Medical professionals often remain in their facilities for a long time—typically 10-20 years. Their build-outs are usually quite costly, making it more cost-effective to stay within the same building for years at a time. But lease terms eventually end, leaving the healthcare professionals with one important question: Should I renew my current lease or renegotiate the lease?
Sometimes healthcare professionals choose to renew their lease by exercising an option because that is seemingly the best method. But actually, healthcare professionals could be missing out on rent adjustments and (or) necessary legal requirements.
So, as a healthcare professional, is there a clear-cut sign when it would be best to exercise an option or renegotiate the entire lease? The short answer is that those signs will vary per lease. The healthcare professional and their healthcare real estate broker must review the lease in detail before making any decisions.
Exercising Lease Renewal Options
An option is a prewritten clause that offers conditions under which a tenant can extend a lease. A lease typically includes one or two options for extending the lease after the initial term is over. These options usually involve the length of the extension or a guideline for how the rent rate can increase per year.
Why Lease Options Exist
Lease options benefit the tenant because it gives them some control over the terms and the rate. Additionally, a reputable healthcare real estate broker will build language into the options that prevents the rent rate from exceeding the fair market value range. That way, if a tenant exercises an option, they will not risk incurring a rate outside of Stark Law requirements.
When Not to Use Lease Renewal Options
Fair market value can fluctuate over time, and sometimes existing lease options do not have rent rate caps. In these cases, exercising an option may cause the healthcare entity to step outside the requirements of Stark Law and the Anti-kickback Statute. This legislation specifically affects healthcare practices that act as referral sources (read more here).
Renegotiating the Lease
Many times, healthcare practices choose to negotiate the lease altogether. They may have issues with an existing lease, a need to renegotiate the rent rate, or they may want to request tenant improvements (TI). Sometimes a tenant wants to remain in a facility for a longer time than their options allow. Renegotiating a lease for a longer term may give the tenant leverage to earn a lower rent rate. A tenant who chooses to stay for a longer term typically has negotiating power to request more money in tenant improvements (TI).
When a healthcare practice chooses to renegotiate the lease, the healthcare broker will review the entire lease in detail. They check to make sure the previously negotiated elements are still intact. They may also write in options that provide flexibility for the tenant in the future. And most importantly, they review fair market value and ensure the rate is accurate.
Healthcare Real Estate Brokers, Options, and Renegotiations
Leases can have any number of custom details. Healthcare real estate brokers are familiar with looking at complicated leases, and they know what elements to watch out for. They understand the needs of both landlords and tenants and can communicate between the two. Their industry knowledge allows them to tailor the lease to fit both parties.
At HBRE, we are well-equipped to handle all facets of a healthcare lease. Whether a tenant is interested in exercising a lease option or looking to renegotiate a lease, we have the skills and resources to help. Healthcare professionals who would like to work with a commercial real estate practice with healthcare-specific tools and experience can trust our team to handle their lease.
