and clearly outline which ones may apply to you (versus the landlord). Additionally, your lease should clearly state how expenses will be proportioned to the tenants (such as by the number of total units in the building, even if certain units are vacant) to avoid being charged more than your fair share.
Unreasonable Fees – Keep an eye out for certain fees that really should not be passed on to you. Examples are real estate commissions, renovations that improve the property value (rather than being specific to your needs), repairs and fees that may apply to other rental spaces in the building, structural building repairs, etc.
Consider the Impact of Competitors
You have probably looked into whether any competitors occupy a space in the same building, but what about future competitors? Request a provision that limits the landlord from renting to other dental offices that may be in direct competition with you. Expect that the landlord may dispute “exclusivity”, and that you both may need to compromise to some degree. Exclusivity is critical for startup dental practices.
More on Dental Office Lease Negotiations
When it comes to your dental office lease, almost anything is negotiable with time on your side; so don’t be afraid to ask your landlord. It is critical that you review and understand every single clause before signing your lease. The above are just a few important dental office lease negotiation tips.
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