A FRESH LOOK … not a bad idea

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With COVID19 causing us to take a new look at how we do business it may not a bad idea to evaluate your office space to determine if it is meeting your current needs, as those needs have changed in our new reality. Occupancy cost generally represents a practice’s second largest expense next to personnel and your office space’s ability or inability to meet your changing needs will significantly impact your bottom line. It deserves your attention. Such a review should involve the following things:

First – Do you have at least a basic understanding of the business terms relating to your office lease? Consider creating a lease abstract for each lease. A lease abstract is nothing more than a concise explanation of the important terms of a lease.

In the case of a lease:

  1. How many square feet do you occupy both rentable and usable?
  2. When does the lease come up for renewal?
  3. Do you have a renewal option and if so how much notice do you need to give for a renewal?
  4. What is your base rental rate?
  5. What does that rate cover?
  6. Is there a mechanism for challenging operating expense increases if you feel they are out of line?
  7. How much does the base rental rate escalate each year?

Second – You should complete a needs assessment; a fresh look at how your office currently functions as opposed to how it functioned pre COVID19, and ideally how should it function starting now into the future as we head to the new normal. Make a list of your current office space needs. Have these needs changed since the introduction of COVID19 world? Are you contemplating additional providers? Have you reduced the number of providers? If you have added, will they be doctors or other types of providers? Particularly as you approach the final year of a lease you should objectively consider whether your current space satisfies your current needs in terms of flow and the adequacy of its component parts. Over time the needs of the practice change in normal times, sometimes in subtle ways. Now we have to look at a new scenario which has never been and figure out how it changes moving forward. You adapt those changes to the space you have and make it work. The office review is a time to take a fresh “ground up” look at the component parts, such as the number of exam rooms, the size and layout of the lab, the size and layout of the front office, the size of the waiting room and the number of staff working in the front office to see if you really have the components you need, arranged in a manner that creates the most efficient work flow.

Third – Once you know what you have and what you need now, and have a feel for what you think you will need in the future, you can determine your options for getting there. Does the area in which your office is located still fit your needs? If you are a hospital based practice, are most of your patients still admitted to the hospital nearest your office? Have your patient demographics changed since your last review? Even if you have significant time left on your lease you may be able to make changes that would have a significant impact on operating efficiency which could justify their cost. Landlords want and need to keep your practice more than ever in the face of what is inevitably a changing environment. If your lease is coming up for renewal and you have made a determination of your needs, you are ready to assemble a list of available alternatives that encompass those needs. Practices often don’t take the time to look at all their options. They often just look at a few possibilities, generally the most obvious. Your time has always been a precious commodity and is probably no less so now but don’t short change the process. For an item which affects your bottom line so significantly it just makes sense to take the time to do your homework to make sure at the end of the process that you have picked the best option. Otherwise you will live with your mistake for a considerable period of time. Consider hiring a professional if you don’t have the time or the market knowledge to work through the process of assembling and analyzing your alternatives. Once you have a comprehensive list, you need to whittle that list down to a workable number of alternatives, usually 2 or 3. You can do this thru actual or virtual tours of those alternatives, Negotiate between those alternatives to find the alternative which offers the best combination of lease terms, location and efficient layout.

Fourth – After selecting the best alternative, the next step is negotiating a lease document with that alternative. A key part of the process is negotiating lease terms which are survivable if the worst should happen and after COVD19, we know that even the most outlandish scenario may be possible. The majority of lease terms are never used, but it is important that you are prepared to deal with those possibilities or they will devastate your practice if they occur.

Among the issues which should be negotiated in your lease agreement:

Assignment and Subletting

Make sure that you will be allowed to sublease your space if a change in conditions which effects your practice should occur. Whether it is thru events like COVID19, the result of growth or contraction or the need to close the location, you might need to sublet.

Consent

Make sure that throughout the lease the Landlord cannot unreasonably withhold, condition or delay its consent.

Full or Partial Destruction.

In the case of full or partial destruction of your space, make sure that the Landlord gives you notice of his intent as soon as possible and that the period allowed to rebuild your space is as short as practical. No one benefits from damage to the building and it is important that the landlord work with you to help you survive an event which would be devastating for everyone concerned.

COVID19 has shown us that we should give much more consideration to access than we previously considered.

Fifth – Finally, follow through. You have slogged thru finding a space and negotiating a lease, now you need to make sure the space is built out as you intended. Tour the space periodically, checking the construction against the space plan you agreed upon in the lease. It is particularly important to walk through the space with the contractor prior to the cover up inspection. This gives you a chance to look at the construction far enough along to see if there are construction errors, but early enough to minimize the cost of any revisions which the tour dictates. In that tour you will be looking for two things; elements which have not been constructed according to the plan and elements which are constructed according to the plan but when viewed in three dimensions don’t work the way you intended and therefore need to be changed. Once the space is finished, you will walk through the space with the contractor and do a punch list of items that need the contractor’s additional attention.

With COVID19 we have had to take a fresh look at everything and this is no less true for your office space, where such a look can provide real benefits. Time spend on the search and negotiation process is time well spent with benefits that extend to your practice’s bottom line.

Stan Sharp

HealthOne Realty Advisors, LLC

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