Tag Archives: medical

Tenant Needs Within A Medical Office Building

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waiting roomAs a truism, the quality of a medial tenant will have a significant bearing on the process of procurement or assignment of healthcare real estate space. This is especially true when considerations are addressed for a tenant that is renewing, expanding, contracting, or relocating within a medical building.

In each circumstance, the overall design of the facility and potential costs associated will account for whether the leasing process will be simple or challenging, on a relative scale. With this in mind, a healthcare real estate advisor has the ability to influence the process positively due to their unique concentration within health care and commercial real estate.

The Renewal

Upon the majority of renewals, the size and layout of the medical office is not altered and the suite design or reconfiguration is avoided. Other times, tenants will request these or other modifications to their space.

Typically, a broker will request the approval of the landlord to determine how the costs will be distributed and who will be responsible. In some cases, the landlord will have budgeted this expense and can absorb the costs. But, most of the time, they will not. Thus, a certain percentage of the cost will be provided. In other cases, the tenant will be responsible for all modifications.

Rental market conditions should dictate who assumes financial responsibility for alterations. To determine market conditions, a good barometer procure a specialist that is educated on the short term availability and effective price of comparable lease space.

The Expansion

Expansion is typically a costly and difficult undertaking for medical tenants. This, due to the increase in overall space, and consisting of additional construction costs, as well as management and accounting requirements. For a tenant to address an expansion request properly, the expenses need to be determined beforehand to limit the administrative liability associated with the request. Space planners or property advisors are very helpful for this logistic exercise. Again, and similar to renewal, the determination of costs should be based on comparable rental market conditions.

One of the main reasons tenants relocate is because their existing floor plan no longer meets the functional needs of the user. Thus, the requirement of expansion should be addressed prior to conclusion of lease. Running up against deadlines will not expedite or provide leverage for expansionary discussions.

If expansion is required in the midst of tenancy, commonly, the lease term will be extended for additional years. Under this circumstances, the costs will be attached to an amended lease and rate will be blended. Another potential outcome may be the continuation of the existing lease and expansionary space rental separated. The former homogenized term typically will favor the landlord, but is generally accepted in investment real estate.

The Contraction

A healthcare space contraction may become necessary because of several factors. Most commonly, it occurs with reorganization, subsidiary or referral base relocating, financial constraint, or regulatory requirement. While this pressure creates an uneasy position for the tenant, the landlord has the potential to react positively through status review.

If contraction request is made by the tenant during the midst of the lease term, a subletting consideration should be addressed via all parties to the original lease. Alternatively, if the contraction request is made towards the end of tenancy, the tenant’s advisors should be aware of the potential re-use of space, any limitations in plumbing or electrical, and costs associated with construction. An expert opinion for the effective contraction of space should be sought.

The Relocation

Too often a medical tenant will need to expand but the adjoining spaces will be occupied. Within most leases, a relocation clause exists that allows the landlord to, essentially, move a tenant into an alternate space. For expansionary needs, this clause may be utilized effectively by the landlord, while hesitantly by the expansionary tenant. To alleviate tenant concerns, the expansion space may include space planning costs, moving expenses, additional rent, and tenant improvements with above standard features.

Customarily, relocating within the building has challenges, but specialized relocation experts can be of considerable service to a landlord or tenant within medical space. The impact of change, via relocation, within or away from a desirable situation, has unique ramifications to both parties to the lease agreement. Understanding the advantages and disadvantages of relocation within a building will provide confidence when addressing landlord/tenant responsibilities.

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Overlooked Items in a Medical Office Lease

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As tenants of medical office buildings, medical users create unique leasing issues. They handle hazardous materials, produce biomedical waste, require confidentiality in patient recording, and are in the watchful eye of safety/regulatory bodies. While medical professionals are familiar with these inevitabilities, most of what makes their business unique are rarely found on a medical office lease.

After location identification, the majority of our time is spent negotiating the lease. It has been our observation that many physicians will negotiate and sign lease agreements without the benefit of educated real estate advisory or legal counsel. Commonly, this medical tenant is simply concerned with the general business terms (including the term of lease, rental rate and commencement date) and rarely gives the lengthy document  a second look.

