Your Practice / Business

Negotiate Your Lease Like a Pro

Renting commercial space is different than renting a residential apartment and should never be approached in a casual manner. Before you even begin to start reading the newspaper ads or making the rounds with brokers, you must first decide what type of clientele you want to treat.

If you want a cash practice that provides various types of alternative care within the scope of your license, you will need a location that is located in a posh neighborhood with upscale amenities. On the other hand, if you are a chiropractor seeking to treat workers' compensation claims, you would most likely want to locate your office in a blue collar neighborhood where your patients are most likely to live.

Ascertain whether the insurance companies with which you will be dealing pay higher amounts for services rendered in certain neighborhoods. If so, you may be able to afford a higher rent if you choose to render services in such a neighborhood.

Once you have determined the nature of your practice and the type of patient you wish to attract, you must then decide whether you want to be located in an urban, suburban or rural environment. In an urban environment you want to make certain that there is ample, convenient parking or, in the event that you are located in a city like Manhattan or Chicago, that you are close to public transportation.

Types of Leases

A gross lease is sometimes referred to as a "pass-though lease" or as a "full service lease." In some cases you will pay the base amount and that is all you will pay for the duration of the lease. For instance:

Dr. Rimilov has entered into a five-year lease. He has rented 1,500 square feet in an 18,000 square foot building. He pays

$14 per square foot, so his base rent is $21,000 per year, or $1,750 per month. This rate includes utilities, maintenance, taxes and janitorial services.

With some gross leases Dr. Rimilov will pay only $1,750 per month each month for five years. At that time his lease will either be over or renegotiated. In other instances, all cost of living increases and building expenses which have been accumulated will be added to the rent after the first year of the lease and he will be responsible for payment.

Examine your lease carefully to find out whether you will be responsible for payment of these types of "pass-though" expenses. If you are responsible for payment, make certain that you know the exact pro rata share of the building that you are leasing. Do not take the landlord's word for it. Measure it yourself. (This is easily done by counting ceiling tiles). Find out whether your leased area includes just your office space or if it also includes part of the common areas, such as the hallways or the lobby of the building (the "load factor"). You may wind up paying for the pretty atrium on the eighth floor when your office is located on the third floor.

A graduated gross lease is a good idea for those just starting out in practice as it keeps your costs lower initially. For instance:

Dr. Rimilov has entered into a five-year lease. He has rented 1,500 square feet in an 18,000 square foot building. He pays $14 per square foot so his base rent for the five years is $105,000 as it was in the previous example. The first year of his lease he pays $1,000 per month, the second year he pays $1,500 per month, the third year he will pay $2,000 per month, the fourth and fifth year he will pay $2,125 per month. He has paid the same amount as in the above example but because he was able to make lower payments initially, it was easier for him to manage the finances of his practice in the beginning when he was first starting out. This rate also includes utilities, maintenance, taxes and janitorial services.

Adjusted Gross Lease. This type of a lease is the same as a gross lease but may wind up being more equitable. Newer buildings generally permit the tenant to control the amount of air conditioning or heat each office suite utilizes. This will work to your advantage if your hours are fairly standard and work against you if you have evening or weekend hours. For example:

Dr. Rimilov maintains a 1,500 square foot chiropractic practice. His hours are Monday through Friday, 9:00 am to 5:00 p.m. He seldom has emergencies. Dr. Rimilov's neighbor, MicroWare, is a 1,500 square foot computer software company, with office hours Monday through Saturday, 7:00 am to 11:PM.

In a gross lease, the heat and air conditioning costs would be split between Dr. Rimilov and MicroWare equally because each had the same amount of gross footage. The amount of time that each used the air conditioning unit would not be considered. In such a scenario, MicroWare Computer Company would obviously benefit and Dr. Rimilov would obviously be paying for a lot of air conditioning that he was not receiving. In an adjusted gross lease arrangement, MicroWare would have its own meter as would Dr. Rimilov. Both would pay their respective bills and neither would benefit to the detriment of the other.

The Net Lease. You pay for all utilities, maintenance, taxes and janitorial services with this type of lease. As a result, your base lease payment should be lower than it would be in a gross lease situation. You have more control over your expenses with this type of lease (except for taxes and increases for common areas) as you decide which companies to use for services such as maintenance or janitorial and the extent of the use of utilities.

Percentage Lease. Do not even think about it. In this type of lease you pay the landlord a percentage of your gross income. Although perfectly acceptable in a retail setting it is not acceptable in a health care setting. Giving a landlord a percentage of your gross income may be construed as fee splitting or be in violation of the Federal Anti-Kickback statute.

Increases to the Price of Your Lease

Many leases have a cost-of-living (COL) increase included in the lease. This increase is generally based on the Consumer Price Index (CPI) for your area.. Make sure you have the type of CPI clearly described in your lease and make sure that the increase is capped by a certain percentage of your lease. Request that the amount of rent you pay also be decreased in the event that the CPI should fall.

