The lease agreement is one of the most significant contracts a dental practice owner will ever sign with another party. Because rent is one of the largest business expenses a dental practice incurs each year, it is essential to make an educated decision regarding your lease so that you can get the best deal possible. Despite the significant impact a lease can have on one’s practice, many dentists choose not to carefully review their agreement before signing it. Often, it is only once they encounter an issue later on down the road when it is too late to change the terms that they give it a first look. Don’t make the same mistake. Always carefully review your lease and, while you’re at it, keep these tips on what to know before signing a dental office lease in mind.
You can and should negotiate
Perhaps the most common mistake dental practice owners make when signing a lease is not negotiating the terms. Many dental practice owners wrongfully assume that the initial form lease presented by the landlord is nonnegotiable. However, most leases are able to be modified and adjusted. As such, you should avoid accepting the first rental terms that the landlord offers.
Instead, try to negotiate the price or other concessions for the property. In some cases, real estate brokers will try to assure dentists that the form is standard or boilerplate when in reality there is no such thing as a standard lease. Don’t fall for such tactics and always try to negotiate a better deal.
If the landlord is firm in their decision not to alter the economic terms of the lease, they may be willing to alter other concessions such as facility costs. As such, you should talk with them and try to work out an agreement that is advantageous to both parties. To give yourself more negotiating power, don’t be afraid to walk away if the landlord isn’t willing to give you a better deal.
If you are acquiring a dental practice, it’s important to realize that you aren’t bound to the terms and conditions of the existing lease. Rather than simply accepting the current lease as it is, you can still negotiate terms that are more in line with the specific needs of your practice.
Expenses differ depending on the type of lease
Before signing on the dotted line, it’s important to know exactly what type of lease you’re being offered. Familiarizing yourself with the different lease types is especially important if you’re comparing multiple options. Fully understanding how expenses differ under each lease will help you effectively determine which one is the most advantageous for your practice. The two main types of leases you will likely encounter are triple net leases and gross leases.
- Triple net lease: Often abbreviated as a NNN lease, triple net leases are an agreement on a property where the tenant pays for real estate taxes, maintenance, and building insurance. In addition to the tenant’s space, such taxes are also paid on the tenant’s pro rate portion of the building’s common areas such as the lobby or parking lots. Under this lease, the dentist will pay a monthly base rent amount for the space the practice operates. Negotiating is especially important and challenging for triple net leases. During the negotiation process, it’s a good idea to hire an experienced professional who can help negotiate exclusions for shared expenses, caps on annual cost increases, which costs to place back on the landlord, and other common negotiation areas.
- Gross lease: Also known as a full-service lease, gross leases have a flat rental amount which is paid by the tenant and the landlord covers nearly every expense associated with the practice space. Such expenses may include taxes, maintenance, insurance, base rent, and janitorial services. As such, gross leases typically have a higher base rent. Because the tenant pays a flat rental amount, gross leases are beneficial for dentists who want a consistent rent overhead figure for easy budgeting. When considering a gross lease, it’s important to have an attorney ensure that the landlord isn’t attempting to pass on any additional costs to you.
The length of the lease can significantly impact your practice’s success
When signing a lease, there are many factors to carefully deliberate. Aside from price, one of the most important considerations is the length of the lease term. The term length of the lease can have a significant impact on the overall success of your practice. Signing a lease with a term length that is too short could hurt the goodwill of your practice if you have to move locations too soon. In addition, many lenders in the dental industry will require the lease to have a minimum duration. Typically, the minimum term length lenders will require is some formulation of ten years to approve a practice acquisition or start-up loan.
That being said, the length of the term shouldn’t be too long. Should the market dip, longer terms run the risk that you may have to pay above-market rent prices for a prolonged period of time. As such, many dentists choose to structure their loans to have a five-year initial term with one or more options to renew the term for around five years each. Such an option gives the dentist more flexibility to renegotiate the terms of the lease and either relocate or stay depending on which option works best for their practice.
Whether you’re starting a practice from scratch, acquiring an existing practice, or renegotiating a lease, it’s important to keep the above tips on what to know before signing a dental office lease in mind. Because there are so many factors to consider when running a dental practice, it can be beneficial to enlist the help of professional dental practice brokers who have expertise in facilitating dental practice success—like Henry Schein Professional Practice Transitions.
As the leader in dental practice transition planning, sales, valuations, buyer representation, and dental practice financing, we can help you achieve professional success at any stage in your career. For more information regarding our services, contact us today.