While it is tempting to sign the lease to reduce the amount of time spent towards negotiating or communicating real estate interests, a few select studies have documented that tenants who solicit real estate advisors for their business negotiations tend to have greater business longevity. Because a medical office lease is an expense that often requires a multi-year commitment, tenants should not want to be party to any agreement that is not reflective of their own interests. Below are a few examples of where real estate advisors or legal counsel may be requested:

  • Medical office leases typically offer one of two approaches in which a physician can make improvements or alterations to the rented space. Either the tenant is required to remove all improvements installed during the lease term or all improvements simply become part of the property. While the lease may variably contain language that references one of these two approaches, the fact is, knowing additional expenses are tucked within the lease is unsettling to our clients.
  • Too often, physicians assume that a landlord will provide certain basic services for their tenancy. It should be known that landlords only provide the services that are expressly stipulated within the lease. Often, for example, landlords turn off a building’s air conditioning “after hours”, designated as evenings and weekends. If a medical tenant requires extended evening or weekend hours, advisors may assist, in the very least, by educating the tenant on what can be done to facilitate this request. Similarly, medical practices rely on certain types of equipment that consume significant electrical resources. In this case, an advisor should be able to make certain whether the landlord will furnish the necessary amount of electricity or will charge separately for such extensive use.
  • As a tenant, you want clarity for all financial obligations. Some medical office leases require you to simply pay the established monthly rental rate. Others require pro rata payments of some, or all, of the landlord’s operating expenses and real estate taxes associated with the property, in addition to the monthly base rent. In the past, we have noticed where operating expenses have been interpreted loosely by landlords, which may come as a shock to some. Overall, though, the majority of medical office landlords will adhere to the strict guidelines as set forth by educational bodies that attempt govern building use metrics. But, without proper advisory payment, especially the fluctuated amount, may easily become misrepresented. In order to minimize the financial responsibility for operating expenses, tenants should verify that the landlord’s operating expense calculations are correct and not being overcharged. If the operating expenses include real estate taxes, tenants should request an annual copy of the tax bill. In addition, within the lease, tenants may have the opportunity to verify that the operating expense charges have been accurately calculated.
  • Lastly, while you may think you will never default on your lease, it is hard to ignore default provisions. Remember, defaults may not necessarily be the result of bad faith or bad action. A non-monetary default may include failing to maintain the premises or violation of one specific clause within the complete document as written by the landlord’s counsel. Some leases provide a certain time period to “cure” the default, but some do not. It is necessary to identify the potential for violations or default and discuss each one.

It is of great importance to seek the guidance of experienced healthcare real estate advisors or counselors to negotiate the lease in an effort to meet the tenant’s professional needs and insure the continued health of their medical business.

3 Development Strategies for Healthcare Providers

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Hospitals and physician groups are embracing third party ownership, management and development of real estate because it has the ability to preserve capital resources for acute care needs, eliminate the conflicts that arise in the landlord/tenant relationship and minimize the potential legal and regulatory challenges associated with leasing space to referring physicians.

Many partnership synergies and dispositions have been publicized through our organization’s newsletter, but a new trend is occurring in which small providers up to large systems are utilizing third parties to develop and own new medical real estate projects. This trend has the potential to have a significant impact on capital structure decisions for going forward.

The use of outside capital to fund non-core real estate assets has been used with improved adoption in corporate America to facilitate growth and expansion. Retailers such as Wal-Mart, CVS and Walgreens, which are becoming stronger competitors in providing healthcare, have all increased liquidity and implemented cost efficiencies using third party capital and development expertise to fund billions of real estate expansion over the last few decades.

As for the development of medical facilities, healthcare providers may choose a few approaches that have been highly successful.

One. Providers may select to develop a project internally using an owner’s representative in place of the traditional developer. The owner’s rep determines the size and scope of the project and works with architects, engineers and the general contractor to build the facility. The provider is responsible for procuring entitlements and utility easements and covering the costs for the site preparation process. In this scenario, third party consultants may be employed to assist with these individual processes. The hospital is also responsible for the leasing and management of the building, although it may appoint a property management firm.