When you receive your yearly statement showing your increases, make certain that you review these increases with your accountant immediately. Also, in the event that your building is not fully leased out, make certain that you are not paying for the shortfall. Your lease should state that expenses will be adjusted as if the building were fully occupied.

There are many types of leases available. Each have pro and cons. The one thing to bear in mind is that the lease will control your ongoing relationship with your landlord. All leases should be in writing, even if you are leasing office space from your mother or your closest friend. Life has its ups and downs. Your mother could fail to pay her bills and the bank could foreclose on the mortgage making the bank your landlord; your best friend could get divorced and lose the property in the divorce settlement leaving the evil spouse (who never liked you) in charge of the building.

The lease should contain all terms that are important to you. Never leave issues to be determined at some later date. They never get determined until you need an answer and by that time you are subject to the landlord's whims. For instance, if you have a lease with an option to renew in five years, make certain that there is a formula in place to determine the price you will need to pay in five years. If the neighborhood in which your Practice is located becomes fashionable, you may be looking at an increase of two to three hundred percent (as happened in Manhattan in the late eighties). On the other hand, if the price is tied into the rate of inflation or some such other objective criteria, you will be able to handle any increase much more easily.

The lease may be one of the most important documents that you ever sign. Make sure that you read and understand it. Frequently the lease will be long with very small print. Read it anyway. Make sure you understand what it says. If you cannot understand what it says, make sure that you get a written explanation from the landlord, attached to the lease, and that the language that you did not understand is crossed out. Make sure that the landlord puts his initials near the changes.

Leasing Pointers Specific to Health Care Facilities

The following issues should be addressed in the lease when you are leasing space for your new practice:

Do you have sufficient storage for your supplies both in the office and in storage bins (if available) in the building?

What provisions will be made for your signage?

Are you restricted from having certain equipment in your office either as a result of the weight of the equipment or the usage of such equipment? Will such a restriction impact your practice, either now or in the foreseeable future?

Is the space Medicare-approved?

Is there emergency access to the office space?

Are there elevators (if any) operational 24 hours a day?

Is there access to parking 24 hours a day?

Are there handicap facilities?

Refer to local codes to ascertain the types of handicap facilities required. Do not take the broker's or landlord's verbal representation for compliance unless the landlord is willing to give you a signed statement that the office facility is in compliance with the handicap codes and if they are not, he will make the office facility compliant within 30 days or pay the cost of having you do so. Making an office handicap compliant can be very expensive so, if you are not prepared to bear the brunt of paying for such improvements yourself, make sure that you get the landlord to agree to make whatever improvements are necessary.

Are the exam rooms soundproofed to ensure patient confidentiality? There seems to be a growing tendency in chiropractic offices to separate tables by the use of curtains. I would strongly advise against this trend because of the lack of privacy to which your patient is entitled both legally and ethically.

Will other of doctors practicing chiropractic be able to lease space in the building?

What are the conditions, if any, that would permit you to sublet or assign the premises? Get those conditions in writing even if you think that you will never want to sub lease or assign the office. You may outgrow the office and require additional space elsewhere, or you may find that until your office grows a bit more it would be in your financial self-interest to lease part of the space to another practitioner when you are not there. NEVER, NEVER, NEVER agree to "working it out" when and if the time comes. It never works out in your favor. TRUST ME ON THIS!!!

Is the lease only between the landlord and your practice or are you personally liable under the terms of the lease?

If the building that you are interested in has parking, can you obtain discount parking validations for your patients?

Do you have a sufficient amount of space in which to expand your practice?

If you are building out office space, are you required to use the lessor's space planner or may you use one of your own choosing? a) If you are permitted to use your own space planner, make certain that he/she is experienced in the medical field: Get references and visit offices that the space planner has created. b) If you must use the landlord's space planner, make sure that you obtain a written representation from both the landlord and the space planner that the space planner is experienced in planning medical offices and will be responsible if anything is built which is not in accordance with customary medical type space. Specialized equipment, such as X-Rays, requires specialized wiring and lead lined walls, ceilings and doors. Make sure that the space planner has this information as soon as possible so that the space can be built to suit the requirements of your equipment.

What utilities are provided in which hours? For example, in Florida you would want the air conditioner to be turned on before you open your office and you would want it to be kept on until such time that the last person in your office leaves.

Lease Term Requirements

Always have a written lease signed by your company and the Landlord. If at all possible, try not to sign or guarantee the lease personally. The lease should always contain the following conditions:

Term. The lease should be for a term of no less than one year. Ideally, the lease will contain options to extend the lease on certain, pre-negotiated conditions.

Rental amount. The rent should be at fair market value prices. Fair market value is determined by what other, similar offices in the area are charging for the same square footage. Under no circumstances should you agree to pay the landlord a percentage of your fees as rent.

