How to Positively Ride the Wave of Awareness Through an Effective Practice Lease Negotiation
Welcome to the Jameson Files. I’m your host, Carrie Webber, and I’m so glad that you’re joining us today for another episode. If you’re a part of our Jameson Files community, thank you so much for staying connected with us. Our goal is to create a Jameson Files community that provides the information you need to help you get closer to your ideal practicing vision.
I’m really excited today to have a tremendous guest with us, Eric Pook, the president of the Cirrus Consulting Group, and what Cirrus brings to the table is extremely valuable for any of you out there that are leasing your facilities. This is going to be a conversation that is directly for you if you’re asking yourself questions like “do I stay in this current situation in this facility or do I move on?”
Eric and his team are in the business of helping doctors make the most of their real estate or lease situations. They take care of practices all across North America. And so it’s an honor to have you with us today, Eric. Thank you so much for joining me in this session.
Very happy to do this, and I’ve been looking forward to it for quite some time. Thank you for having me on.
So, Eric, we’ve had several conversations over the last few weeks, and a lot of the pieces of those conversations are so valuable to doctors, especially in the current situation, a very key element of their business operations and that’s their practice lease. You shared how doctors are in this “wave of awareness,” as you put it, this heightened sense of awareness of where am I now, what’s possible, and what am I missing? Do I stay where I am today? Or do I move on? And I’d love to dig into that with you today. In your conversations with doctors across North America through the past year, what has been a consistent topic of your conversations with them or even some of the things that have been surprising to those doctors that you and your team have identified when it comes to their leases that they are in commitment with?
How am I supposed to pay rent when closed during a pandemic?
Yeah, that’s great. Lots to unpack there. If we look all the way back to almost this time last year, which was when you and I and others were doing webinars to try to make sense as to what was happening with shelter in place, lockdowns, et cetera, what we saw was that from Anchorage to Honolulu to Key West and everything in between, as everyone began to lay off their staff, the number one hit to their overhead expenses became the tenancy expense and the rent and the lease. Among thousands of doctors who registered for one of our Shine webinars, we heard this almost collective sigh of “Where’s my lease? Do I have a lease? And where’s my landlord’s phone number?”
And suddenly there was a really heightened awareness of, “But I’m closed. There’s no way I should be responsible for paying these expenses when I’m closed.” What many doctors realized was that the lease survives it all. It’s pandemic proof. It is a certainty like death and taxes. So what was really helpful was doctors suddenly realized the importance of that office lease. And then, for the first time in perhaps years, or in some cases, decades, they dust off that old lease and tried to figure out what was in it. What was their liability? And more importantly, “If I’m required to be closed, how can I possibly be required to pay rent?”
Awareness is the first step in proactive lease negotiations.
So that was the first piece, that awareness of how important the lease was and how detrimental it could be if the pandemic or the lockdowns continued and the landlord wasn’t helpful. A lot of them reached out to their landlords for help for free rent or rent deferral. A lot of doctors said, “You know what? My landlord is my best friend. We’ve golfed together. He’s a great guy or she’s a great gal.” Yet suddenly that landlord wouldn’t even pick up the phone when the doctor needed help. Crickets. So that created a bit of a shift in the doctor’s perspective about their value. You know, they were the perfect tenant, paid the rent on time, signed onto whatever was newly proposed every five years, never caused a fuss when they needed to get a plumber to come in.
They incurred all those additional costs. And suddenly they felt almost cheated, or at least were very upset about how the situation went down this time last year. So what we’ve seen after all of that is a big shift of doctors saying, “Next time around, I’m definitely going to make sure my lease is properly structured. I’m going to get what I feel are fair financial terms and business terms, because, heaven forbid something happens like this again. I want to be protected. And they suddenly saw the lease for the massive hundred-page book of liability that it is.
Headaches you can avoid with proper lease negotiation tools.
