The decision to lease office space is an important financial and business decision that requires consideration and competency.  Leases are typically for an extended period of time, from 3 – 10 years and it is important to address each of the issues listed below in your negotiations and in the Lease document itself.  Here are six important lease considerations to address before signing any lease.

1. Maximize your USEABLE space

Office space is typically quoted on a cost per square foot per year ($/SF/YR). Your goal is to maximize the amount of space within your four walls that you use for your practice, defined as “Useable Area,” and minimize the charges for space outside of your office. There are three commonly used floor area measurements used to calculate the amount of space you rent and the method used can greatly impact your costs. These methods are: 1) rentable square feet, 2) gross square feet, and 3) useable square feet as described above.

Let’s define the floor area calculations used:

• Rentable Area (RSF): perhaps most commonly used, defines the areas within the walls of your suite plus a pro rata share of the common areas of the building. The common areas consist of hallways, lobbies, restrooms, etc. but do not include vertical penetrations such as stairs or elevators. Typically, common areas make up 15 percent of a building’s area.

• Gross Area (GSF): includes the area within your suite plus ALL common areas. This may also include areas under canopies or drive through. Typically 18 percent – 20 percent of a building’s area.

• Useable Area (USF): includes only the area within the walls of your suite

EXAMPLE: Let’s assume you were to rent 5,000 sf of space under each of these terms, how much space would actually be Useable (within your four walls) in which to practice medicine?

Rentable Square Feet-we need to subtract common areas, so 5,000 sf – 15 percent = 4,250 sf

Gross Square Feet, using the same logic, 5,000 sf – 20 percent = 4,000 sf

Useable Square Feet – definition of USF is the space within the walls so 5,000 – 0 = 5,000 sf

In reviewing office properties to lease, make sure you are receiving the greatest value for your investment dollars. In the example above, there is a 20 percent difference in useable space.

2. Negotiate for free rent and/or a tenant improvement allowance

Most landlords offer incentives to lease space in the form of a “Free Rent” or “Tenant Improvement Allowance.” Free rent is usually 1-3 months but is very dependent upon vacancy rates in the area. Tenant improvement allowances vary considerably, depending on the rental rate offered and the condition of the building. It typically costs around $10/sf to refurbish an office with new paint, carpet, etc. and can run from $45 - $80 to build a new office from a shell condition.

3. Negotiate for the greatest tax advantages

This is critically important and RARELY properly addressed. Your lease should specifically state how tax advantages are determined and who gets to write them off. If your lease does not state this in detail, you do not have specific items to depreciate, nor specific costs to write off at lease termination, and your deductions may be disallowed and/or challenged by the IRS. A “Cost Segregation Study,” attached as an amendment to the lease can greatly benefit you and your landlord.

4. Address each of the following cost issues in your lease

Here is a list of items that may become additional expenses if not specified in the lease:

1.                  Rent and rent escalations

2.                  Common area expenses; cleaning, maintenance, repair, replacement

3.                  Utilities; water, sewer, trash, electric, etc.

4.                  Management fees; supervision, accounting, legal, leasing commissions, construction administration

5.                  Real estate taxes, licenses and legal fees for disputing assessments

6.                  Future regulatory assessments and impact fees

7.                  Repair and replacement of major building systems; HVAC, Elevators, roof, windows, etc.

8.                  Insurance; building, flood, sinkhole, liability, etc.

5. Address each of these other important considerations

Here are some additional factors to consider in your lease:

1.                  The leased premises, the method of calculation and changes to the method or basis of area calculations (Common areas in buildings can change.)

2.                  The length of the initial lease term, especially if there have been tenant improvements

3.                  Lease extensions, renewal terms and holdover provisions

4.                  Flexibility - the ability to expand or contract the practice space requirements through options or First Rights of Refusal.

5.                  Exclusivity – to limit competition within the building.

6.                  Relocation – may wish to strike this landlord option if involuntary relocation may affect your practice

7.                  Restrictions on use and/or procedures you may provide (typical on hospital campus’s)

8.                  Hours of operation – many buildings have standard hours and utilities may be assessed for after- hours operation and security.

9.                  Macro factors that may affect your lease such as condemnation or property taking (i.e. for a road expansion) that may have deleterious affects such as noise, vibration, etc.

6. Additional Considerations

A lease gives you the right to control your particular space but not the rest of the property so some additional considerations are very important. These issues include: parking and parking space assignments, signage, accessibility, options to purchase, handicap accessibility and many others and should be addressed in your lease.

In Conclusion

Leasing space is an important financial and legal transaction and should not be taken lightly. It is important to have an experienced real estate broker and real estate attorney represent you. This combination of professionals provides the greatest protection at the least cost. Based upon their market experience, your broker should handle all of the preliminary issues, negotiate the rates and terms and prepare the deal points in a “Letter of Intent (LOI).” Landlords typically furnish their own lease which the broker should review and “flag” for inconsistencies in rates, terms and verbiage. Any inconsistencies between the LOI and the lease can be further refined and determined to avoid numerous attorney reviews. Once negotiated, a complete attorney review should be completed to address legal issues before execution.

By following this 6 step plan, you should be able to move forward with confidence in the completion of your lease negotiations and securing your office space for your required term.

Frank Ricci is president of Healthcare Realty & Development and has 28 years of medical real estate brokerage and development experience. He can be reached at FrankR@HealthcareRealtyOnline.com or visit the company website at:  www.HealthcareRealtyOnline.com.

Tags:

Bookmark:

Digg

Facebook

Technorati

Newsvine

Google

Related: