Is Your Aging Medical Facility Still Relevant?

Over the last decade, new design and construction has altered the physical characteristics and functionality of the medical building. From a healthcare systems standpoint, the motivation to renovate or build new facilities has been attributed to increased patient demand, technological advances, renewed branding efforts and access to inexpensive capital.

From a small to mid-size provider standpoint, the location attributes have been the greatest influence for continued patient demand and satisfaction. Now, larger, better capitalized systems and retailers have entered the marketplace to capture greater share of the patient marketplace.

To remain competitive, a medical facility owner and/or operator will be required to renovate or be faced with reduced patient volume within the building. Less rent, weaker leases and hemorraghing property values will be exacerbated by relentless commercial real estate up and down cycles.

In this article, we drive the debate for medical tenants and landlords to address their compelling inquires of whether to RENOVATE OR RELOCATE. Below is a progression of helpful tips that gain momentum towards relocating as the reader moves down the list.

  1. Existing structure(s) are less than 25 years old with several years of additional life remaining.
  2. The building engineering and technology infrastructure is functional with space and capacity to upgrade.
  3. Administrative and clinical space supports efficient and cost-effective operations and modern standards.
  4. There is room to increase the square footage of the user, either horizontallyBlog pic or vertically.
  5. Supportive partners or referral affiliates remain in place.
  6. The present facility offers greater opportunity than space located elsewhere.
  7. The facility is significantly dated and requires excessive capital to modernize with marginal potential return.
  8. Floor-to-ceiling heights are inadequate for modern ventilation requirements.
  9. Column spacing is too tight and inflexible for efficient space planning, particularly with planning of large diagnostic and treatment departments like imaging and surgery.
  10. Building systems such as HVAC and power are insufficient to support modern health care spaces with increased air changes and advanced imaging modalities.
  11. The facility has already been structurally maximized to remove inefficiencies. 
  12. No contiguous real estate is available for key tenants expansion.
  13. The incremental growth of old business functions causes functional inefficiencies for coordination of new programs. 
  14. Access to capital, rebranding initiatives, technology and/or increased market share will forward income generation.

For a dedicated list of factors for repurpose, redevelopment, renovation, relocation, replacement, expansion, purchase and lease representation of a medical building, contact MREA at 713.701.7900.

Tenant Needs Within A Medical Office Building

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.

A Healthcare Real Estate Success Story

Given economic and regulatory uncertainties, a provider of healthcare services retains our firm to improve relationships with the physician practices that occupy several medical office properties around their hospital campuses.  This essentially enables the provider with an opportunity to obtain positive economic outcomes such as tenant retention, property referral, good will and financial clemency.

Additionally, the provider wants to measure its own operations through the simple method of acquiring physician input regarding service delivery, as well as report on the present adequacies when compared to other like providers so as to audit possible tenant separation.

MREA collaborates with the client to coordinate a proprietary satisfaction assessment specifically geared towards to medical tenants.  This includes:

  1. Tenant survey of satisfaction with building services, property management performance and lease renewal intentions
  2. Action planning reports for each hospital campus, region, service provider and the national portfolio, highlighting performance trends, strengths and weaknesses
  3. Comparative performance analysis of year-over-year results and versus report
  4. In-depth, statistical analysis of property and tenant characteristics influencing satisfaction, retention and relationships
  5. Recommendations for the enterprise and each service provider to improve customer service delivery, strengthen relationships and boost retention
  6. Customized presentation of the results and recommendations to each service provider’s national account management personnel and property management teams

While we will keep our results confidential, based on assessment the client:

  1. Targets improvement initiatives toward highly influential property management practices, such as frequency of proactive communication with tenants
  2. Requests action plans for improvement from each hospital campus and service provider
  3. Increases tenants’ satisfaction with management by 10% to exceed benchmarks
  4. Improves tenants’ likelihood of renewal rate by 5%
  5. Identifies “at-risk” tenants whose lower satisfaction level and higher likelihood of defection warrants immediate property management follow-up
  6. Strengthen physician relationships with property management and hospitals

We are proud to offer this service as part of a growing list of healthcare real estate competencies located here.

6 Sublease Tips For Existing Tenants

With an abundance of rent space about to wash ashore, it may be wise to address your excess space or locations, before the next wave of renewals and relocations batter the Houston commercial real estate market.  Because this market currently favors landlords and tenants that control space within a well leased and managed or highly trafficked location, depending on the nature of the business, we suggest taking advantage of an engaged subleasing market to locate other potential users. When analyzing space to sublease, the following factors should be considered:

Space to Sublease

  • How much space is to be sublet?
  • What is the average transaction size in the market?
  • How many competitive blocks of similarly sized space exist?
  • What is the absorption of those sized units in the marketplace?

