Lease or Buy Medical Office | The Medical Strategist

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In this episode, Barbara and Colin discuss:

How healthcare providers can save $100,000 on their next lease renewal.
Top mistakes that health professionals tend to make in lease agreement negotiations.
Pros and cons between leasing and buying and how to make that decision.
Choosing the best real estate professional to help serve your needs as a health care provider.

Key Takeaways:

The strength of you negotiating the best terms possible is predicated upon you having multiple viable options.
It pays to get someone on your side who knows what they are doing. Medicine and health is your speciality – let a realtor help you with your real estate.
For a standard transaction, you should start 12 months in advance. Don’t wait until the last minute to begin negotiations or you are already starting on the backfoot.

“If you have a lease renewal coming up, there’s as much opportunity for you to capitalize on that transaction as any transaction. All commercial real estate, if it’s done properly, it’s typically $100,000 – $200,000 that is on the table that is in play for either you to capitalize on or for you to lose out on.” — Colin Carr

Transcription

Barbara: Welcome to another episode of Marketing Tips for Doctors. I’m your host, Dr. Barbara Hales.

Today, we have with us Colin Carr. He is the founder and CEO of Carr, the nation’s leading provider of commercial real estate services for healthcare tenants and buyers. Every year, thousands of healthcare practices trust Carr, that’s C-A double R, to achieve the most favorable terms on their lease and purchase negotiations. Colin has been involved in commercial real estate since the year 2000 and has personally completed over 1000 transactions. He is a licensed real estate broker in 10 states.

Colin lectures and trains thousands of healthcare professionals, administrators, business owners, students and more on an annual basis throughout the country. Welcome to the show, Colin.

Colin: It’s great to be here. Thank you.

Barbara: How can healthcare providers save $100,000 on their next lease renewal? That’s pretty impressive numbers.

Colin: Yeah. That’s a big number but it’s a real number. And I think it starts with understanding how much is really at stake when people are doing lease renewals. Most people just assume that their lease rate is going to be close enough to the market, it’s going to be good enough. And what they don’t take into consideration is if your lease is off by let’s say $2 or $3 a square foot and let’s say you’re in 3,000 square feet of space, you take that $2 or $3 a square foot, you multiply it by your square footage at 3000 square feet, and all of a sudden you got $6,000 to $9000 per year mistake. You take that over a standard five or 10-year lease and it adds up to a substantial amount of money.

And what most healthcare providers don’t realize is that there’s a huge margin for negotiations on a lease renewal. It’s actually the #1 transaction in all of commercial real estate. And at the same time, the concessions that a new tenant would normally get like tenant improvement allowance, free rent, a market lease rate, those are all concepts that are on the table for a lease renewal. So to start with, we just want to let people know that if you have a lease renewal coming up, there’s as much opportunity for you to capitalize on that transaction as any transaction in all of commercial real estate. And if it’s done properly, it’s typically $100,000, $200,000 that’s on the table that’s in play for either you to capitalize on or for you to lose out on.

Barbara: That’s really great to know because most doctors probably feel that they’re stuck, that the people that own the building know that doctors really don’t want to move after their office is already established. You know, quite frankly, having to redesign another office someplace else is going to be a terrible headache and pretty costly. So, it’s nice to know that they do have some bargaining power.

Colin: Yeah. I mean, it really starts with the idea that whether you want to move or not, you got to at least get to the market and understand what your options are. Most healthcare providers make the mistake where they just, they make the blanket statement like you just mentioned. It is costly to move. It is time consuming. It can be a confusing, strenuous process. And so they just go to their landlord and they say concepts like hey, I don’t want to move or it’d be easier for me to stay.

You know, what would you do if I want to stay? And unfortunately, that sets a very bad posture because the reality is the commercial real estate landlord is in the game to make as much money as possible. I mean, it’d be the equivalent of, you know, showing up to a car lot and saying, I have to buy a car today but the most I can spend is $40,000 but I can’t leave unless I buy this car. What’s the best deal you can give me? You’re not going to capitalize on the best pricing.

So, when it comes to a lease renewal or any transaction in commercial real estate, the strength of you negotiating the best terms possible is predicated upon you having multiple options. And if at any time any landlord or owner that you’re dealing with thinks that you have no other options and that you have to go into one property or that you’re not going to go anywhere else, you’re going to lose a lot of money because again commercial real estate, you got to have a posture. A posture is predicated upon you having options and you got to have viable options. And the only way you can get to that situation is if you have a strategy where you actually go to the market, look at your top options, negotiate with multiple landlords and then you actually have a standard or a benchmark to compare your current deal with.

Barbara: Well, that’s certainly makes a lot of sense. Are there other top mistakes that health professionals tend to make?

Colin: Yeah. A lot of healthcare professionals talk to their colleagues and their peers and they ask them what they’re doing or what they received in a negotiation. And that makes sense because your friends, your colleagues, your peers, you guys talk on a regular basis. A lot of times, healthcare providers will ask other healthcare providers, you know, what are you paying for your lease rate? Or what did you get when you renewed your lease? Or what type of concessions were available in your last deal? The problem is, they’re measuring their future or current opportunity against someone who probably didn’t do very good with what they had.

We have a scenario, there’s a client I worked with a number of years ago, a healthcare provider on a second floor of a building. Four other healthcare providers on that floor. We sat down and looked at his lease and he was paying about $30 per square foot. He had done a couple of renewals by himself. And we asked them, hey, have you ever gotten any tenant improvement allowance or free rent or any concessions on any of the renewals? And he said, no, you know, my landlord doesn’t do that. And I said, well, how do you know that? And he said, well, because every other tenant on the floor is a colleague of mine.

We all share information. We’re all paying the same lease rate, $30 a square foot, and none of us had ever gotten any concessions. And so I said, well, hey, I understand the logic there. But what if I told you that we just moved a new tenant into the first floor at $21 a square foot and we got $150,000 worth of tenant improvement allowance and free rent.

Barbara: Oh! Egg on the face.

Colin: Yeah. And so I mean, the landlord’s strategy is very simple. You just tell people I don’t do this or it doesn’t work that way. And if they’re naïve just to bite off on that and say, oh,

I guess, you know, I tried, which really they didn’t try. They literally asked a very, very weak question of would you do this for me? I mean, essentially, what they asked the landlord is this: Would you give me tens of thousands of dollars for no reason whatsoever? And the landlord just said, no, I won’t. And then they say, oh, well, I tried. That’s not a real strategy. A real strategy would be to go to the market and get other viable options whether you want to or not. Whether you want to move or not, you’ve got to have a standard to measure this against.

So you hire a professional adviser that understands your industry, that’s going to protect you, that’s not working for the landlord or other owners. It’s working for your interest exclusively. No conflicts. They take you to the market. They show you your top options. They negotiate simultaneously with three or four landlords. They get best and final terms and then they understand what the market bares and then that adviser goes to your landlord and says, listen, my client, Dr. So and So is willing to consider a renewal but it’s going to have to be a term that makes sense to them. And then they provide those terms. You don’t ask the question, what would you do for me? If you ask the question, “what would you for me?” that says you don’t know what you’re doing.

Barbara: Yeah.

Colin: If you say, my client is willing to stay but here are the terms at which it would make sense to them financially and if you can match this or meet his needs, we might have a deal, we can talk. If you can’t, you’re going to have a vacant space. And at that point, the tables get turned because the landlord realizes if this tenant moves out, it’s going to cost them a lot more money than if they just did a fair deal upfront.

Barbara: Absolutely. And for you listeners that are hearing this, just think, it pays to get someone on your side that knows what he’s doing. I mean, look how much money that you would be saving to not do it yourself. Medicine and health are your specialty. Let a realtor help you with your real estate. That only makes sense.

Colin: Yeah. It’s really the same concept as why people come to the healthcare provider. I mean, what they’re saying is hey, listen, I can probably Google this, I can probably self-diagnose, I can probably try some at-home remedy or whatever. And the healthcare provider would say, you know, that’s probably not a good idea depending on what you’re dealing with. And so you have the idea of, you know, if this is all that the provider does day in and day out, it’s what they’re trained to do, it’s what they’ve done for years or decades, they’re probably going to be better at it than you would.

And then the other misnomer in real estate is that there’s this idea that if you do something yourself, you save money. And that’s true if you’re talking about you know. I always joke. You see a U-Haul driving down the street and it says move yourself and save. That’s true if you’re moving your house and you want to get a truck and be your own mover. When it comes to commercial real estate, what people don’t realize is the landlord is the one that determines the commissions and they determine them prior to and independent of what the tenant does or doesn’t do. Meaning, they hire a listing agent. They agree to a commission and that commission is built for two people. If the tenant doesn’t use a broker or an agent or an adviser, the listing agent gets a double commission or the landlord just keeps that money.

Barbara: Wow!

Colin: So, there’s this misnomer. It’s not like for sale by owner where you decide to sell your house and not hire a broker and you think you’re going to save half the commission. You don’t have any say on what the commission is in commercial real estate. There’s a commission that’s set aside for every deal whether they have a listing agent or the owner does it or they have a property manager do it. And that commission is getting accounted for whether you use a broker or not. So landlords are famous for telling tenants if you don’t hire a broker, I’ll give you a better deal. And let me translate that.

What they’re saying is this. If you don’t hire a broker, I’m going to have less pushback. You don’t know what you’re doing. It’s going to be easier on me and I’m going to take advantage of you and I’m going to take you for tens of thousands of dollars meanwhile pretending like you got a better deal and it’s not true. Like what the translation is. I’m going to take advantage of you. I’m going to pretend like you’re getting a better deal and meanwhile you’re going to lose tens of thousands of dollars or more.

Barbara: Wow! Now, a lot of people may say, should I buy my office space or should I just lease it? I know there are probably pros and cons for each one. I know when I was starting out in my medical practice I wanted to buy the building. But of course, then you have upkeep on the building. But on the other hand, it is a tax deduction. It could be a headache. But then again at the end of the day, it’s yours and hopefully builds equity. So you know, what’s your take on that, lease or purchase?

Colin: I’m a fan of both leasing and purchasing for the right situation. And let me give you a couple of different options. If you’re starting up and you need a smaller space to start from an overhead perspective, you don’t necessarily know exactly where you want to be for the next 10 or 15 or 20 years, leasing can be a great avenue to give you flexibility and also to help keep your overhead lower because a lot of times — Again, when you’re leasing, most landlords are going to give you a free buildout period.

They’re going to give you free rent period to offset your startup cost or your moving cost. There are a lot of times when they contribute very heavily to the cost of the buildout. And so if they’re going to cut you a large check for buildout and give you free rent and then that affords you some flexibility with what size of space you occupy in the early years of your practice and/or where you’re actually located, leasing can make a lot of sense.

On the other side, if you know the space size you’re going to need for a long time, okay, this is going to meet my needs for the next 10, 15, 20 years, this is the area that I want to be in and then it’s a quality property that you would be excited and proud to practice in, then purchasing can make a ton of sense. Ultimately, we tell people it’s got to make sense both emotionally, you got to like it, you know, you got to be excited. Sometimes, the options of the purchase are the nice type. Other times, they’re dramatically inferior to lease up. And so you got to like the property, be proud of it. You want to be there for the next 10, 15, 20 years. And then you got to make sure the economics work and that’s where — Just a quick summary is it’s got to make sense from a cashflow standpoint. Meaning, what’s the check you’re cutting per month to lease versus purchase? It’s got to make sense after you factor in tax deductions like depreciation and other concepts like that, writing off the mortgage interest, etc.

And then ultimately as you mentioned, Barbara, it’s got to make sense from the standpoint of principal paydown. If you’re leasing it 10,000 a month and you’re owning it 10,000 a month but every month you cut a check, you know, $3000 or $4000 goes to paydown principal and your net worth increases by 3000 or 4000 per month, that can be a no brainer.

On the flip side, if it’s $5000 a month to lease and it’s $14,000 a month to own, then you might not cash enough benefits with tax deductions and principal paydown for it to make sense to purchase. You might be at a better scenario to still lease. Take the money you’d save per month and put it into some other investment. So really, it’s got to make sense personally and emotionally. And then the numbers are going to tell you very quickly either yes or no. And really, that’s the purpose of a detailed purchase versus lease analysis.

