Article Archive

Read Your Lease...Or Else

Real Estate

Issue: May 2008

By: Ron Centerwall

Over a ten-year period, a doctor will spend between $330,000 and $650,000 for a professional medical office space, depending on the size of the space and the location. Generally, this represents 6-10% of the annual gross revenues of the practice. Without question, the real estate investment for a single practitioner is significant, so it just makes good business sense to afford the time to thoroughly examine the agreement you are about to enter.

In March, I wrote about the vocabulary in a lease. The importance of understanding the terminology is critical to projecting realistic or actual monthly overhead, not just the base rent, but also your responsibility for all the other expenses involved in maintaining a professional space. There are critical terms in the lease that affect how you occupy the space, what common area maintenance you are responsible for, and how normal repairs are expensed.

For many doctors and their office manager/bookkeeper/receptionist the last lease they read completely was probably the lease for their first apartment or condo. Commercial leases are very different than residential leases. Typically, in a residential lease there is a monthly rent to pay. If something breaks down, you call the building supervisor or maintenance department to fix it for you. Repair costs are considered part of the rent.

Conversely, in most medical office leases the general rule of thumb is, if it is within the walls of your suite, you are responsible for the cost of the maintenance and repair…for example, light bulbs, ceiling tiles, paint, carpet, glass, toilets, etc. The landlord will fix it for you, but you will pay for the repairs. In fact, the landlord will probably want to use his own contractors so he can be satisfied with the standard of the repair.

Air conditioning and janitorial service are two of the most controversial issues in leasing office space. Everyone’s preference and standards seem to differ, sometimes drastically. Most landlords strive to deliver air conditioning temperatures between 68 and 72 degrees Fahrenheit. Studies have shown temperature affects how people work. If your practice requires temperatures outside the standard, you may have to pay for that variance. Air conditioning and electricity are provided during building hours. If your practice has extended hours, you may have to pay a surcharge for the additional usage.

Janitorial services are provided in a variety of ways depending on the lease type. Under a full service contract, the service is typically five days per week. Under a triple net lease, it can vary from one to five days per week. Under a triple net agreement, you may have a choice as to the number of days that you have janitorial service. Depending on building security, you may not have a choice of whom you use to do the cleaning. It is important to agree to a “standard” of work, which is generally negotiated between the landlord and the janitorial company. If you have additional needs for your practice (like bio-hazardous disposal) there could be an additional charge.

Here are some additional things to consider:

Insurance. How much do you need? What does it cover?

Parking. How many spaces do you get? Is it free? Who tows unauthorized vehicles? Are spaces marked for your practice?

Security. Is an alarm included? Who is responsible for false alarm charges?

Emergency Service Calls. Who is responsible for immediate service calls?

Quarterly or Extra Maintenance: Are there limitations to waste disposal? Who pays for janitorial services for patient related accidents?

Reading through a 20-40 page lease can be burdensome. Considering the current state of medical compensation, however, having the right lease agreement for your specific practice will heavily impact your bottom line.

I suggest that you carefully consider the type of building for your practice. Currently, there is a trend of trying to make every office building a “medical/office” building. This may present some restrictions that don’t work for your practice. Next, get a draft copy of the building lease early on in the negotiations. Read through it. Take a marking pen and highlight every area that you don’t understand, or you think may cost you money. Then, consult with a real estate attorney and a real estate broker who specializes in medical office leasing. Go through the entire lease and make sure you understand the impact of each term. Determine how your practice will function under the lease agreement. When satisfied, sign the lease. With this approach, you have the best chance of being happy with your space and lease for many years.

Ron Centerwall has been a medical office leasing specialist in Contra Costa, Alameda and Solano counties for over 25 years. He has been involved in over three million square feet of medical office transaction and can be reached at (925) 256-3333.

Back to Article Archive