Value of Referrals. Under no circumstances should the rental price take into account the amount which may be generated by possible referrals.

Miscellaneous Points

Borrowing Money

If you are in need of a loan before you can finalize a lease but are unsure as to whether or not you will qualify, make certain that the following clause is inserted into your lease.

This lease is subject to Tenant obtaining a written commitment within (number) days of the date hereof for a loan in the principal amount of at an initial rate of interest not to exceed percent for a term of years. Tenant will make application therefore within five days from the date hereof and use reasonable diligence to obtain the loan commitment and to satisfy the terms and conditions of the commitment and to close the loan. If the Tenant fails to obtain the commitment or fails to waive Tenant's rights hereunder or after diligent efforts fails to meet the terms and conditions of the commitment then either party may by written notice to the other cancel this lease and tenant shall be refunded his deposit.

Guaranteeing the Lease

Most landlords require that you sign a guaranty of the lease. This is an extremely important document. It means that you are personally liable for payment of the rent on the premises. If your Practice is unsuccessful and you must shut down, you will still be liable for payment for the balance of the lease unless you are able to get another tenant into the space. Even in such an event, you will most likely not be relieved from payment until such time that your original lease expires. Even if you sign a guaranty with a partner, you are primarily liable for the entire amount that is due. For instance, if you have assets and your partner does not, the landlord may go after you alone for the entire amount due. You, of course, may in turn sue your partner for his share but if he does not have assets, you are out of luck (and out of money).

Leasing Pointers Specific to Subletting an Office in an Existing Practice

You are going to be subleasing space in an existing chiropractic office. These issues should be considered by both the sub-landlord and the sub-tenant.

For the sub-landlord: Review your existing lease to make certain that you are permitted to sublet a portion of the premises to another practitioner. If you sub-let the premises without first obtaining such permission you may be required to evict your new sub tenant or, at the very least, pay a great deal of money to your landlord. Rest assured that if you are required to evict your sub tenant, he or she will sue you for damages that he or she may sustain, like loss of income and loss of patients for example.

For the sub-tenant: Review the existing lease (often referred to as the underlying lease) to make certain that your new sub-landlord is permitted to sublet a portion of the premises to you. If you are subsequently evicted because your sub-landlord had no right to sublet a part of the premises to you without first obtaining permission, you may sue for damages but you will still be out of business for a period of time. Additionally, you will need to go through the entire process of finding adequate space once again. Furthermore, even if your landlord is permitted to rent a portion of the space to you, most likely your lease will be subject to the terms of the lease between your landlord and his landlord. It is in your best interests to find out exactly what those terms are. When it comes to real estate, ALWAYS get it in writing.

For both the sub-landlord and sub-tenant, the following issues should be negotiated:

Will the landlord take telephone calls and book appointments for the tenant?

Where will the tenant's charts be kept?

Does the tenant have sufficient storage for supplies both within the office and in storage bins (if available) in the building?

What provisions will be made for the tenant's signage?

What security is provided for the tenant's records, supplies, etc.?

Does the tenant have access to a waiting room?

Is the space Medicare-approved?

Is there emergency access to the office space?

Are there elevators (if any) operational 24 hours a day?

Is there access to parking 24 hours a day?

Are the exam rooms soundproofed to maintain patient confidentiality?

Will other chiropractors be permitted to lease space in the office?

Is the tenant and/or the landlord personally liable under the terms of the lease?

If the building has parking, can the tenant obtain discount parking validations for patients?

The sub-lease should always contain the following conditions:

Term: The lease should be for a term of no less than one year. Ideally, the lease will contain options to extend the lease on certain prenegotiated conditions.

Rental Amount: The rent should be at fair market value prices. Fair market value is determined by what other, similar offices in the area are charging for the same square footage. Under no circumstances should the tenant agree to pay the landlord a percentage of fees as rent.

Value of Referrals: Under no circumstances should the rental price take into account the amount which may be generated by possible referrals.

About the author: Ms. Green has been a practicing attorney since 1977. She is admitted to practice law in the State of New York and Florida and is a member of the American Health Lawyers Association, the New York State Bar Association Health Care System Design Committee, the New York State Bar Association Health Care Providers Committee, the American Bar Association Health Law Section and the Florida Bar Health Law Section. She has lectured to numerous chiropractic groups and is a regular columnist for a magazine devoted to the business interests of chiropractors. She has formed numerous integrated practices throughout the country and her practice is limited to health care transactions.

LEGAL DISCLAIMER: Because this articles was presented to you by an attorney, it would not be complete without a legal disclaimer. This column is provided subject to and governed expressly by the terms of this disclaimer. This column is provided for educational purposes only. The accuracy or timeliness of the information presented herein is not warranted. The information presented herein is not intended to be advice as to a specific fact pattern with which you may be presented. Accordingly, please note that the information contained herein is not being presented as legal advice with respect to any matter and that no attorney-client relationship is hereby established.

April 1999