By Jeff Grandfield and Dale Willerton – The Lease Coach
With the average physician tenant negotiating only a couple of leases in his/her lifetime (and sometimes with the same landlord), it’s easy to understand how various leasing myths can persist. Occasionally, these myths are created and propagated by the landlord, but also by real estate professionals looking to serve their own interests.
We have fully detailed these myths in our book, Negotiating Commercial Leases & Renewals FOR DUMMIES; however, here a number of the most common leasing myths:
You must exercise your renewal option to extend your lease. Physician tenants can mistakenly believe that the only way to renew their current lease is through the renewal-option clause. Ninety-eight percent of the successful lease-renewal deals completed by The Lease Coach for physician tenants don’t involve exercising the renewal-option clause – if they did, everything except the rental rate would have been off the table for negotiation. Your renewal option, if you have one, must be viewed as a safety net or backup plan. All of your negotiations on a renewal term should be done well in advance of your current lease expiring. If you play your lease-renewal cards in the right order, you may be able to negotiate all kinds of inducements and changes that you were initially unaware of when you signed your first lease agreement.
Landlords won’t provide inducements on renewals. Typically, inducements (or leasing incentives) include free rent, tenant allowance, and landlord’s work to the premises. The Lease Coach negotiates these common inducements for tenants on their initial lease agreements and these physicians are often shocked to learn that these inducements are also potentially available on lease-renewal terms. Although it’s true that most landlords tend to take their existing tenants for granted (even long-term, stable physician tenants), it can be argued that any inducements the landlord is prepared to offer a new tenant can also be available to existing tenants on renewals as the existing tenant is the proven customer of the landlord. Sure, a landlord can take a risk on a new tenant, but why not provide incentives to keep an existing tenant (who already has a proven, rent-paying track record)?
Rental rates can only go up. We hear this all the time from tenants: “The landlord wants a rent increase on my lease-renewal term.” Of course the landlord wants an increase, but that doesn’t necessarily mean that they will get it. Rental rates vary across the country and from property to property. One important factor to consider is the Consumer Price Index (CPI), or inflation. The inflation rate for various cities differs, and sometimes the economy is in a state of deflation or recession. It’s unfortunate that so many physician tenants who negotiate their own lease renewal and avoid a rent increase think that they’ve won the battle, when a rent decrease was very achievable if they knew how to negotiate.
Next year will be better than last year. We don’t know why, but physicians frequently seem to think that next year is always going to be better than last year. It’s a myth that just because you get a rent reduction on your lease-renewal that business will improve. In many cases, your problem isn’t that your rent is too high, but that your patient count is too low for your location. If you don’t change your location, your service(s), your marketing, your staff, or whatever your real problem is, there’s no reason to think that next year will be any better than last year. This type of false optimism often wastes many years in the life of a physician.
While we are the subject of commercial lease renewals, one of the most valuable exercises a physician tenant can go through prior to negotiating their lease renewal is site selection. Yes, it can be time-consuming, frightening, and costly for a physician tenant to move; however, typically, many years have gone by since you last looked at other plazas and/or commercial properties available for lease and it’s time to do that again. The reason that so many physician tenants resist doing this homework is that they say they don’t have the time, or they don’t plan to move, so why waste time looking at other locations. The fact is that, by “shopping yourself around” to other landlords and collecting written Offers to Lease, you are creating competition for your tenancy and making yourself more valuable to your current landlord.
For a copy of our free CD, Leasing Do’s & Don’ts for Commercial Tenants, please e-mail your request to [email protected].
Dale Willerton and Jeff Grandfield – The Lease Coach are Commercial Lease Consultants who work exclusively for tenants. Dale and Jeff are professional speakers and co-authors of Negotiating Commercial Leases & Renewals FOR DUMMIES (Wiley, 2013). Got a leasing question? Need help with your new lease or renewal? Call 1-800-738-9202, e-mail [email protected] or visit www.TheLeaseCoach.com.