One of the most heavily negotiated and litigated aspects of a lease is the tenant’s obligation to pay rent. Thousands of dollars are on the line and rent payments can drastically impact a practice’s cash flow. In this second part of the series, Matt LaMaster discusses the obligation to pay rent, how it’s calculated, and tips on negotiating a better lease.
A tenant’s duty to pay rent is one of the most obvious obligations in a lease, and the one that most tenants tend to concentrate all of their attention. It is also the rent provisions that are most near and dear to the heart of the landlord, for that is how the landlord makes money. Accordingly, it is important that tenants understand how their rent is calculated and what is included, or not included, in that payment.
As a starting point, most commercial leases for dental offices fall into two main categories, based on how the rent is to be determined—Gross Lease, or Net Lease. A gross
On the other hand, a net lease provides that the landlord transfers a variety of expenses to the tenant through what is often times entitled “Additional Rent.” Those expenses generally include the tenant’s pro rata share of operating expenses, which can include a share of the: (1) real estate taxes; (2) Common Area maintenance expenses (CAM); and, (3) Insurance expenses of the landlord. These three additional expenses are the reason for the name “triple” net lease. For example, the rent rate per square foot for a net lease may be $20.00, but there will be additional periodic payments to the landlord that could be anywhere from $50 to $500 a month or more.
Today, most landlords use a triple net lease. However, regardless of the lease type, any smart, money hungry landlord will “pass” their expenses on to the tenant in a gross lease too. In the case of a gross lease, you may not see the expenses broken out like you do in a net lease, that’s because they are rolled in with the base rental rate. So, when you’re comparing a gross lease rental rate with a net lease rental rate the price for the net lease may seem less, but you need to remember to add the Additional Rent payments.
That brings us to the next item, rent rate per square foot. Many dentists tend to focus solely on the rent rate per square foot. However, before you look at just the price per square foot, now you know the first thing to look for is whether the lease is a gross lease or net lease. The second item you need to be concerned about is the market rate. That seems obvious, but there are some dentists that just don’t know what the true market rate is for the area. I don’t blame them, dentists are dentists, not commercial real estate brokers. For that reason, I recommend using an experienced broker that knows the local market and healthcare practices. Some brokers don’t even charge you, the dentist, they charge the landlord to find you a place and negotiate the basics of the lease. That seems well worth the “free” money and time.
Another important aspect of the square foot rental rate is how the leased space is being calculated. First, you must understand the difference between rentable and usable square footage. The usable space is the area actually located within the four walls of the premises, and that which is able to be used for the practice of dentistry. The rentable space, on the other hand, may include portions of the common areas, i.e. hallways, entrance areas, bathrooms, and utility areas. For example, your dental office may be 2,800 square feet with 4 or 5 operatories, but your rentable square footage, that which is being used to calculate your rent is actually 3,000 square feet. There is a significant difference between rentable square feet and usable square feet, particularly in office buildings with common areas. Another mistake, or trick, that landlords use is when they improperly calculate the space entirely. So, if you are building out
An additional and often overlooked issue by tenants in the lease, unless they use an experienced attorney, occurs when tenants end up paying for costs that
When comparing locations, you need to consider the type of lease, the manner in which the landlord calculates your rent, and whether there are any additional expenses that you are obligated to pay. Make sure that you are getting a fair market rate for the area and that the calculation for determining base rent is well defined. Also, don’t forget to consider that “free rent” periods often times do not extend to operating expenses.
Remember, leases are negotiated documents that represent the written culmination of a negotiated transaction. These “nuggets” of information in this part of the series are just the tip of the iceberg for you and your lease. Stay tuned for the next part when we discuss maintenance obligations of the tenant and landlord.
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Matt LaMaster, Esq., is the founder and principal attorney of the LaMaster Law Firm, which is committed to delivering legal services to dental professionals and their practices. For more information about dental-specific legal services, please visit www.lamasterlaw.com.
This article includes information about legal issues. Such materials are for informational purposes only and may not reflect the law in your jurisdiction. These informational materials are not intended, and should not be taken as legal advice on any particular set of facts or circumstances. You should contact an attorney for advice on specific legal problems