Barbara: I think that’s a great capture. I think talking about the topic, it really helps give a clear picture of the things a person needs to sit down and think about. Once a person has their lease, assuming they’ve decided that leasing was the way to go, can they successfully renegotiate it?

Colin: Absolutely. And that goes back to, we talked about it a few minutes ago, is the first thing people need to understand on a renegotiation is you got to start at the right time frame. If you wait until your lease is a month or two from expiring, that’s the equivalent for when the other team runs out the clock. You’re not going to get a chance to actually touch the ball and actually get a shot at scoring again if you don’t have enough time before your lease expires. Landlords are masters at letting the clock run out. They love to let you get a month or two before your lease expires and then say, hey, it looks like you’re not going anywhere. Correct? And then you say, yeah, I wasn’t really paying attention. I don’t really know what I’m doing. I don’t have time to move. And then they stick you with an above-market lease rate with no concessions and it costs you again tens of thousands, hundreds of thousands over a lease. So it starts with understanding what’s the right time frame.

Standard transaction usually starts 12 months in advance. And then you got to move on to the idea of are you going to do it yourself or are you going to hire an expert adviser? Obviously, we recommend hiring an expert adviser because it’s going to save you 30, 40 hours of your valuable time but also it’s going to protect your interest and then that person arguably should be doing a much better job than you do it without knowing the game, without knowing the market, etc. That agent then goes to the market, gets the top five to eight properties that meet your requirements, both lease and purchase.

It’s a good idea to look at all your options. And then you go tour the top five to eight. You guys usually agree to winnow it down to the top three or four. And then you negotiate simultaneously with three or four landlords. And that’s the big difference between commercial real estate and residential real estate. Residential real estate, you pick the house you want and you submit a single contract because once the seller signs it, you’re under contract and it’s legal. In commercial real estate, it’s a non-binding unofficial commitment. It’s a goodwill or good faith negotiation.

And so in commercial real estate, you’re supposed to go and negotiate with three or four landlords simultaneously. And you’re supposed to go multiple rounds of negotiations. It’s a give and take. And so at that point once you get to where you got three or four landlords that have given you best and final terms, you can then compare that to your current terms and then you know if your landlord is giving you a good, average or bad deal. You know if they send you some lease rate or some proposal or if you submit a proposal and they respond back, you’re going to know very quickly, this is a good deal or this is a bad deal or this is a great deal. And it takes the mystery and the confusion out of the negotiation.

You know, there’s no Kelley Blue Book when it comes to commercial real estate. Again, using cars as an example, you can’t pull up this make and model and say, well, you know, the range is $38,000 to $40,000. So if I’m there, I’m close enough. Commercial real estate, there are so many variables that the only way to create that standard, that check and balance is from other viable properties that meet your needs that actually get vetted and actually get negotiated. And that’s the game plan for capitalizing on a lease renewal.

Barbara: When you as the potential client submit your proposal, how long can the landlord wait or hold out before giving you his response?

Colin: That’s a great question. And that is a consideration that most people don’t think about for the reason that they’re used to residential. You submit an offer in residential. You know for a fact that the seller wants to sell. They sometimes hit you back like in 30 minutes or an hour. It’s usually never more than a day in residential. In commercial real estate, it’s not uncommon for it to take a couple of weeks to get a response. And here’s why.

Sometimes, they want to respond quickly but they have a lender that has to approve every deal they do. Other times, they have partners that have to sign off on things. Other times, there are moving parts, other tenants moving or renewing or other leases getting signed and they’re trying to buy themselves time because they want to maybe sign another lease at a higher lease rate so they can say that their last deal was a lot higher. You never know what’s going on.

In order to get a landlord to respond quickly, they’ve got to know that you have other options. Again, if you go to the landlord with the idea of I don’t want to move or I can’t move, they’re going to do whatever they want. And it’s not uncommon to have landlords get an offer and just ignore you, make excuses, not respond or respond with an offer that’s not very exciting for you. The way that you flip the script on them is if you have other options and you’re telling them, listen, here’s the deal. I’ve got three other properties fully negotiated, an option to purchase, two options to lease, and I’m looking to see your best and final terms based upon my criteria. Here comes my offer. And I’m going to be making a final decision here in the next three weeks. So if you want to be considered for that, you want to compete for my tenancy, fantastic. If you don’t, you’re going to have a vacancy. And that’s a position of strength.

