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Negotiating Leases for Existing or Future Practices

April 06, 2020 Dental Whale Season 1 Episode 7
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Negotiating Leases for Existing or Future Practices
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Negotiating Leases for Existing or Future Practices
Apr 06, 2020 Season 1 Episode 7
Dental Whale

Carr Real Estate director, Ken Jorgenson shares what dentists need to know about leasing and acquisition, and how to negotiate leases and contracts in their favor. Whether you're a start-up, looking to lease, or purchase - the dental industry holds high-value appeal for landlords. Find out how to leverage your bargaining power and set your practice up for affordable, long-term stability.

Show Notes Transcript

Carr Real Estate director, Ken Jorgenson shares what dentists need to know about leasing and acquisition, and how to negotiate leases and contracts in their favor. Whether you're a start-up, looking to lease, or purchase - the dental industry holds high-value appeal for landlords. Find out how to leverage your bargaining power and set your practice up for affordable, long-term stability.

spk_0:   0:09
Hey, everybody. Dr. Tim McNamara here. So I am pumped for this one. I got kin. Georgia's in here. Who is a director car commercial reality. Talk to me a little about car before we get started. Hey,

spk_1:   0:20
thanks, Tim. Yeah. My name is Ken Jordan Benson with CAR. We are the nation's leading provider of commercial real estate service is for dental practices, another medical and health care clients. So that's what we do. We're very niche and narrow and who we help. We do one thing, and we do it well. So we have agents kind of coast to coast, we hope with startups and leasing Lisa's purchases, acquisitions, anything related to the real estate side of of ah, dental, you know, a dental practice.

spk_0:   0:52
That's great. That's great. So I kind of said that I pumped for this one, and I want everyone to hear why. So, obviously we're living in upside down world, right? Like the Corona Viruses is really having a major impact on all of our businesses. And I get it. I'm living in my own dental practices. I did it, uh, but what's really fascinating to me is when there is chaos, there is opportunity. So inside of our business world, everyone's talking about fixing systems. And here's how you keep training your staff and this is fantastic and I agree with. But there's also opportunity to double or triple your business in this. And what do I mean by that? At no point. And you need, you know, fill me in on this Ken, if I If I am totally off at no point in my experience in dental and so that is, you know, the past handful of yours has the tenant had more leverage than the landlord. And right now, landlords were panicking. And I'm not saying that's a good thing. Some of you are Les importance. Uh, landlord, I'm panicking a bit, but I'm just simply saying that there is massive leverage right now. If you are the dentist, business owner and to CEO, that is saying, I know the sun is gonna come up again someday. I know that we're gonna return to some sort of normal, though it may be a little bit different than what was yesterday, but I know it's going to return right now is a buying window. And so when I got excited to get on here because I'm like, Holy cow. Let's talk about commercial realistic. What are you seeing? How do you feel? Like we can position ourselves if one I'm going and finding new a new build out or two. I'm in a current situation. Is there any wiggle room for negotiation there? Time pump, You lead here, and and I'm gonna support it from the dentist CEO side on how we can win right now in this situation.

spk_1:   2:33
Yeah. No, that's That's perfect. That's a great intro to So I, um uh we were actually talking a little bit earlier on the phone about about an article that just came out in one of our industry's trade. The coast are They're kind of the commercial and the last system, and they study the research they they find, um uh, and follow what's going on in the industry. They just came out a couple days ago with an article that actually a webinar that was talking about talking to landlords like yourself, saying, and the large ones that have, you know, hundreds of thousands of square feet that they're leasing out. Right? Um, they came out with something that saying that in the last five national recessions and downturns, medical and dental were the only two segments that did not see that did not follow the trends that the rest of the industry did. So what that means? What that means to you, as a dental practice is there has never been a better time. Then, um then then now and what's going to be over the next 30 60 90 days for you to have the leverage of of being a portfolio stable, a stabilising client, meaning you're gonna be somebody that the landlord really wants toe have in their center, in their building, in there, in there, in their office space? Because when all the other tenants are saying I need six months of no renter, I'm gonna close up shop for I'm out. Um, the dental practices Health care practices are the one the one tenant that that landlords are able to rely on and know that this is gonna be stable for them because it has over decades and decades. And that's what we're getting in too, right? So for the last 567 years has really been a landlord's market. Um, and it's been getting more and more aggressive. It's been getting more, more aggressive every year where 10 and improvement allowances have shrunk and the number of free rent months or the time that you have to build out his shrunk. Landlords have been able to say, Look, I have 10 people lined up for every space that I have, so I don't need to be aggressive. Well, the tide is now turning, and it's gonna be a really good time for a lot of our dental kind, too. Are thinking about either opening up the first office or adding additional locations or whatever.