Two. Another approach is through the use of a third party to develop the medical facility for a fee. The third party will receive a fee for its services. In this case, the provider is contracting the developer’s expertise, which commonly includes feasibility analysis, project guidelines, pre-leasing, management of the entitlement process, value engineering for the project, negotiating the contract with the general contractor, as well as project management.

Three. A third party developer and owner both develops and owns the building through its completion. The developer/owner performs all the same functions as the fee-based developer. The main difference is that the developer assumes all of the risks and benefits of the development process and the ownership. A fee-based developer may have an incentive to reel the project in at a contracted cost and within a specified timeframe. The developer-owner has the same incentive, but is likely to strategize on ways that will lower costs of the long-term ownership, because this will ultimately determine the owner’s total cash flow and return on investment. Furthermore, a developer-owner has an incentive to minimize the size of the building to assure high occupancy rates, which has the ability to create conflict with the providers longing for vacant space to accommodate future needs.

If you should have any questions or require a proposal for a medical development under one of these three proven commercial real estate development strategies, please contact MREA at 713.701.7900.

Determining A Suitable Medical Location

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Determination of the ideal, long-term real estate location in the current healthcare environment is challenging because the foundation, where healthcare business and real estate decisions once accumulated, is now shifting. With numerous economic uncertainties on the horizon and questions regarding Medicare and Medicaid coverage and its model of distribution, physician real estate demand is suffering at what is perceived to be a fiscal and legislative bottleneck with a limited few finding fresh strategies for improved long term growth.

With quality, rather than quantity, slowly championing the minds of providers and their  patients, increase to a wider range of access and patient referral options are being explored. MREA is at the forefront of these discussions.

For instance, one area that is of key importance to review is the enterprise’s existing referral base. Our brokerage unit tends to visually distribute these referral sources via location map with tiered monetary importance to highlight relocation opportunities that are optimal for existing, as well as future growth. MREA has identified multiple other methods to best suit a referral-based expansion.

Another alternative for consideration is that of weighing leasing and purchasing. If purchasing real estate to locate multiple businesses, MREA provides an income-to-cost analysis, as well as upfront cash commitments, which are transferred into our firm’ proprietary investment proforma model. We work with several models to forecast future years of income, costs and return on investment which compliments a cost and comparable market analysis for each property.

Leasing may be a better option than purchasing, though. The competition for healthcare tenants from owners/landlords translates into better incentives to lease. It is often that a build-out allowance, deferred rent and aggressive long-term package will exist. The management responsibility and liability concerns are also reduced or eliminated in any tenancy.

Besides these two ideas, the third would pertain to the competition of the organization. Establishing goodwill is no longer merely important; it’s vital. The industry is now plugged in and race for market share is fierce. Whether the competition is from a hospital system, a well-established brand, or independent, understanding what they are (or are not) doing in this environment will help to determine where your organization needs to be focused. Our firm maintains a unique database that highlights the top 5-20 competitors within each specialty in a geographical area and performs routine evaluations on their business and real estate modalities.

These select few location reminders highlight the need for quality healthcare real estate representation. Please contact MREA at 713-701-7900 for all of your medical real estate needs.

Leasing Vs. Owning a Medical Facility

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While opinions widely differ among the ranks of healthcare providers, most would agree that the financial ramifications of long term commitments for medical real estate space will continue to weigh heavily on growth in people or technology. Some see real estate as a cost of doing business, yet, we attempt to dispute this notion and advise that it can be a tremendous avenue for personal wealth if performed with diligence and comprehension. The leasing vs. ownership model for a medical building still significantly benefits the providers seeking to purchase or development. That said, is the advantage of real estate ownership appropriate for you and your organization?

Providers, especially small to mid-size physician practices, need to answer several questions in order to determine if ownership is the right strategy going forward.

