Every profession has its own lingo.
The healthcare real estate world is no different. If you want to succeed in that world, you have to learn to speak its language.
Learn the language and things change.
The mind-numbing fog lifts and a little light goes on in your brain. So, without further ado, here’s some of the lingo you need to know when negotiating a lease for your new office space:
Different Types of Leases
You need to know the types of leases before signing one.
Different leases have different ways of divvying up landlord/tenant expenses. An absolute net lease means the tenant pays all property expenses. An absolute gross lease means the landlord pays all expenses.
In real life, things aren’t that simple. Most leases fall somewhere in the middle of these two extremes. Here are some of the more popular types of commercial leases:
- SINGLE NET LEASE. The tenant pays rent to the landlord and the property taxes. Single net leases aren’t as used as much as the other types.
- DOUBLE NET LEASE. The tenant pays rent, property taxes, and insurance premiums.
- TRIPLE NET LEASE. The tenant pays rent, real estate taxes, insurance, and maintenance. For a tenant, a triple net lease has several disadvantages. For example, the tenant risks property tax and insurance increases. He’s also responsible for maintenance. This may make him liable for any personal injuries that happen on the property.
- MODIFIED GROSS LEASE. This is a lease where the landlord and tenant share expenses. The tenant handles any cost directly related to his unit. These costs include unit maintenance and repairs, electricity, and cleaning. The landlord pays for all other expenses.
When you understand these types, you’ll better know where your money’s going.
Go over your lease with the proverbial fine-tooth comb. Leases share common language, but each lease is unique and is its own thing.
Let’s talk about a building’s load factor.
To figure out the load factor, you need to know how much common space a building has. These are areas like lobbies, elevators, and atriums.
This is space that all tenants share and must pay to use.
To get the load factor, find out how much total space a building has. Next, subtract the shared square footage to find the usable square footage.
Then divide the total floor space by the total usable floor space. For example, if your building has 75,000 square feet and the usable square footage is 60,000, the load factor is 1.25.
Next, multiply the load factor by your usable square feet. This number is your total rentable square feet. Using this example, if you have 3,000 feet of usable space in your office suite, your rentable square feet will be 3,750.
Your landlord will use this number to calculate your rent in lease negotiations.
Ask your broker what the building load factor is for buildings you’re thinking of renting. This gives you a basis for comparison. When you know these numbers, you’ll know exactly what you’re paying for.
A high-load factor isn’t a bad thing if it comes with great amenities.
The load factor is often not as accurate as it could be. Sometimes landlords choose a number that is an estimate for that particular market. It's good if your landlord uses BOMA (The Building Owners Management Association) standards.
You can trust their numbers.
You want the load factor to be as accurate as possible so you can negotiate the best lease. Buildings with generous amenities will have higher factors than buildings that have fewer.
Tenant Improvement Allowances
A tenant improvement allowance (TI) is money your landlord gives you for renovations. Ask your landlord about one before you sign a lease.
You use this money for alterations to your space you might need before you move in. You'll get either a total amount or a per square feet amount.
Although it doesn’t cover all the costs, it covers much of the expense. Ask if the quoted rental rate includes a TI.
If it does, find out how much it is. If it isn’t included, negotiate for one. Otherwise, any improvements you make will come out of your own pocket.
Your goal during negotiations is to get enough allowance to cover improvements. It's also good to keep control over the process.
You should have a good idea of the scope of the renovations before negotiating. Otherwise, you might underestimate how much tenant allowance you’re going to need.
When you renew your lease, try to get your landlord to give you a tenant improvement allowance. You can use it to spiff up the place a little. You've lived here a while and deserve to have it freshened up.
Your landlord might insist on a personal guarantee.
This might happen if you’re asking your landlord for major renovations. This will be a huge cost for him, and he needs to protect his investment.
If you default, you might have to pay the cost of improvements made during the leasing period. Plus, the amount of all rent during this period.
But even if a landlord insists on a guarantee doesn’t mean you have to accept his terms too. You could try to limit the amount of the guarantee to be only the cost of the improvements.
Many medical leases contain a rent escalation clause. A rent
escalator is the amount
your rent will increase to keep pace with inflation.
This number is often 2-4%. Negotiate to keep the escalation factor as low as possible. Rent escalation compounds so the amount you end up paying can balloon fast.
Some rent escalation clauses are more favorable to the tenant than others.
Rent escalations come in several different forms.
Some have a single payment that includes use of the building space and the costs of managing that space. Others have separate payments for rent and operating expenses.
There are many types of rent escalation clauses used in real estate agreements. Here are some of the most common:
- TAX PASS-THROUGH ESCALATION. This means your rent will only increase if the landlord’s property taxes increase.
- DIRECT OPERATING COST PASS-THROUGH ESCALATION. Here, your rent increases when operating costs like utilities and maintenance increase. The clause should spell out exactly what is and isn’t considered an operating expense.
- STEPPED INCREASED ESCALATION. With a stepped increase, the amount of your lease will increase by an agreed-upon amount.. This can be something like a flat increase of 75 cents per square foot per year. Or a percentage, like a 2 percent annual increase. Many tenants favor this type because it gives them more clarity in the amount they’ll be paying.
- INDEXED ESCALATION. These clauses are tied to an index that tracks the rate of inflation, like the Consumer Price Index (CPI). If the CPI increases, your rent will increase.. This type of clause can be scary for a tenant because of its unpredictability.
Rent escalation clauses tied to an inflation index favor the landlord. The risk you take with this type of lease is if inflation surges, your rent will too.
These are a few of the terms you’ll need to know.
I don’t know medical lingo. When I try to look over my dentist’s shoulder at my medical chart, I’m awash in a sea of abbreviations. And arcane medical jargon.
I don’t have an idea what it all means.
That’s why I rely on an expert when I go to a dentist. That would be you (or someone like you).
In the world of healthcare real estate, that would be me.
I’ve spent years cultivating an insiders’ knowledge of this world. And I’ll put this knowledge to work for you.
I can explain any of these terms to you with piercing clarity. I can also talk to you about anything else you need to know about leasing or buying medical office space.
I know this stuff inside and out because I’ve specialized in this type of commercial real estate for over 20 years.
Call me today and we can talk about your needs.