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Dale Willerton.
Leasing Do’s and Don’ts for Dentists
By Dale Willerton – a Certified Lease Consultant
In leasing, tenants don’t get what they deserve – they get what they negotiate! These are the first words dentists see on the overhead projector when they attend one on my dental convention seminars. Since 1993, I’ve been helping dentists and tenants learn the Do’s and Don’ts of Negotiating Commercial Leases & Renewals. In no particular order these are some important Do’s and Don’ts.
Do create competition for your tenancy. You should be negotiating on more than one location simultaneously. Especially with lease renewals, even if you don’t want to move. The key here is creating options so you can play one landlord against another. Let the landlord know you are receiving proposals on other sites. Remember that the tenant is the customer – the landlord is the seller. Make them earn your tenancy.
Do start the planning and site selection process well in advance.
For new locations, I recommend you start the site selection process at least six to twelve months in advance. Two months for site selection and negotiations, one month to finalize the Formal Lease Agreement, one month for design drawings, three to four months for the office build out, and a one-month cushion out of respect for Murphy’s Law. For lease renewals, you should start at least nine months in advance. If you can’t get a good deal in the first few months you can still exercise you option to renew or start the relocation process.
Do negotiate to win.
Many dentists are so focused on not getting taken during the leasing process that they forget to negotiate to win. So what are you trying to win? You want to get as many landlord inducements as possible…free rent, tenant allowance, no deposit, low rental rate, a great location and more. The landlord and its agents are playing to win and so should you. It’s okay to negotiate aggressively.
Do ask for more than you expect to get.
By asking, I really mean negotiate for more than you expect to get. If you want five months of free rent ask for eight months. If you want a $60,000 tenant allowance ask for $80,000. The reason so many tenants are disappointed with the outcome of their negotiations is that they neglect to build in room to negotiate. They ask for what they want and the landlord counteroffers with less. Just like a boxing match, negotiations should go a few rounds – that is the nature of the real estate industry.
Do your homework, talk to other tenants. You can gain a wealth of information by talking with tenants who have recently moved into a building or even those who have moved out. I recommend the direct approach. Tell the tenant who you are and why you’ve come to see them. Ask for their comments about the landlord, the property management, get into rent discussions, and so on. For lease renewals talk with other tenants in your building who have recently renewed to find out how much they are now paying and how smoothly the negotiations proceeded.
Do ask questions about the property. Tenants shouldn’t rely on what the property manager, leasing representative or realtor voluntarily tell them about a specific property or leasing opportunity. You must ask questions about both the property and the landlord. Think of questions such as these: How long has this landlord owned this property? Is it for sale? How many other properties does the landlord own? Is there a local onsite management? What is the vacancy rate? Are any of the current tenants not renewing their lease and planning to relocate? You may be surprised with the conclusions you can draw from the answers to these questions.
Do charge GST on tenant allowance.
If you successfully negotiate for a tenant allowance make sure you also collect the Goods and Services Tax (GST). If you don’t collect 7% more from the landlord, you will be obliged to pay it out of the allowance. The best place to stipulate that GST is applicable to the allowance is right in the Offer to Lease so there is no arguing after the fact. You cannot collect GST on free rent or other incentives – just money being paid from the landlord to the tenant.
Do keep your success quiet.
The number one reason your landlord will use for raising your rent for the lease renewal period is that you have been successful. If you have been making a profit in a particular location you will likely not want to move plus you will be able to afford the rent increase. Some realtors and landlords will take advantage of dentists since they know how expensive it is to move and setup a new office.
Do negotiate for lease renewal incentives.
For some reason, tenants forget, neglect, or are simply fearful of negotiating lease renewal incentives. If your lese is expiring, ask yourself which inducements would the landlord give to a new dentist. If new tenants to the building were getting free rent and tenant allowances then why wouldn’t an existing tenant with proven track record get the same consideration? The reason so many tenants hire The Lease Coach ® to negotiate for them is simple – 75% of the lease renewals we handle for tenants result in a substantial rent reduction, plus free rent and a tenant allowance for renovations.
Do walk away from a bad deal.
I am an optimist at heart, but in business you must look at pessimistic projections and worst-case scenarios, not just the optimistic picture. Years of frustration in a slow practice can be avoided if only more dentists would have walked away from poor locations and bad lease deals. Be careful, take your time, and get some help fro a Certified Lease Consultant before signing a Lease Agreement…it could save you a lot of money and heartache.
Don’t let one realtor show you space all over town.
When you’re doing site selection you should contact each property’s leasing representative individually. Telephone the For Lease number on the building and speak directly with the listing agent. This will help avoid commission splitting and get you the best service. If two real estate agents are involved they are legally and ethically both serving the landlord who is ultimately paying their commission.
Don’t telegraph your intentions.
What tenants say to the landlord’s leasing representative on the phone and while viewing space is often the tenant’s undoing. What you say (or even don’t say) plus your body language will come across loud and clear. Try to avoid too much enthusiasm or excitement about a location. As they say in poker – play your cards close to your vest.
Don’t make the first Offer.
The landlord’s representative should make the renewal proposal or the first Offer to Lease. This provides you with a platform or starting point from which to negotiate a better deal. Sometimes the leasing representative will offer you a better deal than you expected, but you will still want to negotiate for more.
Don’t accept the first Offer.
Once the landlord’s leasing representative has made the first Offer or proposal, the real negotiations begin. Don’t be too eager to simply accept their first Offer even if it seems reasonable. With patience and good communication you can improve almost any first Offer, which may be nothing more than a smoke screen anyway. One landlord’s first Offer to my client, a dentist, was at $28 per square foot. I was able to negotiate a long-term deal at under $10 per square foot plus a tenant allowance. This saved my client over $2,500 per month in rent for their entire eight-year renewal Term.
Don’t sign a ten-year lease Term.
If you are like most dentists entering a new location you will want to sigh a four-year term – plus one more year – plus 5 more years. This has tax benefits that your accountant can tell you more about. In addition, I recommend at least three five year renewal options.
Don’t give unlimited personal guarantees. Sometimes a personal guarantee is necessary, but I recommend what is called a Limited Declining Personal Guarantee. Say you are getting a $50,000 tenant allowance. It would not be unreasonable to guarantee a maximum of $50,000 declining by $10,000 per year thereafter. Many variations are possible – so get creative. There is a big difference between personally guaranteeing the entire Lease Agreement and giving a limited guarantee.
Don’t have false optimism.
When dentist tell me their practice isn’t doing well, but they want to renew their lease anyway, this is false optimism. Unless you change location or something else about the way your practice you should not expect your next five years to be any better than the last five years. It is difficult and expensive to consider moving after you have been in one location for a long time, but frequently it’s necessary. Dentists I’ve consulted to about moving reported that the relocation was scary, but well worth it once they got settled in the new location.
These are only a few of the Do’s and Don’ts that will help you when it comes to leasing commercial space. Ultimately your livelihood will depend on the location you select and the deal you make. Good luck and remember – In leasing, tenants don’t get what they deserve – they get what they negotiate!
Dale Willerton is The Lease Coach – a Certified Lease Consultant working exclusively for tenants. He is author of the book “ Negotiate Your Commercial Lease” and frequently speaks at dental conventions. The Lease Coach ® is proud to serve dentists right across the country. To speak with The Lease Coach ® in your city or to request any of our self help leasing books, videos or CD's visit www.TheLeaseCoach.com or call toll free 1 (800) 738-9202. To reach Dale Willerton at his Edmonton office call (780) 448-2645 or emailDaleWillerton@TheLeaseCoach.com for consulting inquiries.
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