And then on the second part of your question, I think what some doctors in the crisis mode of “Hey, I need to block off some operatories” or “I need to make some changes to my reception area” was to call a contractor. And they did that without knowing that within the alteration section of the lease was very clear and specific language that they can’t make any changes without the landlord’s prior written consent. So there is a bit of a building issue that if the landlords wanted to use that against them in the future to nullify their options to renew or the ability to sell.
And what some people realized the hard way was the landlords were smart. They got a hundred or two hundred requests this time last year saying, “Hey, I can’t make rent. I need help.” So what a lot of them did was to strategically ask all of their tenants to, say, send the last three years of financial statements or audited financial statements or tax returns or whatever. And, of course, a lot of dentists had a great 2019 and certainly were a little reluctant to do that. So a lot of the dentists, unfortunately, just ignored that request and didn’t share.
What those doctors didn’t realize until after we reviewed their leases is that in one section of their lease was specific wording that the landlord could, for any reason, once a year actually request those financials. And if it wasn’t sent through, that doctor could then be in default of the lease because of that specific clause that required the doctor to share it for any reason whatsoever. So yeah, from that perspective, we’re not out of the woods yet. I think a lot of doctors might find some unpleasant surprises when they go to renew their leases. It’s so important to have the right lease negotiation tools and knowledge before making that next step.
The Good News
Of course, since then it’s been on the positive. It’s been a great time to shift from surviving to thriving. And right now the value of the dental tenants is second to none, in my opinion, the highest build-out costs of any other tenants on the planet, right? Some of the lowest default rates. Especially through COVID. In addition to that, the rent rates are very, very low these days. Plus they’re bringing in high quality foot traffic. So it’s a bit of a, again, a huge opportunity for leverage, in my opinion, for the dental tenant, when the nail salons, hair salons and restaurants are still to this day reaching out to the landlords for help. The dentist is now proving that they can never work from home. They are bringing in high-quality foot traffic, even in some of the largest hotspots throughout the continent.
So there’s a lot more value for the dental tenants than I think we’ve ever seen in our company’s 27-year history. We’re seeing a significant amount of leverage for the dental office landlord. And we’re seeing that the landlords are typically choosing one of two paths: either making life very difficult for the dentist, because they feel they can; or on the flip side, they’re saying, look, I don’t want this dentist to have to relocate, so let me make sure that we’re fair.
Yeah. And you know, Eric, I love that we are talking today because I think you’re hitting on several key things. Number one, just understanding that a lot of doctors have more than likely stepped into agreements that they’ve either long forgotten what they agreed (short of what they’re paying out every month) or maybe they never really knew what they were signing on for from the very beginning. There may have been a sort of blind trust or perhaps a lot of blissful not knowing what was included in that hundred page document. I mean, who’s really reading the whole thing?
So on the one hand there’s the pain of finding out what you’re locked into. But also I love what you’re saying in terms of the opportunity for all of you doctors and practices that are watching or listening to this message. You really are a valuable tenant. You are desirable to the real estate community for all of the things that you represent. You’re that long-term space holder because of the consistency and strength of your business. You bring in the traffic, just like Eric said.
And, you know, when you presented to our team recently, Eric, you had some stories. Some encouraging, but also some frightening stories. And that’s not to make you afraid or make you overreact about this, but I want to drive home the message that this is a massive opportunity as you dental practice owners are reviewing the operations of your business. If you haven’t utilized a tool like this and taken a deep dive into what you’re engaged in, there may be a great deal of opportunity here.
So Eric, what are some opportunities that you see for doctors, if they’re trying to make some decisions for themselves, what are some things that they need to be considering at this moment or what are the conversations they may need to be engaging in with their landlords at this time?
Important Conversations and Considerations in Negotiating the Best Lease
Great question. So, Carrie, let’s break it up maybe into career states. First let’s talk about that doctor that’s either opening the first clinic or buying a second or third clinic. From a leverage perspective, I can’t stress enough that the doctor has, in my opinion, some of the best leverage they’ve ever had because of the impact of COVID-19. In many markets, vacancy rates have gone up while market rates stayed the same, or in some cases gone down. So the value of that dental tenant is high. So a couple of key things in terms of tips and tricks is that when they’re negotiating the very first lease, it boils down to the letter of intent. Is that very first communication through the landlord’s broker, or are they dealing directly with the landlord?
