Real estate is the second highest expense behind payroll for most healthcare practices. The benefits of capitalizing during lease negotiations can include a healthy raise through increased profitability, reduced debt, a nicer office and more. On the contrary, if negotiations are not handled properly, the results can be decreased profitability, resulting in the need to produce tens to hundreds of thousands of additional dollars just to pay the same bills that should have cost less.
While there are many strategies you should always do prior to and during any lease or purchase negotiation, there are an equal number of mistakes to avoid. Having represented thousands of healthcare professionals over the last decade, we have gathered some of the most common mistakes healthcare professionals make during lease and purchase negotiations.
Here are three of the most common mistakes:
#1: Believing the landlord or seller will simply offer their best terms.
Landlords and sellers are in business to make money. They are no more likely to voluntarily reduce lease rates or give up any extra money through concessions as you would be to voluntarily reduce your reimbursement from an insurance company or cut your patient fees if you didn’t have to. While it sounds pleasant to hear a landlord talk about giving a ‘fair deal’, your odds of getting this are bleak without understanding the market, entering the negotiation process with multiple other options and having the needed guidance to capitalize.
Trusting a landlord or seller without the help of professional representation will most likely result in the forfeiture of tens to hundreds of thousands of dollars that could have stayed in your checking account. Case in point: if you were about to sell your home and a fair price was $400,000, but your agent told you a buyer would pay $500,000, what would you list or sell it for? You would sell it for the most you could. Your landlord will treat you the same way. They will charge you the highest they can while giving you the least they can get away with.
#2: Determining market value by asking what your neighbors are paying
Several years ago, while reviewing the lease terms of a doctor who had been in a building for 20 years, we found that he was paying $30 per SF, and had not received any free rent or tenant improvement allowance in his last negotiation. He believed that was a fair deal because the four other healthcare practices on his floor had the same terms.
However, we had just done a lease with a brand-new tenant on the first floor at $21 per SF ($1,800 per month in savings if it were your lease rate), while also obtaining three months of free rent and over $100,000 in tenant improvement allowance. The bottom line is that landlord got away with convincing five different practices the market was far higher than it really was and that they didn’t deserve any concessions.
#3: Not knowing market availability and comps
The foundation of a successful negotiation starts with understanding what your other viable options are, how they compare to each other and how to execute on them. When dealing with landlords or sellers, many healthcare providers try to bluff their way through negotiations. A savvy landlord can often read a bluff from a mile away.
Here is the problem with this approach: it communicates you are too busy, you don’t know who to hire and you don’t know what you could achieve. Trying to wing it in these scenarios will not work. This approach typically results in less respect from a landlord and the exact opposite results you were hoping for. Also, overly aggressive offers or unrealistic requests can compound the problem, as can emotional responses to the conflict inherent in most high-dollar negotiations. If you are going to be successful in your next negotiation, understanding market availability and comps is the first place to start. You can hire representation to do this for you, or you can invest dozens of hours yourself into the process.
Don’t be taken advantage of during your next purchase or lease negotiation. There is too much on the line. Losing thousands of dollars affects your income and can also impact the quality of care you provide. Hire professional representation to level the playing field, start the transaction at the proper time, know the market and top available options and negotiate with multiple owners. If you do these things you are very likely to capitalize on your second highest expense.
Richard Tidwell is an agent with CARR Healthcare. CARR is the nation’s leading provider of commercial real estate services for healthcare tenants and buyers. Every year, thousands of healthcare practices choose Carr to save them time and money, while ensuring their interests are always first. Visit CARR.US to find an expert agent representing healthcare practices in your area.
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