Regardless of their specialty, most healthcare professionals (unknowingly) overpay for their office space. I surmise that the reason for this is because real estate decisions are typically made every five to seven years, and few healthcare providers can devote adequate time to becoming proficient at a task that occurs so infrequently. This makes them vulnerable to exploitation at the hands of those whose core business is commercial real estate, e.g., property owners, property managers and the real estate agents that market buildings for lease or sale.
The insights presented below are intended to increase awareness of some seldom-discussed nuances of the commercial real estate industry and help physicians, dentists and the managers of their practices make better-informed leasing and buying decisions.
Insight 1: It pays to shop around. Claims that “everyone else pays this amount” (besides being unverifiable) are irrelevant when deciding how much you are willing to pay to lease space or buy property. In fact, every transaction is unique; tenants and buyers not only pay different rates, they also receive a wide range of concessions.
Insight 2: Time can be your ally or your enemy. It generally takes three to 12 months to complete a medical/dental real estate transaction. This includes the due-diligence period during which comparable properties are identified, negotiations are conducted and, if buying a building, financing is arranged. Designing and building out the space typically takes an additional five to seven months. Astute practitioners plan well in advance and are continually looking for ways to reduce, or at least control, their operating overhead.
Insight 3: The negotiation process is, by definition, adversarial. That’s because people with opposing interests square off against each other – the property owner trying to determine the greatest amount the tenant or buyer will pay, and the tenant or buyer seeking the lowest amount the owner will accept.
Insight 4: Say less – save more. Property managers and real estate agents are the eyes and ears of the property owner. Their tools-in-trade include a friendly manner and the ability to gather revealing information through the guise of innocuous banter. Seemingly innocent disclosures can adversely affect your negotiating leverage the most, so instruct your entire staff that all questions regarding your current space or future requirements are to be referred to you or your real estate advisor.
Insight 5: The “asking” rate is seldom the “getting” rate.
Listing agents, property managers and property owners commonly refer to their “asking” rate as the “market,” “going” or “standard” rate – I call it the sticker price – the amount only an uninformed person would pay. Because the asking rate does not reflect any of the discounts or concessions that purposeful negotiating can achieve, it is merely the starting point of the process.
Insight 6: Arm’s length or strong arm? The modern real estate industry is founded on the concept of the arm’s length transaction, where the parties deal from equal bargaining positions. The operative words in this definition are “equal bargaining positions,” meaning that each party conducts business in a formal manner without trusting the other’s fairness or integrity and without being under the other’s control or dominant influence. When the parties are unevenly matched in experience and access to information, exploitation can occur. To level the playing field, do as property owners do: hire your own skilled real estate advisor to educate and insulate you throughout the search and negotiation process.
Insight 7: Leasing space provides flexibility; owning property provides stability. To control the costs of occupancy, it makes good economic sense to purchase the space that houses your practice as soon as your mid- to long-term space needs are established. Because well-located buildings tend to increase in value, owning commercial property should be viewed as an important part of a balanced financial portfolio.
Insight 8: Choose your real estate advisor wisely. Your choice of advisors determines which properties you are shown and how much you will pay. Query potential candidates as you would when selecting an attorney or accountant, making certain they have significant and verifiable experience in solving your problems. Because you seek objective advice, eliminate any agents/brokers who also list properties, as they have inherent and insurmountable conflicts of interest.
Closing Comments: Because healthcare professionals are healers, they tend to trust that those with whom they do business are motivated by the same altruistic desire to help their fellow man. The reality of commercial real estate, however, is that property owners are speculators whose primary objective is to lease or sell their investments for the highest prices possible.
I urge all medical and dental professionals to heed their own advice and schedule annual real estate checkups. In the final analysis, adequate preparation, unbiased information and tenacious representation are the antidotes to overpaying.
Stephen A. Cross, CCIM, owns Cross Commercial Realty Advisors. He counsels business owners, healthcare professionals and corporate decision-makers on ways to acquire or lease property at the lowest cost and most favorable terms. Contact him at 480-998-7998 or firstname.lastname@example.org.