Once all of these questions have been asked and answered, the user will have a better understanding as to how long it should reasonably take to lease the space.

Configuration of Space

  • How is the space configured?
  • What is the utility of the layout?
  • Is it primarily offices or substantially open space?

The configuration of the space will also determine how easy (or difficult) it will be to lease. For example, a medical office space consisting of nothing but private consulting offices will be extremely difficult to sublease, as most office space users seek a balance between private offices and public workspace. Accordingly, subleasing that type of space will take longer than space with a better balance of private offices and workstation areas.

Furniture, Fixtures, Equipment, Etc.

In certain circumstances, the configuration of the space may be enhanced by leaving the furniture and fixtures in place. In this manner, a prospective user will not have to incur the additional costs and longer lead times associated with obtaining new and/or used furniture for this requirement. Consequently, in subleasing space, consideration should be given – and value should be sought – for subleasing space complete with furniture for both private offices and workstation areas if that represents a competitive advantage.

Lease Term Length

There is a traditional “predisposition” to find a subtenant whose needs with regard to term coincide with the term of the prime lease. However, this is not always possible. Accordingly, in marketing the space, the minimum term acceptable should be understood and dealt with. In certain circumstances, a landlord may be prepared to offer a longer term to a creditworthy subtenant, thereby creating an opportunity for the current user to eliminate all liability. Term is a critical factor and always needs to be viewed.

Rent

Simply stated, sublet space should be priced to move. The longer it takes to sublease, the more expense incurred and the less the percentage of recovery. In most markets today, it is virtually impossible to make money on a sublease transaction. Accordingly, and to repeat a theme, the goal is to move the space to minimize loss, not maximize potential (and actually illusory) gain. To that end, a rental structure should be developed which provides the marketplace an incentive for taking the space.

Improvements

In the real world, sublet space does not usually offer 100% of what the new user requires. Accordingly, money is needed for recarpeting, repainting, some construction work, etc. Many firms subleasing space prefer to grant free rent as opposed to providing cash for improvements. Irrespective of the approach taken, one thing is certain – firms subleasing excess space need to be prepared to address the concept of providing monies for improvements to the space if they expect to successfully sublet the space.

10 Lease Renewal Reminders

1.   The most important consideration any tenant may do is to hire a tenant representation broker, especially when relocation is an option.  Working for both landlords and tenants, I can say for certain that having a tenant broker can provide a tremendous advantage during a renewal negotiation. Just by placing a tenant broker on your team can increase the leverage in your lease negotiation. In the Greater Houston market, it is traditional for the landlord to pay your commercial broker’s fees, so it is imperative to be informed about the commercial real estate marketplace through brokerage representation.

2.   Second – begin early.  You do not want to subject your company to a position where it is down to the wire and the terms will not be favorable. Most tenants neglect this point and end up signing a poor deal only because they were not familiar with the process and had no time to negotiate a better transaction. “Early” can even mean over nine months or greater in advance of the lease termination, especially for those spaces that are large, and whose lease documents were written previously in a complex manner.

3.   On that note, review other options.  Even if you are not considering other space, you should always keep your eye on other space.   Have a number two and three pick for that “just in case” scenario. Performing proper due-diligence to see what the competition is offering for incentives is our job as tenant representatives. And, you will be surprised at what we can uncover. The simple fact that you have options lets your landlord know that you have alternatives.

4.   Negotiations do not take place casually in your office or at showings. Even the largest companies make this mistake.  Stop talking and start listening for negotiable items.  So often, emotions and ego enter into negotiations and they will typically lead you to nowhere.  Remember, these are business decisions that need to be handled behind the closed doors of your business operation.

5.   Always have you landlord present you with the first proposal. This not only will lay the groundwork for a possible counter proposal by your team, but it will reveal what position the owner is angling.

6.   Once you get your proposal from the landlord, always counter. Even if it looks like a great deal with everything you want, 99% of the time you can get more if you simply counter. In addition, you should always ask for more than what you want, that is, if you have a leg to stand on.  Typically a back and forth takes place, so do not begin by asking for too little.

7.   You should not put stock into how long you have been at your current property, how many times you have paid your rent on time, or how little you have called to report problems at your space. None of these items will present you with a better deal.

8.   You should avoid having side conversations or direct conversations with your landlord or their representative. This can hinder your tenant representative’s negotiation power and can muddy the waters if things were promised in a side-conversation that your representative was not privy.

9.   Your business should try and keep only those who need to know on a “need to know” basis. Rumors spread fast, especially among co-workers. You do not need the latest updates on your renewal negotiations to be made aware. In the end, this will hurt your negotiation efforts.