And here’s I guess the secret sauce if you will. The reality is for a landlord, if they lose the tenant and they don’t have someone to immediately back to fill that space, they’re going to lose a significant amount of money. And so even when landlords tell you, you know, I’ve got someone that want your space, the reality is they’re not going to pay above-market lease rate and they’re going to have to give them concessions that are market. And then even if someone does, there’s probably some downtime. There’s a brand-new lease. There are commissions being paid to the new brokers, etc. So, the whole posture from landlords of I’ve got someone that wants the space, it’s usually a bluff. It’s usually just honestly a bold-faced lie. But even if it’s real, they’re still not going to do better than they do with you typically if they just did a fair deal with you.

And so, it’s important for tenants to realize that we’re not trying to hurt landlords, we’re not trying to take advantage of landlords. We’re just trying not to be taken advantage of for our clients and for ourselves. And all that means is just put together a fair offer. Treat me the way you treat a brand-new tenant. Treat me the way you treat a national tenant that knows better. If like a Chipotle or a Starbucks or a Charles Schwab showed up, you wouldn’t play games with them because you know that they’re not going to play games with you and you know that they know better. So, treat me the way you treat a sophisticated national tenant that you want to do a deal with. And if we can do that, we’re going to be in good shape.

The reality is though most landlords assume the healthcare provider whether it’s a solo practitioner or a group practice, even if it has an organization affiliated with it, they typically still assume you don’t know what you’re doing. I’m the expert and we’re going to play by my rules.

And so that’s why for our company, we love to flip the script and level the playing field and say, listen, you’re going to treat Dr. So and So or this group fairly or you’re going to have a vacant space and we both know how much it’s going to cost you. So, let’s stop playing games and let’s give them a fair offer. And if we can do that, then you can end up having a new tenant or renew the deal for five or 10 years which is a win-win for everyone.

Barbara: What an eye opener, Colin. This is really great to hear.

Colin: Absolutely.

Barbara: How can I as a healthcare professional choose the best adviser to help me with my commercial real estate? You know, everybody says, oh, like I’m experienced. I’ve done this before. I can help you. How can you like weed out the ones that would not be as beneficial. And which one would be the best for you?

Colin: Absolutely. So, if you’re operating as a healthcare provider doing a deal, you’re going to be operating as a tenant or a buyer. I’m not talking about a landlord. Maybe you own a building, you’re leasing space to someone else. We’re not talking about that right now if you’re a landlord or an investor. We’re talking about if you’re a healthcare provider and you’re looking to do a new lease or a purchase, you’re a tenant or buyer. You want to find someone that doesn’t have what we call conflict of interest. That’s the first and most important aspect. So if somebody lists a bunch of properties in your area and they work for landlords, they can’t work for you without a conflict because they have a fiduciary legal obligation to help that landlord get the best deal possible and that means they’re going to actually have to negotiate against you. So that person can’t represent you.

The next thing is you’d love for that person in an ideal scenario to have healthcare experience because a healthcare office is very different than a CPA office or a restaurant. So that’s the next criteria. First criterion is are you going to work for me and me only? No conflicts on the listings in the area that I’m looking for. Number two, do you understand healthcare? Hopefully, you do. And then if you can find that combination, the third and final concept is do you trust the person? Do you like the person? And when they tell you they’re going to put your interest first and work very hard for you, do you believe them? Is it just lip service? And you can sift that out by asking them to provide you testimonials, references. You can ask them how many deals they’ve done in this area in the last couple of years or several months, whatever your criteria are. So those are some great questions.

As far as getting in front of people that do healthcare real estate, one of the best ways to do that is to ask some of the key players in your market. Ask some of the merchandise companies, the sundries, the equipment suppliers. Ask the technology, the CPAs, the lenders, the folks on healthcare because they operate in a game or a sphere where it’s a lot of the same people.

You know, there are lenders and all they do is lend to healthcare providers. There are CPAs, all they do is provide services to healthcare providers. And so they typically get accustomed to seeing who’s good and who’s not that great. And really, a lot of times, real estate is one of the first main people that you get on your team. And then once you get a really good real estate adviser, they will do the same thing in the other areas. They’ll tell you, hey, here’s the top two or three banks. Here’s the top two or three CPAs. If we need to do a buildout, here’s a couple of great architects. Here’s a couple of great contractors. And they’ll help you assemble your team.