  • Will the provider own the building alone or should a joint venture with other practices be considered?
  • Will partnering with a hospital be considered?
  • Will a third-party developer or investment partner be considered to help guide the practice through the development process?
  • What are the front-end cash requirements?
  • What is the tolerance for debt guarantees?
  • How does ownership align with long-term practice strategies or goals?
  • What is a viable exit strategy?

The answers to these questions will help guide the physician group (and broker/developer/investor) to the right decision regarding equity participation in a medical office project. In today’s tight lending environment, the more cash invested, the better the borrowing terms available. Although borrowing for commercial real estate today has become increasing more challenging, especially compared to residential, we routinely take calls from lenders who will fund medical single and multi-tenant buildings by qualified buyers that will use the space.

How will the provider’s occupancy help to determine the cost of the building? Follow me here, as this is difficult for medical tenants to grasp. Rents are based on the cost of the entire project and cost of borrowed funds along with the return on cash investment desired, rather than the availability of space. In today’s medical real estate investment climate, the typical cash on annual return ranges from 9% to 15% per year based on a fully occupied building. As time lapses and rents improve, two favorable investment events happen: The cash return increases on an annual basis, and the market value of the property increases. Both of these events create increased value and wealth for their owners.

The inherent risk is the inability to maintain building occupancy with a practice group or medical rent-paying tenants. Empty buildings are extremely volatile and difficult to price. Prices parallel the availability of space coupled with the absorption of space in the regional and local marketplace. Rarely do vacant buildings increase in value unless the land underneath appreciates in value.

If you have a question regarding leasing, ownership, or simple investment into a medical building, please contact MREA at 713.701.7900.

Ground Lease Structures, Motivations

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A land owner typically has one of several motivations for choosing to implement a ground lease instead of an outright sale for a parcel of land. The most common motivation is to preserve the opportunity to participate in the appreciation in land value over the term of a ground lease without the financial risks of developing.

Other examples exist for the owner where the:

  1. Land has a low basis for tax purposes and owner receives rental payments without having to pay capital gains for the appreciation in value of the property.
  2. Property is encumbered in debt in excess of the tax basis. The owner may want to avoid a sale where such a large portion of the sale proceeds, if not all, will satisfy the debt that the taxes payable will require of the net cash.
  3. Tenant is of quality credit; the owner may encumber the interest in the land to secure a loan to be amortized by the rent payments under a ground lease. This would allow the owner to realize a large percentage of a sale or refinance for liquidity purposes without experiencing adverse tax consequences.
  4. Land owner (i.e. hospital systems), may have concerns over how nearby tracts will be built in the future. Utilizing a ground lease can exert more control over the development than through the use of restrictive covenants through outright sale of a tract.
  5. Land owner may not want to be associated with the development risks of improving the land and, rather, may defer these risks but remain a participant in future income.

The tenant usually has a select few reasons to ground lease.

The most frequent reason for ground lease is not having to obtain the cash for the purchase price of land. This motivation is to avoid having to relinquish the resources necessary for day-to-day business operations within the property. Essentially, the tenant is amortizing the cost of improvements and land payments over a period of time. But, ultimately, the aggregate amount of ground lease rentals will exceed the total of interest and principal payments required to pay for the outright purchase.

As for the structure and motivation, the landlord wants:

  1. Tenant to occupy and pay rent for a long initial term;
  2. To limit the tenant’s renewal options;
  3. Rent payments to be adjusted frequently;
  4. Rent payments to be fair market value (or higher).

The tenant wants:

  1. Obligations for occupancy and rent for a short period of time;
  2. Wants numerous options to renew at rates already negotiated;
  3. No adjustments to rent.

Outside of the healthcare arena, the future of the ground lease and its success in matching interested parties are highly dependent the banking system, who can marry multiple components; land, tenants and developers. Within the healthcare transactional market, we expect that the ground lease will remain a source of control, and competition, for location-centric healthcare providers.

For historical healthcare real estate examples, studies, additional structures or request for attorney assistance, please contact Robert S. “Bob” Lowery at 713.701.7900.

