Property Search
Loopnet.com was an invaluable resource for finding commercial listings. I interviewed a few commercial real estate agents/tenant representatives but ended up deciding against hiring one. I know people who swear by their tenant representative, and I don’t think it’s wrong to hire one. Their utility is highly dependent on your real estate market and the amount of time you have available to do the legwork yourself. I moved into a relatively non-competitive market and had a lot of time to find properties and negotiate leases, so I decided against hiring a tenant representative.
It’s important to note that tenant representatives are paid by the lessor and the typical terms of their payment are as a percentage of the total cost of the lease. These costs are usually included in your rent as a rate increase. Let’s investigate a couple concrete examples.
Tenant representative fee: 4% of the total lease
Property size: 2000 square feet
Rental terms: $22.00/square foot/year for 5 years
Cost of tenant representative: $8,800.00 ($146.67/month)
Tenant representative fee: 4% of the total lease
Property size: 2000 square feet
Rental terms: $22.00/square foot/year for 10 years
Cost of tenant representative: $17,600.00 ($146.67/month)
Tenant representative fee: 4% of the total lease
Property size: 2000 square feet
Rental terms: $20.00/square foot/year for 10 years
Cost of tenant representative: $16,000.00 ($133.33/month)
It is in the best interests of the tenant representative to get you a longer lease at a higher rate because that will allow them to collect the highest fee. In direct opposition, it is in your best interest to get a lower rate for a smaller term. As a start up, your cash flow is very important and having an additional $146.67/month available to you could be very important to keep the lights on.
On the other hand, the time value of money is a very important consideration. If you are currently working as an attending physician, there is a good chance that the additional fee is worth it to avoid spending time searching for properties, getting quotes from property management companies, etc. A good tenant representative will find potential locations (including those not listed on commercial real estate websites), negotiate terms on your behalf, and have a network of architects and contractors to help with your build-out.
Something to keep in mind about your lease regardless of hiring a tenant representative is that everything is negotiable. This includes getting a couple months of free rent (the cost will increase the fee over the rest of the lease term, which is advantageous to the lessor), utilizing the address for mailing (and credentialing, etc) prior to taking occupancy, when the rent payments start (preferably after tenant improvements are finished and you take occupancy), and more. Your ability to get favorable terms greatly depends on your local real estate market. In general, expect higher rates if you require more tenant improvements and do not want a long term lease. In my experience, most building owners want a 7 to 10 year term lease if a significant build out is required. Alternatively a 3 to 5 year term lease is very achievable if you are willing to take a suite as-is or with minor cosmetic changes.
In all markets, competition is crucial to getting the terms you desire. Regardless of your practice location, make sure you get rates from at least 5 different properties on your own so that you can inform your negotiations. If you hire a tenant representative, obtaining rates on your own are helpful to make sure that nobody takes advantage of your ignorance. I advocate getting a 3-5 year lease to start. Most lessors want a personal guarantee (you are personally responsible for the rent for the duration of the lease even if the business files for bankruptcy) for young businesses, and it’s difficult to know if the space you start in will suit your needs long term.
For example, if you become busy enough to need additional support staff or a junior partner, you’ll need additional space to accommodate them and their practice. However, if practice growth has been slow you may just want to extend your current lease. Perhaps your location analysis wasn’t perfect and you want to move your practice to another location. It takes about 3-5 years to build a busy ophthalmology practice, and you’ll want flexibility at the end of this period to change your office if needed.
In all cases, I highly recommend consulting with an attorney to ensure you understand all the terms of the lease. Some landlords will try to sneak things into your lease that greatly favor them and hope that you don’t read it. I found the extra cost to have an attorney review my lease to be money well-spent.
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