One more thing to ask any provider you work with as well is just to make sure that they’re not taking referral fees. They’re not getting paid by people to build a team. And so in real estate, believe it or not, it’s actually highly regulated. It’s more regulated than a lot of industries that work in healthcare. And just ask them, just say, hey, I just want to make sure that if I bring in my team and I hire you that no one is paying to refer them and you’re not paying anybody for it either. And if you can clear that last hurdle with no conflicts, someone you trust, someone who understands healthcare, you’re going to be in really good shape.

Barbara: If they were taking kickbacks, will they be honest about it?

Colin: No, no. Most time, people don’t. They don’t want to tell that. They don’t want to tell who’s paying who. And unfortunately, just again, people are paying people all the time. Some markets are a little more challenging. Some vendors, it’s a little more challenging. So if you ask a question, “are you paying anyone or are you getting paid by anybody” if there’s even like that little flinch there, you know something’s going on. And so somebody can say, listen, it’s our company policy. If I did, I’ll be terminated or our industry says we cannot, here’s why. You know, those are good checks and balances.

Barbara: That certainly sounds like it makes sense. Well, before we end the show, do you have any additional tips for the audience?

Colin: You know, I can wrap this thing up and tell people treat real estate with the respect that it deserves. It’s not, did you overpay for rubber gloves or gauze? And next month, you’ll do a better job with it and buy at a better price. You only get one crack at this every five, seven or 10 years, maybe once in your lifetime if you buy a building. So with that in mind, do the best you can with the opportunity. Don’t assume that you don’t have options. Don’t assume that because you want to stay that you’re just going to have to take the best deal the landlord gives you.

Hire professional representation. Let them create a custom strategy for you. And then realize this. The landlord doesn’t want you to move worse than you don’t want to move. Like you might say I don’t want to move. I can tell you right now the landlord — You can say I’m terrified about moving. Here’s what I’m telling you now. The landlord is terrified you’re going to move. All right. So just realize you have a stronger position than you think you do. You have more authority than you think you do. And if you hire the right adviser, they can help you create a strategy that can allow you to capitalize. And if you do, it’s going to probably mean you save a couple of hundred to 1000 or a couple of $1000 per month in overall cost, believe it or not.

Barbara: That’s really just so impressive. How can our listeners get in touch with you?

Colin: Absolutely. So our website is carr.us and that’s C-A-R-R dot us. And on every page on the upper right-hand corner, there are a couple of tabs. One of them is contact us. One of them is find an agent. And if you click find an agent, you can find a city that you’re in, the state that you’re in. We have agents across the country. We do deals in all 50 states plus DC. And so if you want to connect with someone locally and you want to just sit down and talk to them or do a phone call or a Zoom call, they’ll look at your current lease, they’ll tell you how your current terms compare to the market, they’ll start to give you your options. And they do all that at no cost.

We also have a tab for a free lease or purchase evaluation which is what I just mentioned but even more in depth. Whether your lease is up in a year or you’re one year into a 10-year deal, if you just want to know, hey, “do I have a good deal? Do I have a bad deal? What’s the right timing? If I want to own, what does it look like?” our team will provide you with really detailed information because once you have that information, you’re going to be able to make the best decision for your practice and we want to inform people on how to do that.

Barbara: Well, thank you so much. This has been really such an enlightening episode. I’ve learned a lot and I’m sure that our listeners are going to be finding this extremely valuable. This was Colin Carr speaking with us today and another episode of Marketing Tips for Doctors with your host, Dr. Barbara Hales. Until next time.

Connect with Colin Carr:

Twitter: @carrhealthcare

Facebook: CARR Health Care

Website: CARR.us

YouTube: CARR Healthcare

LinkedIn: CARR

Instagram: @carrhealthcare

Connect with Barbara Hales:

Twitter: @DrBarbaraHales

Facebook: facebook.com/theMedicalStrategist

Business website: www.TheMedicalStrategist.com

Show website: www.MarketingTipsForDoctors.com