Letter of Intent
And more importantly, in our opinion, the letter of intent is where the vast majority of the negotiation occurs. We want to include seven or eight financial variables—base rent, annual increase, common area maintenance, fixturing, free rent, landlord work, tenant improvement amounts, et cetera. We want to include all of those core elements to ensure that every possible nickel and dime is negotiated to minimize that cost, which could be $1-3 million. I mean, even a $5,000 a month rent over the next 5, 10, 15, and on average, 26 years of the doctor’s practicing in the same location can be millions of dollars of financial commitment, even assuming a simple 3% annual increase.
So focusing on the letter of intent and including the proper language is important. Is there a demolition right? Is there a relocation right? Does the landlord have the right to tear up the lease with six or 12 months worth of notice to demolish the space? It really depends on what’s within the lease. Commercial is very different from residential. Commercial really does boil down to what’s written in black and white in the lease agreement.
For doctors who are acquiring, one of the biggest things we see missed in an acquisition front, from the largest group to the smallest single practitioner, is that they don’t see the acquisition of the practice as an opportune time to renegotiate the lease. So a lot of doctors are buying a clinic, and the MNA attorneys are going through the full process, getting the deal done, and they want to just assign the lease and be done. And the doctor comes in with a bag of money to buy the clinic, but misses that opportunity to take a look at the, maybe, two years left on the remaining lease and another two five-year options.
Renegotiate the lease upon acquisition of your practice.
If the previous dentist never had professional representation or the lease is in a pretty sad state of affairs you could really run into trouble by missing that opportunity to renegotiate. And that is either as the lease is assigning or, potentially, if the landlord is in a difficult situation. If I was a landlord, I would love to have a dentist come to me and say, “Look, I’m willing to commit to a new 10-year term, forget about just the remaining year or two. I’ll give you a new 10-year term, the two five-year options.” Well, again, all the landlord sees in the eyes of the tenants is a dollar sign. So if we can leverage term options, that gives a lot more ability to help deal with some of the issues and improve it.
Beware! Some leases are binding to your spouse or heirs.
There’s often personal guarantees. A lot of doctors are surprised to know that even after they sell their clinic, they remain personally and continually liable. If their spouse co-signs, then their husband or their wife would remain liable as well, even after they sold the clinic. And these are the types of things a lot of our clients are surprised about when we review the lease. Heaven forbid if the doctor was to pass away. Many are surprised to know that a lot of the leases are binding to the successors or heirs. So just like a will in an estate planning exercise, if they haven’t put in the proper protections to cover themselves or their estates, what happens? Doctor, if you were no longer there, what’s the plan as it pertains to that lease? We’ve seen some examples in the past few years where the spouse, who may have no involvement with the practice, is then responsible for that $3,000 to $7,000 a month for the remaining five or ten years on the lease.
That gives me heart palpitations for people! But you know, again, it’s good to know, before it’s too late, how important it is to take the opportunity to negotiate. And, I thought that was insightful that even single-location practice owners are acquiring a second, third, or fourth location. What an opportunity to really make a positive impact on whatever you’re committing to for the long haul through that transition or that practice acquisition. And also to protect yourself against the risks. I wonder if there’s going to be a healthy handful of our listeners that say, “I don’t even know where my lease is. I haven’t looked at it in seven years. I’m just in the flow with this place. This is where I show up. When we have a problem, they come and fix it.” But you don’t even know, not only what’s in it, but where it is. Would you find that is a common conversation you have?
More Financial Issues That Can Stem from Unplanned Lease Negotiations
Of course. And you know, the doctor is a fantastic clinician. They went through all the years of dental school and specialty school without, in some cases, a single class on the business side of dentistry. So we’ve done a lot. Tufts University uses us now in their fourth year dental program, because we’re really trying to yell from the rooftops to make sure that the dental community is aware of the importance of the dental office lease and to make sure that they see the massive opportunity to make sure that the lease is aligned with their value of being a top quality tenant. So even for the mid-career doctors it’s a perfect time. They might think, “Oh, well, I guess I missed my original chance.” No. Every time that lease comes up for renewal is a perfect time to treat it as if you’re a new tenant, rather than just exercising that next five-year term. If you exercise that term, that’s it. And if you want to sell in the next few years, you’re sort of like a pirate walking to the end of that gangplank. There’s no term left.
