How Physicians Can Save Money Through Their Real Estate

November 16, 2009
Ed Rabinowitz

A medical practice that has proven to be a good credit tenant has leverage in lease negotiations; landlords are willing to negotiate when they know they have a reliable tenant.

Real estate decisions are crucial for medical practitioners, especially since medical-office leases tend to be long-term deals that can have a significant impact on the future of the practice. All too often, however, physicians attempt to negotiate directly with their landlord which, more often than not, puts them at a disadvantage compared with larger tenants.

“Medical practices, unless you’re dealing with a corporation where there’s a national presence, tend to be smaller,” explains Valentine Ecker, a tenant representative with Howard Ecker + Company, a commercial tenant representation firm. “That lessens their leverage compared to larger tenants.”

But with an advocate on their side, physicians can gain valuable assistance in the renegotiation and/or relocation of their practice.

Leverage works both ways

Physicians who have been in the same location for 15, 20, even 25 years have an established patient base and are reluctant to pick up and move—even if it’s just a mile down the road. Older patients who are used to taking the same transportation to the practice’s current location might not follow if the practice moved elsewhere. In addition, physicians often have a referral base within their existing location, such as a gynecologist who refers new patients to a pediatrician, and a relocation might negate that arrangement.

But, says Ecker, physicians can use their longevity at a location to their advantage. “There are often buildings that appeal strictly to medical professionals. I think landlords in those buildings are willing to renegotiate just to keep the tenant. Because in this volatile economic environment, medical professionals are proving to be a pretty stable commodity when it comes to a landlord’s income stream.”

A medical practice that has proven to be a good credit tenant has leverage in lease negotiations. Rental abatement, reduced rental rates, and tenant improvement allowances are all elements that landlords are willing to negotiate when they know they have a reliable tenant.

Value of a business plan

Ecker points out that it’s extremely important for physician practices to have a business plan when it comes time to renegotiate a lease. For example, is the practice in a growth mode or a constriction mode? A new lease could contain a clause that after a five-year period of time, if the practice is in a growth mode and adjacent space becomes available, the practice has the first right to that space before it’s offered to any outside prospects. The opposite is also true.

“Medical practices sign ten- and twelve-year leases,” Ecker says. “They may want the option to give back a portion of the space after the fourth or fifth year. It’s important [for physicians] to really see where their practice is going. If they’re in a growth mode, two years from now they may want to take an additional 1,000-square feet for a laboratory. If that’s not going to be an option in their current location, are they willing to relocate to a nearby building that will offer those options?”

It’s also important for physicians to sit down and examine the costs of expanding or relocating a practice. According to Ecker, banks are not as eager to lend money as they were several years ago. “Especially when [physicians are] purchasing equipment that is so expensive, a lot of large suppliers aren’t lending as frivolously to doctors. It’s important for doctors to be counseled by both their attorney and their financial advisor, and we can act as their real estate advisors.”

More leverage on the way?

Ecker explains that, according to a recent industry report, ten million square feet of new medical space is predicted to come onto the market following passage of President Obama’s health insurance program. With more space coming on the market, medical practices should have more leverage than ever before to negotiate favorable lease rates and save money.

“If President Obama’s healthcare plan is passed, there’s going to be a need for a large number of new practitioners to be put into these spaces,” Ecker says. “So, even thougth we don’t know for certain what’s going to happen in the future, physicians should be thinking about it.”

Some are taking action. Ecker says that over the last few months she’s seen an increase in stragtegic maneuvering between two different practices, such as a gynecologist and a pediatrician who get referrals from the same hospital moving into office space in the same building.

At the very least, she says, it’s important for physicians to sit down and evaluate the best options for their practice in this environment. “And keep their options open, even in a lease signed for ten years, that allows them to grow, contract, or sub-lease space, if necessary.”