Cost Saving Strategies: Case Study on the Benefits of Early Lease Renewals and Lease Audits

If you are like most medical practices, you are constantly looking for ways to decrease your overhead costs. In a lean market, it can mean a more competitive position in the market. It can also be the difference between profitability and loss. One area that you may be overlooking is your current lease agreement. If you are up for renewal within the next year or two, you may have more leverage than you think.

This past year, the Equity Healthcare Team was hired to review Dental Care Alliance’s (DCA) renewal option. The following case study shows the benefit of having a formal lease audit conducted by a commercial real estate expert.

The Situation: DCA felt that their base rent and common area maintenance charges (CAM) were above market.  Since occupying their space, the tenancy in the building and surrounding area was on the decline.  The anchor tenant in the building was Suntrust, whose relocation could stigmatize the building.  In addition, the elevator in the building was inadequate and needed replacement or repairs. Since DCA occupied second floor space, this was an inconvenience for their patients.

The Strategy:  DCA hired Equity Healthcare Real Estate to represent them in their lease renewal negotiations. The client had two options; move to a new location or stay put. DCA was more inclined to stay in their existing location. In an effort to have a stronger position while negotiating with the Landlord, Equity advised the client to pursue a leverage negotiation. Equity reviewed DCA’S existing lease while also performing a site search for alternative spaces in the market. By understanding the market conditions, including rental rates, CAM charges, tenant improvement allowance, and vacancy rates, Equity was able to have a stronger position in negotiating leverage with the landlord.

The Results: Equity was able to negotiate the following renewal terms for DCA:

  • A five (5) year lease with a starting Base Rent of $12.37 PSF with 2% annual increases. This was a significant decrease from their original Base Rent of $25 PSF with 3% annual increases.
  • Equity discovered inconsistencies in the CAM Charges, which were adjusted and brought the Base Year down to $8.73 PSF from $10 PSF. The landlord also agreed to a 5% cumulative cap on operating expenses.
  • The renewal allowed DCA to terminate their agreement if the bank downstairs left the building at any time during their lease period.
  • DCA was able to obtain exclusivity for dental care in the building.
  • In their initial Lease, DCA agreed to pay back the total build-out allowance ($71,000) if they did not renew their Lease for an additional 10 years.  Equity was able to convince the landlord to terminate the language in the Lease tied to the $71,000 penalty and modify it to include 2 renewal options for 3 years each.
  • The Landlord addressed the significant concerns regarding the elevator problems and provided an acceptable resolution.

Over the course of five years, the renewal negotiation saved DCA approximately $316,207 in base rent alone. Additionally, Equity helped DCA achieve more flexibility in their lease and a stronger control of their environment. Not every situation will yield the same results, however, if you would like an analysis of your current leases, please contact Carleton Compton at 813-490-9812.

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