As we explain in our new book, Negotiating Commercial Leases & Renewals FOR DUMMIES, your rent is typically one of your major business expenses – often second only to salaries. Consider that your rental rate can also be a major factor if and when you sell your practice. If your rental rate is considered too high, potential buyers of your practice can hesitate to commit. Many tenants have come to The Lease Coach over the years complaining that they’re unable to sell their business because prospective buyers think the rent is simply too high. The buyer is essentially scared off by the overhead.
Never underestimate the importance of getting a commercial property at the right rental rate. Rent can make or break your practice. If you’re struggling to pay your rent, there are two possibilities: either your rent is too high or your patient load is too low.
You can’t negotiate your rent until you have some idea of what you can afford to pay. This would seem to be a basic business tenet, but it’s one that many physicians neglect to figure out. Therefore, it’s important to come up with a figure that won’t eat up too much of your business profits.
A general rent range figure, encompassing all industries, is that tenants should budget to pay between 5 – 12 percent of their gross sales in rent (provided their sales volume is high enough). Naturally, the exact number varies from industry to industry, depending on the type of product or services you’re selling from the premises. The more patients that you see, the more important every percent becomes to your bottom line.
The landlord doesn’t generally set the rental rate based on what they think tenants can afford to pay. It’s your job to figure that out. If you’re a start-up physician tenant, you should have a business plan or sales volume figure in mind that you expect to achieve in any particular location. The amount of sales can vary depending on the location. Being realistic about your rental budget begins with being realistic about your area and how much space you lease.
Current physician tenants need to remain realistic about their rent as well. Based on your patient load, you can, mathematically, afford to pay only so much in commercial rent. If the gross rent you’re looking at is too high, there’s no realistic reason for you to expect that you can magically come up with that extra money.
We often see tenants who get into trouble by agreeing to pay a rental rate within a property or plaza where their location is inferior to other units. End cap tenants with a high visibility to the street and parking lot often pay the highest rental rates. If your premises are at the elbow of a plaza with side exposure (instead of front exposure), you need to examine that closely and determine how it might affect your number of patients. A bigger space doesn’t always equate into higher patient volume on an equal scale basis; remember the old adage: location, location, location.
Landlords anticipate that the cost of living or Consumer Price Index (CPI) may increase over time, and it usually does. By its simplest definition, this is called inflation. Therefore, the landlord wants to build steps, or annual increases, into a tenant’s 5- or 10-year lease term. This may be stated as a rent per square foot (such as $25.00 per square foot the first year with a $1.00 per square foot increase each year thereafter). Many lease agreements state that the annual rent increase may be calculated as a percentile factor.
On a final note, commercial space isn’t the only thing that your landlord may charge you to rent. You may also be charged for signage, parking, a marketing fund, or extra storage. Not all lease agreements disclose that there’s an additional charge for these items, so don’t assume that you can get these items, so don’t assume that you can get these things for free, or even at all.
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.