10. Lastly, I always recommend to my clients that you seek the assistance of a real estate lawyer before signing any legally binding documents. A good time to bring in an attorney is often when a lease document is produced for the tenant’s review. It is the attorney’s job to find the glitches, problem areas, and other questionable sections in the often lengthy lease document, that may not be in your best interests. If there are any, they should produce alternatives to the lease section language or suggest deleting it all together.

3 Tips For Startups When Leasing Space

Yes, in 2011, we have been receiving more inquiries from startups.  With this in mind, we have documented a few ideas for business owners to take advantage of a weakened commercial real estate environment, while preserving cash and protecting themselves in a situation where future funding may be a concern.

Tip 1: Find Turnkey Space!

Truth in any space relocation is that the simple act of “moving” is expensive! Not only does the search for office space rob operating officers of hours that they should be spending growing the business, but it also creates several additional expenses. These expenses, for example, include having to pay movers, order new telephone systems, purchase new furniture, add telco/data cabling, request new service contracts, change paper advertising, etc.

These expenses can range from ten thousand to one hundred thousand dollars, depending on the space requirement. The best way to reduce expenses is to find a commercial space that is already furnished and comes with a telephone system. In an environment of shrinking balance sheets, opportunities are available via other businesses that are downsizing and trying to sublease space. The majority of sublease spaces have furniture and phone systems in place, in which these companies would rather include, as it would create an additional expense for them to be removed. The most attractive feature regarding subleases is that the rent is typically discounted when compared to space offered by landlords, as the tenants have greater motivation to lease.

Tip 2: Negotiate Low Rent Today and Let it Increase in the Future!

Most businesses today have had the feeling that if they “burn” through current funding too quickly, they may not be able to come-back for more. So they find themselves hunkering down wherever you can. Most business owners are not aware, but they can actually negotiate an extremely low rental rate today, one that landlords would of laughed at just a few years back. This is true. The reason: The landlord’s sweet spot and what they are most concerned are “Effective Lease Rates”. An Effective Lease Rate is the “average” lease rate over the life of the lease term.

Tip 3: Negotiate Termination Options!

Many office lease obligations could create a situation where the owners are held personally liable. If provided with this conundrum, sometimes it is best to negotiate a lease-termination option with the landlord, one in which the landlord and tenant determine how losses will be reimbursed, sometimes at significantly discounted payment(s).

If you should have any inquiries regarding this article or commercial real estate interests, please do not hesitate to contact Robert S. “Bob” Lowery.

7 Strategies to Implement Prior to a Lease Renewal

Be Prepared To Walk Away

The biggest mistake many tenants make is not developing legitimate alternatives to their first choice, whether a new space or a lease renewal. If a landlord believes you’re not willing to relocate to a comparable property, you lose your negotiating leverage.

Begin the Process Early

Time should be your ally, not your enemy during negotiations. Landlords know that the managers of other buildings can take six to nine months to create a space plan, obtain construction pricing, agree on a rental rate, prepare a lease document and ready the space for occupancy. If you wait too long before asking for a renewal proposal, you’re telling the landlord that you’re not considering any other options.

Capture the Big Picture Before You Start Negotiating

Is the building being sold? Is the largest tenant moving out? How much free rent did the last tenant get? Does the building have HVAC or parking problems? What is the landlord’s financial situation? Candid, complete answers may not be forthcoming from the landlord or landlord’s broker. A large commercial brokerage that has access to such items is mandatory, as they will impact your lease decision and negotiation.

Make Sure Landlords Are Competing For Your Business

The key to a successful negotiation is creating competition between your current landlord and other landlords in the area. You should have an experienced adviser providing the comparable market research, lease comparables and the negotiating expertise to create a competitive advantage.

It’s In Your Best Interest To Have A Professional Negotiate On Your Behalf

Unless you’re a commercial real estate professional, it’s not a good idea to negotiate a lease deal directly with the landlord’s broker. An experienced tenant representative will help ensure that you receive the best possible rates, terms, incentives and lease clause protections. Remember, the landlord’s representative negotiates leases every day; you may do it once every 5-7 years!

Hire A Tenant Representative

Occasionally a landlord will “try to save you some money” by discouraging you from engaging a tenant representative. Don’t be fooled. He’s not doing this out of the goodness of his heart. He knows that without a tenant representative you’re more likely to be in the dark about market rates and complicated attorney drafted lease items.  Also, you are far less likely to shop the market or consider other lease or purchase alternatives. This equates to more money in the landlords pocket.

Make Sure You Are Comparing Apples To Apples

Business owners who are not experienced with commercial real estate often find it difficult to perform a true “apples to apples” comparison of different facility choices. Lease terms such as full service gross, modified gross, triple net, tenant improvement allowances, rental abatement, escalations, base years, operating expense stops and loss and load factors can obscure the true amount you’re paying and make legitimate comparisons difficult. A good tenant representative will sort through all this for you.