By Peter C. Jameson, CCIM
As medical real estate consultants, we meet with physicians weekly to discuss their real estate needs. Naturally, we hear many of the same questions from doctors and practice managers on a regular basis. This Q & A article covers many of the main topics we review with our clients.
1. What are the differences in the main types of leases (Triple Net vs. Modified Gross vs. Full Service)? Triple Net is most common in retail settings and stand-alone buildings. This lease passes through all building operating expenses to the tenant. This typically includes property taxes, insurance costs and common area maintenance (CAM.) Full Service leases are most common in larger multi-tenant buildings or on-campus environments. A Full Service rate includes most operating expenses so the rental amount per square foot will be higher but it is intended to be all inclusive. Modified Gross is a hybrid of Triple Net and Full Service where certain expenses can be included in the rental rate and others may not be included. The tenant’s expenses in this lease form can vary and it’s important to understand what your obligations are under whichever type of lease you sign.
2. What is CAM? Common Area Maintenance is a portion of a building’s operating expenses. This can account for services such as common area janitorial / cleaning, parking lot & sidewalk repair and maintenance, pest control, trash pick-up / dumpster, indoor and outdoor lighting and security. These costs get totaled up and billed back to the tenants based on their pro rata occupancy of the building.
3. Why am I getting charged a large lump sum at the end of the year when I’ve been paying CAM and operating expenses the whole year? This invoice is an annual reconciliation statement. CAM and other operating expenses are charged based on an estimate at the beginning of the year and each tenant pays their pro rata share of the building’s expenses. Typically, the landlord’s estimate is not a perfect one and the tenant is billed to make up the difference. Sometimes landlords can overestimate annual operating expenses and tenants can receive a credit instead of a bill.
4. Should I build my own building? Most doctors tend to think owning their own building should be their ultimate real estate goal, however, this is not always the case. We believe that finding the best real estate, owned or leased, should be the goal for the practice. Leasing in a great building and location will likely be more advantageous for your practice than owning a property of lesser quality in an inferior location. It is important to weigh all your real estate options and analyze them apples to apples. Real estate should never be an anchor to your practice’s success.
5. When buying a building, can I get a loan for my equity? There are ways to do this, but we believe equity for ownership projects should always be cash. Do not over leverage yourself just because a bank or other institution is offering it.
6. How can I get upgrades to my space? The best times to improve your suite is when signing a lease renewal document. Tenant Improvement money is offered by most landlords when renewing or signing a new lease. Often, a certain amount of TI is included in your rental rate and if that is not enough, most landlords will offer more and include the amortized cost as additional rent.
7. Why does my rental rate keep going up? Landlords can give you many reasons for annual escalations such as: Inflation / cost of living increases, real estate tax increases, bank / investor requirements or simply operating expenses constantly rising. The good news is you can negotiate with your landlord and if your rate is out of market at the end of your term, then it is possible to have it lowered as opposed to a continuing escalation.
8. Can I get out of my lease early? There is no easy way to do this. The most beneficial method for all parties is to find someone to sublease your space (if your lease allows). Other options typically involve the tenant going into default which likely leads to a legal battle. Do not be afraid to ask your landlord for help if you are in trouble. Most of them are willing to work with you and try to help. Remember, the last thing a landlord wants is an empty building.
9. Why am I being asked to sign a personal guaranty? It is not uncommon for physicians to be asked to sign a personal guaranty on their leases, especially if you are a solo practitioner or part of a newer practice. This is an item that can sometimes surprise you at the end of deal negotiations so it’s important to be aware of this and try to avoid it when possible. Landlords know that many medical practices have limited assets and that the credit of their tenant is only as good as the physician owners. The larger the practice is and the more revenue it produces, the more comfortable a landlord will get with accepting just the practice guaranty.
10. Should I sign a long-term lease? There are circumstances when signing a 10-year lease makes sense, but there is not always a need to commit your practice to such a lengthy term. There needs to be significant benefits from the Landlord in order to justify a 10-year deal. These benefits commonly include lowering the rental rate or providing you with ample tenant improvement allowance so you don’t have to come out of pocket on your build out.
Peter C. Jameson is a real estate consultant with Veritas Medical Real Estate Advisors.