Leases are two-way agreements that require some give and take from both parties. Sometimes landlords will agree to something in the tenant’s favor to attract the tenant to the property. Other times, landlords have so much interest in their highly sought-after properties that they decline a tenant’s request.
One of the main negotiation topics is whether lease options can exist in the initial lease. These clauses give the tenant a chance to extend their lease under specific conditions. For a landlord, it’s not always a clear-cut decision regarding whether they allow options in the lease.
Healthcare Real Estate and Lease Options
Healthcare tenants tend to remain in their facilities for a long time. This is usually because the buildout for a healthcare practice is typically quite extensive and costly. But aside from that reason, healthcare practices serve a specific patient base over time and want to remain in a location where their patients can easily access their care. Healthcare tenants are usually some of the most valuable, reliable tenants a landlord can have. Landlords may heavily consider the benefit of consistent income when determining if they will allow lease options in the initial lease.
The Benefits and Disadvantages of Lease Renewal Options for Landlords
When a Landlord Would Not Agree to Renewal Options in the Initial Lease
Many landlords do not want a tenant to include renewal options in the initial lease. Renewal options tend to include a rent cap. This language typically benefits the tenant because if the property increases in value over time, they don’t have to worry about a dramatic rent rate increase that reflects the change in the market. A tenant who exercises their options then pays a lower rent rate than the landlord would receive if they found a brand new tenant.
When Lease Options Are Helpful for Landlords
In some cases, lease renewal options are beneficial for landlords. Sometimes having any paying tenant can be more beneficial than having a vacancy. If the landlord doesn’t have a lot of interest in the property, they may allow options in the lease to secure monthly income for a longer time. Since options have shorter, limited terms than an initial lease, the landlord has a little more time to plan for the eventual vacancy or lease renegotiation.
Additionally, sometimes landlords will allow options but include language stating they will renegotiate the rent rate when the tenant chooses to exercise an option. This way, the landlord retains more control over the options, but the tenant can still maintain the right of first refusal for the space.
Renegotiating the Lease
Many landlords would prefer to negotiate a lease with tenants. For some landlords, the risk of finding a new tenant is worth the increased revenue they could receive. If a landlord chooses not to allow options in the initial lease, then they should also be prepared to handle commonly negotiated points within a lease:
Tenant Improvements
Many healthcare tenants will ask for tenant improvements (TI) during renegotiations. Landlords who agree to pay for TI may want their tenants to remain in the building for a longer term. In turn, tenants may also negotiate a lower overall rent rate.
Rent Rate
Landlords naturally want to earn top dollar for their properties. However, some healthcare properties must abide by the fair market value (FMV) range to comply with Stark Law and the Anti-kickback Statute. For those healthcare tenants, the rent rate cannot exceed FMV.
HBRE and Lease Renewal Options
HBRE is a full-service healthcare real estate practice familiar with all aspects of healthcare leases. Our team has helped private physicians and health systems, ensuring their leases fit their interests. Since we serve both tenants and landlords, we know what each party will need in their lease. Healthcare professionals can trust our team to guide them through lease negotiations and renewals.