The banks typically will not issue a loan if there’s only a few years left. You know, they won’t issue a five or a 10 year term of loan, if there’s only two years left on the lease. So the term is a huge component for that mid-career doctor. It’s far easier to get it fixed early than it is two minutes before they plan to sell, and suddenly the landlord says, “Whoa, I’m not making any of these changes.” One of the number one reasons why a practice sale dies at the 11th hour is the lease.
And you know, here’s something else we run into. Let’s say the transitioning doctor’s spouse is saying, “You know what, honey, enough is enough. Time to walk away.” They’re very surprised to know that hidden deep into article 86, subsection two, through the restoration clause or surrender language, it is their responsibility to remove all lease hold improvements, even if potentially they were done by the former doctorate. They have to return that space back to pre-dental condition, if the landlord requests it. So even those that just want to throw the keys and say, I’m done, it might not be that easy. And there could be even more financial issues if they were to just walk away.
Wow. And, Eric, that made me think of the conversation we were having recently, and you were encouraging putting this in your calendar. So can you share some guidance on that? Because I feel like that fits in here, and your guidance was really valuable and very simple for getting on track.
Important Steps to Take
Get a signed digital copy of the lease and all renewals and amendments.
Yeah. So, number one, make sure you have a signed copy of your lease—and a digital signed copy. A lot of doctors will sign it and send it on, but they never get a countersigned copy. And if we don’t have what the landlord’s agreed to, then technically it’s not worth the paper it’s written on. So one of the easiest ways of doing this is just emailing your landlord and asking for a signed digital copy, and they should have it there not only from the last renewal, but every renewal, every amendment going back to the original lease, which could be 1982 potentially. So number one: Get a digital copy of the lease so you know exactly what your contractual obligations are.
And for those that might have acquired or are thinking of acquiring a practice, make sure to get that as part of your due diligence. I had a call with a doctor in Southern California who never even received it as part of the purchase. It wasn’t until after we did the review that I said, “No, this isn’t the lease. Where is the actual 30 to 50 page lease?” And unfortunately it was just the assignment that he was looking at. So by the time he requested it, he was just gutted to see all of the terms. The personal guarantee was in the ongoing liability post-sale, and all of these other restoration, relocation, demolition clauses. He was just blown away that none of his team said, “Get the lease, review the lease, and get a professional review.”
Put the key dates in your calendar.
And now to go to the two things, as you had mentioned, to put in your calendar. Number one is: When does your lease expire? Put it right in your calendar. And then more importantly, check if you have any remaining options to renew your lease. What is the option-to-renew deadline? It is typically three, six, or 12 months prior to the actual lease expiring. You might think, “I signed a lease eight years ago, and I’ve got at least another, hey, maybe 20 years left.” You don’t. All you have is the original term. And then you have two options. To exercise, to renew the lease, which basically means you agree to everything within the lease with the exception of rent. (And again, that isn’t a great position to be in.) But let’s say you want to exercise that option. You still have to give notice at that date of three, six, or twelve months in advance.
If you don’t, if you forget, if it’s a pandemic (believe me, you’re not alone), but what that means is those remaining two five-year options have become null and void, meaning that there’s no term left at the end of that expiry. That’s it. Now, the landlord may be willing to re-engage, obviously, but it’s never too late to engage professional help and to draft a new letter of intent or proposal, treating yourself as a new tenant, to say, “Hey, I want another 10 year term with two five-year options. Forget about the lease from eight years ago. It’s COVID time. And I definitely want to make sure that the lease is now aligned to where we’re at as a career.
And it happens, right? You’re a new associate, excited to get going. It happens. But lease negotiation needs to be in your calendar, part of your savvy financial management.