Easements Explained

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Easements are complicated. The law of easements has its own unique language, and being privy to the terms will provide a foundation for understanding the how your building arrived onto the property.

The top 10 most commonly used easement terms are:

  1. Easement: A legal interest or right which one party has over the land of another.
  2. Affirmative Easement: An easement that allows the holder to perform certain actions on the land of another.
  3. Negative Easement: An easement that allows the holder to prevent the owner from performing certain actions on his own land.
  4. Easement Appurtenant: An easement that attaches benefits the property owner, rather than the individual.
  5. Easement In Gross: An easement that benefits an individual, rather than the property.
  6. Prescriptive Easement: An easement acquired through continuous and open use over a period of time.
  7. Easement By Necessity: An easement that is necessary for access to the dominant estate after it has been created out of the servient estate.
  8. Easement By Implication: An easement that is necessary for the reasonable enjoyment of the dominant estate after it has been created out of the servient estate.
  9. Dominant Tenement: Land that is benefited by an easement.
  10. Servient Tenement: Land that is burdened by an easement.

There are a certain ways by which easement rights arise. For a few examples, easements can be acquired: 1) by an express grant; 2) by prescription; 3) by necessity; 4) by implication; and 5) by condemnation.

  1. An express grant refers to the granting of permission by the owner of the land where the easement would lie.
  2. A prescriptive easement arises if someone uses a portion of another’s property without his or her permission for a statutory period of time.
  3. An easement by necessity arises when a property is landlocked and the easement over the servient estate is necessary because the dominant estate is not accessible by other means.
  4. An easement by implication is be necessary for access, but arises when an existing, open, and continuous use of one parcel is necessary for the reasonable enjoyment of the other parcel.
  5. An easement by condemnation arises when it is taken by the government or an entity with condemnation authority that has exercised its right under eminent domain.

Most often an attorney will be asked to draft an easement into a deed or instrument that will be recorded in the applicable registry of deeds. The registry of deeds is the appropriate place for recording an interest in real property.

If you require assistance for an easement pertaining to healthcare real estate related issue, please contact MREA either for past reference or recommendations to counsel.

The New Commercial Real Estate Model

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Over the past few years, the commercial real estate firms that have performed as front runners are also the ones that have married the lending aspect to their brokerage and relationship capability. While these upper tier firms commonly work on a variety of product types, and typically place loans for properties that are $10M and greater, MREA works with multiple lenders to assist in placement of loans for individual healthcare business and real estate portfolios.

With a continued challenging landscape, it is now the responsibility of the commercial real estate firm to attract customers with their financial prowess and lender relationships, even more so than their knowledge of real estate, whatever the level of comprehension.

Locating a lender for your healthcare real estate interests is commonplace for MREA. But before you allow us to initiate the process, we have some ideas that may assist in obtaining a loan:

  1. Prior to sending the healthcare loan package to a lender, contact MREA to research the probability and availability of lenders for the scenario. Lenders are comfortable working with qualified commercial real estate representatives to “run a deal”. This assists the lending efforts and helps to avoid components that may be contentious or irrelevant to a review.
  2. It is important that when sending the loan package to reduce its overall size.  A two or three page Executive Summary that is delivered by email with a “CC” of a commercial real estate reference is the most effective form of introduction to your financial interests.
  3. Make certain that the Executive Loan Summary includes at least one photograph of the property. The majority of MREA’s lender relationships will visit the property, but the inclusion of some kind of visual identification will allow the lender time for reflection and necessary due diligence.
  4. When a commercial real estate loan officer receives a PDF by email, commonly they are suspect of what may be included in the package, so including a short email describing the components is necessary to receive priority status.
  5. It is customary for MREA, or the customer or client, to follow up with the lender shortly thereafter to verify its receipt. In our experience, emailing the package to multiple lenders all at once is extremely discouraging and will not gain the attention of the most qualified lenders.
  6. Based on your specific scenario, if one of our preferred real estate lender(s) cannot procure the loan, then it is important to recognize that efforts need to be made to remedy the concerns prior to its reissuance. Our lenders range in size, scope, service and fees — never qualifications.
  7. This said, not all lenders are alike and, depending on their (or your) level of commitment and comprehension, the Loan Committee may never be introduced to your loan. Thus, it is imperative to host key, influential relationships to receive a greater level of service and attention.
  8. Based on our experience, determining the motivation of the lender is key to placing a loan. Among others, are they improving their healthcare portfolio and/or how are they incentivized may be important to their overall capabilities.
  9. Lastly, utilizing MREA’s free data storage to load the entire package has now become essential to our lenders’ assessment. This allows them the freedom to access loan documents (tax returns, financial statements, etc.) as needed.

