MGMA 2020: How to save money on real estate leasing costs

While COVID has hurt the commercial real estate market, physicians should not be expecting a massive discount on their next lease renewal. In fact, if they don’t follow some best practices, they may see a rate increase, possibly with less generous terms, says Colin Carr, CEO of Carr Inc., which specializes in health care properties. Carr spoke at the Medical Group Management Association’s virtual conference.

Real estate is typically the second highest expense following payroll, says Carr. “Payroll is minimally negotiable, but real estate is 100% negotiable,” he adds. But like any major expense, a practice needs to understand the rules and should shop around, as leases typically only come due once every five to 10 years. A lease that is just a few dollars per square foot above market rate could cost a practice tens of thousands or even hundreds of thousands of dollars. When you factor that through profitability, you might have to produce $500,000 in revenue just to pay for that excess rent expense.

Carr says to start by never assuming the terms offered by your landlord are good enough. “Landlords love to say, ‘It’s no big deal if you leave,” but they don’t want to lose that cash flow from your practice,” he says. It’s cheaper for the landlord to give a current practice a better rate now than to lose them, have the space sit empty for 18 months, and then end up giving a new tenant the same deal. However, if a practice doesn’t know how to negotiate real estate, getting that best rate can be difficult.

“Landlords negotiate for a living,” says Carr. “They want the highest lease rate with lowest concessions. If there are a few hundred thousand dollars on the line, they will do everything they can to achieve that, including trying to manipulate you, put pressure on you, or lie. They don’t come to the table with their best terms unless they have a risk of losing the deal.”

The first step is to make sure the landlord thinks losing the deal is a distinct possibility, and that starts with having a professional real estate representative working with you. “Landlords assume that providers and practice managers don’t know what they are doing, and they assume that if you were serious about negotiating, you would have professional representation,” says Carr.

A real estate professional will look at several other locations in the area and help you narrow it down to the top three or four. From there, the rep will negotiate simultaneously for multiple properties in non-binding contracts. These competing contracts establish benchmarks that set the boundaries that the existing landlord needs to match.

“This approach tells them it’s not a guaranteed fact that they have a deal, and that they may lose business if don’t give you a deal that is as competitive for you as it would be for a new tenant,” says Carr. “If the space is vacant, they are going to lose $10,000, $15,000, or $20,000 a month. But if the landlord thinks you are not willing to move or look at other options, they will hit you as hard as they can and not give you the terms they would give a new tenant.”

Commissions for a buyer’s (or leaser’s) agent are paid by the landlord. The agent does all the research and deals with the confrontations and conflicts with the existing landlord, but does not make the final decision, as that still falls to you. While it may seem that not having an agent could save money, it is not like a “for sale by owner” situation in residential real estate. The commercial real estate landlord has determined the commission for the deal and set money aside for both parties; if the practice doesn’t have an agent, then the landlord receives a double commission.

“Landlords will tell you if don’t get agent, they will give you a better deal,” says Carr. “That’s not true. They know if you don’t have an agent, you do not have the market knowledge.”