Case in Point
We did the lease negotiation for Dr. Sam Thatcher, who’s the dentist for the San Francisco Giants. He wrote us a great testimonial and a great video review. And he said, like, “I was so excited to get going, opening right next to the ballpark. A friend was a lawyer, had a look at it, but you know what, we just signed it.” And we went through it, and we dramatically renegotiated all the financials. And as he said, even just the changes on the business clause has helped to save them hundreds of thousands.
Wow. I mean, I just feel like the takeaway is that the best time to start getting on track of whatever it may be is now. And such powerful first steps that you shared that are very simple. Number one, get the digital copy and make sure you have the actual lease and the whole thing. And then set up those dates in your phone, in your calendar, so that you’re intentionally putting that in your path to have that signal come up for you to do whatever you can to improve the situation you’re in and protect yourself. So such great insights, Eric. So much about heightening our awareness of this very integral piece of our businesses.
If there’s anyone in the community that is interested in what Cirrus can do for them, what are some things that they could do with you that could be a helpful first step?
How and When to Engage with the Landlord
Yeah, absolutely. So I think, in practical terms, obviously, get a copy of the lease. A digital copy. Part two is to have it professionally reviewed, which we’ll touch on in a second. Make sure you’re aware of those critical dates. When does it expire? When is the option-to-renew deadline?
And we often get questions like, when and how do I engage the landlord? Well, typically,being proactive is the key. And even with COVID—it’s caused us to rethink the whole negotiation playbook. In some cases, landlords are under pressure from their banks or dealing with a lot of vacancies or lower rent or rental income, and maybe they’re willing to engage in negotiations even three years prior to expiry. Others might delay. They might wait as long as possible before the time that they actually engage. It depends on the situation, but starting the process early is always a good idea. The more time you have, the more leverage you have.
One of the strategies we do is to send a proactive proposal. So we hit them right in the wallet to get them to think about engaging in lease negotiations a little earlier than they might’ve been thinking. And it’s something that we can create a win-win on. So those are the core components.
In terms of that, for any of your listeners today or viewers that are watching live, they can go to our website Cirrus Consulting Group or email us at [email protected] and request a complimentary lease review for all viewers of the podcast today, and we’ll certainly waive the fees for that lease review.
A review will at least help you understand and know what’s what. And if nothing else, you’ll be able to take away from that hour-long conversation what the market rates are in your area, the vacancies, what the market looks like, especially for the past two years. And then number two, what are some of the major red flags you need to be aware of in order to be prepared for the next lease negotiation? And also, for those, I would suggest putting “urgent” in the subject line, because if you’re in a month-to-month situation, or if you’ve missed your option-to-renew deadline, that’s definitely something we want to clear our skies for to help out the dental community as quickly as possible. As you know, that puts you in a very risky situation because the landlord could wake up tomorrow and put a brown envelope on your front door, and then 30 or 60 days later, you’ve got a big problem.
What a generous offer. Thank you so much, Eric. So, everyone, I would highly encourage you, if you are leasing your space, take advantage of this complimentary lease review. What do you have to lose? And what do you have to gain, from reaching out to these experts to help you with wherever you are right now in your practicing career? I highly encourage all of you listening to reach out to the Cirrus team and to Eric and let them help you see what is possible in your current situation.
So with that, Eric, thank you so much for joining me today and for sharing so much of your wisdom and insight with the community. Such valuable information! And thank you for generously sharing with us. And I do hope that those of you listening will stay connected with Eric and his team and let them help you along your path. I know that’s what they’re passionate about, and I know that they can be a huge benefit to you in your ongoing career path. So Eric, thank you so much for being with me and opening our eyes to the importance of timely, proactive, educated lease negotiation.
Carrie, absolute pleasure. And thank you so much for your time.
Thank you all for joining us on this episode of the Jameson podcast. Visit us online at jmsn.com. You can subscribe to this podcast on iTunes, Google Play, and Spotify. Do you have questions or topics you’d like for us to answer or cover on the next podcast? Email us at [email protected]