There’s a difference between the phrases “cheaper” and “best value.” In commercial real estate (CRE), sometimes a landlord will agree to a lower rental rate for a decent, well-maintained facility. Those agreements offer the best value for the price and are often the result of a thorough negotiation strategy. But many times, a lower price is actually an indication of issues that ultimately cost the tenant more capital. No matter how good a deal seems to be, a tenant should never allow the rental price to be the only factor in their property search. Tenants should engage in detailed market research. They should be careful to ask landlords specific questions about the medical facility and the items they are paying for.
While careful research and negotiations are an important part of any CRE deal, these planning measures are even more important for medical real estate tenants. Healthcare facilities require structural elements that are vital to their patients’ treatments. Medical professionals need to be certain that their facilities can accommodate the additional plumbing, cabinetry, and large medical equipment that their practices use. A lower rental rate cannot outweigh a facility’s capacity to meet the tenant’s needs. So when a medical tenant reviews the rental rate, they need to consider all other costs for leasing their commercial space.
A Lower Rental Rate Could Mean Less Square Footage
In some cases, tenants occupy spaces that are too small for their growing medical practices. The rental rate may be lower than if they occupied a larger facility, but they pay for it in other ways. Sometimes the small space may prevent them from serving a larger number of patients or adding more services within their facility. So, before a medical tenant moves into a new facility, they should consider their future plans. If they plan to grow exponentially or add new services in the next five to ten years, they should consider occupying a space that can suit their needs for a longer lease term. And since landlords prefer tenants who plan to stay for a longer term, they may be more willing to negotiate other elements of the lease.
The Buildout May Cost More Than Planned
The buildout of a commercial property is the construction process that tailors the space to the tenant’s specifications. These elements could include additional interior walls, cabinetry, specific flooring, etc. There are two primary ways to handle the cost of the buildout: tenant buildout and turnkey buildout. In the tenant buildout, the landlord provides the tenant with a set allowance per square foot. In a tenant allowance agreement, typically, but not always, the tenant will oversee the construction process. The tenant also pays for everything above the allowance amount. But in a turnkey buildout, the landlord manages the full scope of the construction process, according to the tenant’s exact specifications. The landlord will include tenant fees in the rental rate.
There are pros and cons to each of these types of buildouts. But the tenant allowance can get especially tricky for medical tenants. Medical buildings require some very specific elements in their buildouts. If the tenant isn’t careful to review the facility and negotiate the right tenant improvement allowance, they may end up paying substantial costs above that amount. In this case, the rental rate remains while a plethora of additional costs accrue on top.
Why It’s Important to Hire a Medical Commercial Real Estate Advisor
Commercial leases can be challenging to navigate. A few forgotten details or miscalculations could become detrimental to a medical tenant, impacting their business for years to come. Medical professionals should strongly consider hiring a commercial real estate practice that specializes in medical real estate.
Collectively, the HBRE team has decades of experience in the commercial real estate industry. Their focus on medical real estate has given them the unique skill set to handle the complexities of healthcare real estate deals. Serving both tenants and landlords, they have a keen understanding of how to negotiate deals on both sides of the table. Medical professionals can trust HBRE to guide them through the right CRE deal for their practices.
If you are interested in learning more about investing in commercial real estate, or if you have questions about buying, selling, or leasing a commercial property, please contact an HBRE advisor. Our team of experienced CRE professionals have the skills and insight to assist with all property transactions. To reach out to us directly, email [email protected] or call 615-564-4133.
