The Ambulatory M&A Advisor: UNDERSTANDING RETAIL COMMERCIAL LEASES FOR URGENT CARE PRACTICES
UNDERSTANDING RETAIL COMMERCIAL LEASES FOR URGENT CARE PRACTICES
Written by Brittany Belli
When it’s time to pick the perfect location for an urgent care center, owners/operators can choose from several different locations. Strip malls or plazas are some of the more popular choices, as they provide high foot traffic through the area. However, retail commercial leases can differ from leases for traditional medical office buildings (MOBs). Retail commercial leases will generally shift responsibilities from the landlord to the tenant (you), so it’s important to understand what they entail, and what can be negotiated.
Carmin Grandinetti, Partner at Bingham Greenebaum Doll LLP, says that an area that is often overlooked by prospective tenants when evaluating retail commercial leases for urgent care practices is the common area maintenance expense (CAM). Differences in how CAM is handled in an office lease could vary significantly from the way it is handled in strip malls or plazas.
“In any type of office lease setting, the CAM (which covers the taxes, the cost of maintaining the property, any cleaning costs, day-to-day maintenance costs, electricity, gas and utilities) is usually built into the initial rent rate,” Grandinetti says. “Increases in CAM over the initial year are then billed to the tenants every year. Other landlords may keep it separate; they will charge the tenant an additional amount per square foot for the CAM, and the amount will likely increase over time.”
It’s also extremely important to understand how tenant improvement (TI) works. Sometimes, a retail space may be ready to house an urgent care practice from the start. Other times, space will need to be built out to accommodate the center.
“There are often specific building requirements that you’d have to comply with as a medical provider, instead of just a plain retail tenant,” Brian Berlandi, Partner and Co-Founder of Berlandi Nussbaum & Reitzas LLP, says. “Prior to signing the lease, you need to make sure that the building is zoned appropriately, and that you’re going to be able to obtain the permits you need to build out the space the way you want.”
“If you’re building out space, sometimes the landlord will require tenants to use a specific contractor,” Jim Taylor, Partner at Milligan Lawless, P.C., says. “Some landlords and contractors may not be as familiar with specific requirements for healthcare facilities, so once the space is built and regulators come in to inspect your facility, you’re going to want to make sure you’ve complied with the required guidelines.”
Costs associated with TI can be calculated a number of different ways.
“Tenants should not hesitate to ask the landlord to pay for, or contribute to, any TI work, and in exchange, the landlord may want to lock them into a long term lease,” Berlandi says. “That’s very common! Tenants should not be afraid to ask the landlord to shoulder or share the cost of the build out.”
“Landlords will amortize the cost of any TI over the balance of the lease, spread it out, and build it into the rent rate,” Grandinetti says. “They’ll include an interest factor on that as well.”
To some extent, Grandinetti says you can negotiate a little. If you choose to pay directly for some of your own TI, you should be able to negotiate a slightly lower lease rate.
“Landlords may charge you 6-7% interest on the cost of the TI, and bill it into your rent rate, whereas you could just get a five year loan at a 2-3% interest rate to pay for your own TI,” Grandinetti says. “Weigh your options and see how much the landlord is willing to reduce your lease rate.”
Parking is another concern with retail commercial leases. Parking at strip malls may be more complicated than MOBs.
“In a standalone building or MOB, you may have 30-40 spaces designated as yours, but if you’re in strip center, parking is first come, first serve,” Berlandi says. “For an urgent care center, it may be important to you that your patients are able to park in proximity to your facility. You might want to try negotiating your lease to allow you to have a minimum number of parking spaces specifically for your facility right in front of it.”
Taylor also says you need to be careful about what a retail commercial lease may say regarding cleaning and interior access to your space. If the retail landlord requires tenants to use a certain cleaning crew, they may operate differently than a cleaning crew trained to clean urgent care centers. You may have to negotiate certain things like how to properly dispose of medical waste.
“Retail landlords will not want to have a disposal box out in the open where other tenants and/or clientele could have access to it,” Taylor says. “You may need to arrange for special pickups to follow medical disposal guidelines.”
Retail landlords may also have a provision in the lease saying that they can relocate you. If there is a grocery store or other big box retailer in the same strip mall as you, and they want to expand their space, landlords will want to keep that big tenant, so they’ll try to move smaller tenants father down.
“Usually, the landlord will pay for the improvements to move the tenant to another location, but if you have to shut your doors for any period of time, you’re going to lose income,” Taylor says. “If that provision is in the lease, and you cannot negotiate it out, you want to make sure that the landlord is not only paying for your move and the improvements, but for any down time you may experience when they move you.”
Hours of operation may also be a concern when it comes to retail commercial leases.
“If you’re going to maintain hours that are beyond the hours of the other tenants in the strip mall, you have to worry about things like lighting and security,” Taylor says. “But that also goes in the other direction as well. If a landlord wants all of their tenants to be open seven days a week, from 9 a.m. to 9 p.m., but you want your urgent care facility to be closed on Sundays, you have to negotiate that into the lease.”
Tenants should also be aware of how long their leases will last, and how they’re structured. An office lease should generally last 10-15 years, but you don’t have to sign a lease lasting for that long upfront. Grandinetti says that having the option for short, incremental renewals of five years each, with multiple terms to get you to 10-15 years is the best way to go.
“If you get into a lease, and it turns out you’re not making any money, you want to get out of there as soon as possible,” Grandinetti says. “Having a five year lease offers you that flexibility to walk away if things aren’t working out.”
How much you’ve invested in your urgent care practice will also dictate how long of a lease you should strive for.
“If the urgent care facility has put up a lot of money for the TIs, or has installed medical equipment that required a larger, upfront investment, the facility is going to want to have the lease for at least as long as they can get their money’s worth,” Taylor says.
Every lease comes with different terms, so it’s important to shop around to make sure you’re getting the best terms for your money.
“When comparing rates, you need to look at the other obligations that are shifted to the tenant, evaluate the cost of those and come up with a per-square-foot analysis of what those costs are,” Grandinetti says. “A rate of $20 per square foot in an MOB building may be equivalent to a rate of $15 per square foot in a strip mall because you’d have an extra $5 per square foot of costs that you’d have to make up out of your own pocket.”
Whether you end up in a medical office building or a strip mall, it’s important to analyze all of your lease terms to understand what you’re getting yourself into. It’s crucial that you understand what you will be responsible for, and what your landlord will be responsible for. And if you’re not happy with parts of the lease, you should negotiate.
“Never just take what you can get,” Berlandi says. “Always negotiate.”