Whether it is recognized or not, the commercial real estate marketplace is advancing and, without the necessary level of financial comprehension and real estate specialization, overall client service will continue to decline and potential opportunities will not be realized.

Outpatient Facilities: Growth On The Horizon

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The weak economy, political debate and subsequent challenge in Supreme Court prompted a period of reflection for healthcare providers to reevaluate their growth strategies. While most provider-speculators who sought poor guidance or partnerships, loopholes, or weak financial or competitive analysis’ will continue to run into complications, the majority of medical professionals now have the green light to further their entrepreneurial pursuits by expanding financial and real estate footprints in hospital and physician-collaborative outpatient settings.

The health reform initiative and advancements in care and treatment will not only allow ambulatory services the opportunity to grow, but this strategy will begin to even the distribution of care from the heavier weighted inpatient model. Currently, outpatient services serve as a complement to the inpatient hospital.

Outpatient settings will become the central location for the sophisticated array of specialized services delivered in an integrated environment to ensure a high quality of care and positive patient outcomes.

The majority of the healthcare law includes features aimed at reducing the number of uninsured patients, which will increase demand for outpatient services (especially in underserved areas) and require hospitals and health systems to become more efficient in order to accommodate the improved volume.

Healthcare reform also will reward providers that can coordinate services in a cost effective manner while improving quality of care. The focus on primary and preventive care will push providers to expand services to include a wider range of outpatient services to ensure integrity of care.

As payment reform moves away from fee-for-service reimbursement to outcomes-oriented reimbursement (e.g., bundled payments, pay-for-performance), this incentive-based legislation focuses on preventive and coordinated care to encourage greater collaboration with physicians, demonstrable quality of care and outcomes and more efficient operations. The development and implementation of patient-centered medical homes (PCMHs) and accountable care organization models (ACOs), improved management of chronic diseases, and focus on preventive services and healthy behaviors will accelerate the shift of traditional hospital care to more integrated, coordinated, and outpatient-oriented care delivery systems.

As ambulatory care services become a larger part of healthcare delivery, hospitals and healthcare systems should ensure that services are positioned to maximize both patient and financial benefits. An ambulatory care services strategy and plan is increasingly critical and should outline five important strategies.

For these strategies, please contact Robert S. “Bob” Lowery, Managing Partner of MREA at 713.701.7900 or email us at office@mreausa.com.

Issues That Can Arise When Leasing Medical Space

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ImageYou feel fortunate to have negotiated a favorable rent on behalf of your physician group, with free rent and options to renew, a generous tenant improvement allowance, and your contractor is ready to start building out the office. You have also negotiated with your contractor a reasonable price for the tenant improvements, and you have obtained a loan from your lender to cover all of your construction costs. The landlord quickly presents you with a lease which looks to be a  well-prepared document in which he/she requests that you sign it quickly to obtain the keys to the building / space. Should you sign the lease and expedite the process or should you consult with a leasing specialist to analyze?

This article is intended to provide an overview of some of the issues that MREA encounters when negotiating leases on behalf of physician practice clients. It is not intended to be comprehensive in nature, nor is it intended to replace the advice an attorney may provide.

Commencement of Lease

Once the lease is signed, your practice group and the landlord often have objectives that differ from one another. The landlord wants the lease commenced as quickly as possible so that lease payments begin, while your office seeks the completion of the build out to the agreed specifications with everything operational.

