Renegotiating Your Dental Office Lease

Stephen Skok, CPA, MST – Senior Tax Manager, Dental Division

When it comes to managing expenses in your practice, there are dozens of categories to evaluate: equipment, technology, marketing, supply costs and many others. One expense many practice owners seem to always overlook is their real estate expense. The largest expense for most dental practices is payroll, followed by real estate. Real estate expense encompasses your monthly rent, the property’s operating expenses and maintenance fees.

What many practices owners don’t realize, or until it’s too late, is that their second highest expense is actually negotiable. By planning ahead and having professional representation, most doctors are surprised to find out it is possible to negotiate a lower lease rate and receive a substantial tenant improvement allowance, all while never having to move your office.

How the Renewal Process Works

An important clause found in a standard lease is the renewal option. This allows you to extend your lease for a predetermined amount of time (often three, five or ten years) by giving your landlord advance written notice. Renewal options include terms for specific lease rates, concessions such as free rent and tenant improvement allowance, and whether a new base year for operating expenses will be granted. Whether or not a renewal clause exists in the original lease, all of these terms are negotiable and play a large role in the financial structure of a lease renewal. Renewal negotiations are most effective when conducted in the proper timeframe, by having multiple viable relocation options and creating a strong posture to maintain the upper hand.

When Should the Process Begin?

As a rule of thumb, you should begin to consider the renewal process 12 – 18 months in advance of your lease’s expiration. This is recommended so you can compare all relocation options in the market before your current lease options expire.

What Type of Cost Savings Can Be Achieved Through a Successful Renewal?

If properly negotiated, you can achieve significant rent savings, a build-out allowance, free rent and other concessions. It is very common to start a lease renewal term at a lower lease rate than what you are currently paying. In many markets, landlords are offering aggressive concessions and more attractive lease terms to good tenants to keep their buildings leased and avoid vacancies. The amount of overall savings will depend on the availability of competitive vacancies, the efficiencies of the buildings, and your market knowledge and ability to negotiate business points.

Rely on a Trusted Advisor

Successfully negotiating a lease renewal is more than bartering, bluffing or asking for a good deal. Landlords and their professional representatives are in the full-time business of maximizing their profits, even if it means taking advantage of uninformed tenants. You can level the playing field by engaging your own professional representation, gaining competitive market knowledge and by having multiple options for your office space. Doeren Mayhew partners with CARR Healthcare Reality to help our clients negotiate their leases because when done properly, a well-negotiated lease renewal can have a dramatic impact on your practice’s profitability.

For more information on ways to negotiate your practice’s leases, contact Doeren Mayhew’s Dental CPAs and advisors today.