Medical Space Leasing Good-to-Know Terminology
As a medical or dental professional, you no doubt have a clear understanding of medical terminology. But if you’re looking to lease a medical space for a new office (or even taking a new look at your existing lease), the terminology is equally important to understand.
Following are a few useful medical space leasing terms you may want to know
Usable vs. Rentable Square Footage
- Rentable square footage(which will be the basis for your payment) includes everything that you, as a renter, have access to. This includes office space, as well as all common areas such as public toilets, building lobbies, elevators, public hallways, mechanical and electrical rooms, etc.
- Usable square footageis the space dedicated to your business alone, and is frequently calculated by measuring office space from wall to wall, without deductions for structural support (like columns or interior walls).
This is the percentage amount your rent will increase over time, and typically ranges between two and four percent. While that number might sound low, keep in mind that the escalation compounds, so the difference of a couple of percentage points can mean tens of thousands of dollars in savings (or losses) over 10 years of rent payments. Try to negotiate this number to be as low as possible.
Triple Net Lease
A common and often misunderstood term in leasing medical spaces, it is also known as the “net lease,” “NNN lease,” or “net-net-net lease.” At its most basic, a triple net is an agreement in which you, the tenant, pay for expenses in addition to your base rent. It sounds straightforward, but that can include any combination of maintenance, taxes, utilities, sewer/water, Internet, phone, insurance, maintenance fees, etc.
Avoid issues like common area maintenance (CAM) fees, and what share you’ll be responsible for. To keep your costs low, you may even be able to partner with neighbors on certain expenses like housekeeping and other services. If you are unsure of provisions in the agreement, ask to have them spelled out for you, and see what’s up for negotiation.
Medical offices require more attention to workflow, legal regulations, and safety than traditional offices, so the discussion around implementing the upgrades you’ll need before your office is ready for your use (“tenant finish”) will be more complicated and more expensive.
Tenant finish can apply to new construction, department, or retail spaces that a different type of tenant (or even another clinical provider) previously occupied. It can involve changes to mechanical, electrical, plumbing, and communication systems in the existing space, as well as by the square foot; in the case of medical spaces, it can mean larger initial outlays that you will negotiate in your lease terms and can even finance yourself.
Tenant Improvement Allowance
Tenant improvement allowance is the amount of money a landlord is willing to spend on tenant finish. It is typically more expensive for medical properties than general commercial properties, which is why medical leases tend to be twice as long. Have an idea of the total cost of improvements when negotiating your lease. That way you’ll be able to negotiate your tenant improvement allowance in a way that will benefit you.
This is the length of time for which your lease agreement is legally enforceable. Lease agreements tend to be fixed term and greater in length, ranging 7-10 years. You will sometimes find offices that are willing to rent to medical tenants on a month-to-month basis, but as with anything else, know that the flexibility will come with tradeoffs in other areas.
A situation could arise in which your landlord brings on a larger tenant — one that wants your office space. To be proactive about this difficult situation, lease agreements frequently contain “relocation provisions” that dictate matters like the landlord’s responsibilities in finding you a substitute premise. Make sure your provisions indicate that the landlord is responsible for the cost of the move and you a similar space if relocation does need to occur.
When it comes to renting medical properties, lien rights will become especially important around rights to medical equipment purchased above and beyond the tenant improvement allowance and tenant finish add-ons. You’ll want to make sure that landlord lien rights to medical equipment purchases are subordinate to yours, the tenant.
Restoration of Premises
You won’t likely have to worry about this term for a few years, but it pays to think about the implications today.
Restoration of premises (or surrender of premises) terms dictate the state in which you agree to leave a property at the end of a rental agreement, the rights of the landlord, and what will happen to any property that’s left behind. This can mean more than you just removing all of your files and equipment and vacuuming the floors. Many agreements will require that you restore the space to its original state. If you fail to do so, you can end up with a painfully expensive bill from your landlord, even after you thought everything was said and done.
When negotiating this part of your rental agreement, pay attention to:
- The condition of the space at move in
- Improvements you want to make
- Length of lease term
- Items you’ll want to keep once the lease is over
- Keep these in mind while you’re also budgeting for the cost of moving out.