If your landlord is building out the office space, it is of vital importance to provide the landlord with the most detailed plans relative to your space and other details in an effort to guarantee that the office will meet the groups needs and expectations. However, it is important to ensure that the lease will not commence until the built out space has passed inspection by the local building authority. Most standard form leases provide that the build out will be deemed complete when the landlord or its contractor/architect certify that it is “substantially complete”. Usually this means that “punch list” items will be completed by the contractor after you have opened for business, and this isn’t the image you want to present to your patients.

Price Increases

Nearly all leases have rent escalation clauses that are either contractual in nature or are tied to an index, usually the Consumer Price Index (CPI) published by the U.S. Department of Labor. Contractual increases are what your practice and the landlord will negotiate regarding the life of the lease term. More common is a cost of living adjustment tied to the CPI. In recent years, CPI increases have averaged approximately 2% per year. However, historically the CPI has had periods of tremendous volatility. For instance, during the four year period between 1978 and 1982, CPI increases averaged over 10% a year.

We always recommend that they have a “ceiling” on CPI increases is necessary to protect them from unusual inflation occurrences. However, this is a highly negotiable item that will not gain consideration without compromise.

Rental Rate During Option Periods

When initially negotiating the lease, your group wants the option to renew the lease, which is very specific as to rent price. If you are using the typical standard forms as provided by the landlord, you will usually find one of two standards; either an increase tied to the CPI increase over the last adjustment date or an adjustment to prevailing market rent in the area. Many business people opt for CPI increases. However, there is a hidden trap here for physicians in that they typically spend a considerable sum on tenant improvements, and the landlord knows it is simply not economical to move an office if the CPI adjustment for the option period far exceeds the prevailing market rent.

Therefore, it is important to consider an adjustment to market rent, provided that it does not restrict the rent from being reduced in a soft rental market. Also, in order to ensure that a real market rate adjustment will occur, we recommend an arbitration procedure whereby the parties each choose one appraiser, and together the two appraisers choose a third appraiser, with the two closest appraisals being averaged to determine the fair market rent. Although this procedure is rarely used, it offers protection to a physician who has an arbitrary landlord unwilling to negotiate fairly.

Office Damage

A few years ago, we received a call from a client that they had moved from an office that had been destroyed in Hurricane Ike. Although the Hurricane had occurred a year and one-half prior, the physician had received a call from the landlord telling him that the building was being renovated and the lease term was still in effect. Since the client had already built a new office in a separate location, the group found himself in a sticky situation where there was the possibility of paying on two leases.

Most of the standard physician office leases impose no real obligation for the landlord to rebuild, and provide the landlord the greatest flexibility in determining when or if to rebuild. By contrast, the tenant is typically obligated to move back into the space within a short period of time after the building is repaired. But, imagine the difficulty in retaining patients when the move into interim or new medical space is necessary, especially when unexpected. Therefore, it is becoming a common request for the right to terminate the lease if the landlord has not commenced restoration or has not completed the work within a reasonable period.

Assigning or Sublease a Space When Selling a Practice

Suppose a lease was negotiated several years prior and the lease rate is substantially below market and the current tenant remains responsible for the entire lease term plus any options. The lease also provides that the landlord can deny the assignment if it would upset the tenant mix in the building.

The landlord disapproves the assignment even though the buyer of a practice has the similar financial net worth as the seller when they signed the lease. The landlord also claims physician group’s operation would upset the tenant mix in the building, even though there were no other like physicians in the building and attempts to negotiate.

How Can You Avoid Situations Like These And Other…?

  • Eminent Domain?
  • Road Construction?
  • Tenant Becomes Disabled or Dies?
  • Foreclosure Sale?
  • Relocation Rights?
  • Water Damage?

Summary

A prospective tenant should always remember that the lease the landlord presents is subject to negotiation. The tenant should use a qualified real estate counsel to review the lease. Entering into a landlord/tenant relationship is similar to getting married, and the relationship is likely to last a long time, for better or worse. A careful review of your lease documents before signing will ensure a better relationship between your group and the landlord should issues arise.