spk_0:   4:56
Yes, so I'm getting I'm like, excited right now because there's there's from dentist CEO to CEO right now. Listen, I want to make sure I paint this in the right way. There is a definite cash flow crisis for many people watching this, so if you are hurting for cash, it may not make sense for you to go expand. But some of you are positioned perfectly for this. And now when we and so first off, I want to make sure that I acknowledge it, because what I'm not saying it's gonna put yourself in a position where you have not leveraged your fixed assets in your current practices and you're not ready for expansion. Some of you are ready for expansion. And you've already got something happening really good over here. And it's time to go do another one, and and that's one category of person and I want to talk about that first, and then the next category that I want to come back to is someone who is not looking for expansion, but that is locked into a long term least maybe they're coming up now on a point where they can re negotiate. That is a whole another type of person I want to tackle right after that. But I have a white board behind me and can you know this about me. But I love to draw things up because I think I can find my way to work with my friend but

spk_1:   6:02
help you have a pen.

spk_0:   6:03
So I'm gonna just break this down, then to CEO to CEO on why this is just a really neat opportunity. So everyone, I hope understands a pl and I'm just gonna put your revenue here right and revenues coming in, we're gonna just say we're doing 100 k a month. That's already. And then we have our expenses. Okay, Now expenses. We have a bunch of different line items. One of them is I'm just gonna call it rent. And let's say, in yesterday's market, I made 10 K for rent. What I'm getting out of what's exciting right now is that we may be able to negotiate a 10 year term and again tackling number one. This is expansion. This is what my extension looks like. Yesterday on a practice that I'm projecting and writ was 10 k just for simple, simple Matthew. I know that that percentage is not quite. People are typically think 10%. But all right, what I'm getting at is that we might be able to get enough for gay. And so now all of a sudden, what we have here at the very bottom is revenue minus expenses gives you your net income because now is a perfect time to expand. You might think you might end up with a much prettier looking pl because you simply recognize the right time to go negotiate your rent for your new practice. That is fascinating to in addition to that. Let's get away from the monthly fee and l Let's talk about the loan and maybe this is more balance sheet. We're talking about a loan we have to take out in order to build out this new practice on, and we can walk down the bank terms right now and maybe we have another webinar with a banker. But, you know, the bait terms, you might be able to negotiate lower right now, which means you're gonna pay less to do this and the other amazing thing. And this is what I may be most excited about is the tenant improvements might be really, really high right now because, as you just alluded to, we're, uh we're the you know where the prettiest girl on the block right now, like they want us. And not only that, that was yesterday. They wanted us like we're in Acre 10 but even more so right now. Right now, we reach out in a term in a time of crisis. For them, maybe 80% of their tenants are going out of business or telling them that they need relief and we're showing up when we were like, Hey, we're ready to sign a 10 year lease like this Tea. I might be significant. Hundreds of thousands of dollars, depending on how big your your spaces. All right, I'm going off. But this is an exciting time for me. I see a tot of opportunity for the people that are positioned correctly to expand.

spk_1:   8:44
Absolutely. So what I'd like you to do, Tim, is the 10 k down to four k. That's that is aggressive. Would love to see that. But what I want you to do Let's just let's just play that out. That's one month case for the average term is somewhere between 5 to 10 years and, like we were kind of talking about earlier, the longer you can lock in these terms at this point, the better, because this is gonna be one of the more aggressive. So let's say exactly six times 12 months, right? You're at 72. You lock that in for seven years or 10 years. You're talking a massive opportunity for your practice, right? So So you're looking at $720,000 right there of of potential savings, and that's that's not that's cash savings, right? So

spk_0:   9:31
what's the production

spk_1:   9:32
value, right? What do you have to produce to To to, uh, save that 7 20 right? A massive upside to getting in while others are pushing Pause right now, if you if you're in the in the position and again, we're gonna talk about the other. You know, if you're in a space where you really need some of the help or support, we'll talk about that in a minute. But if you're in a position where you're able to keep, uh, look att at the additional office or the expansion or whatever this is, this is a great opportunity where you're gonna be ableto see, um, up, you know, 506 100 feet, $700,000 Upswing. When you add in the tenant improvement allowance you add in the in addition to the rent concession and also the months of free rent, we've had a number of land words come back to us even just in the last week saying, Hey, if you if you if your client will we were negotiating on spaces for, you know, a month prior, we're now getting landlords reaching out to us saying, Hey, if you'll move keep moving the deal forward. Keep moving. This going all add another six months or another 12. I'll

spk_0:   10:38
do free rent for the first

spk_1:   10:40
year. If we could just lock this up because what they're seeing is there bleeding right now. And so if we can step in, I mean, now is the time to really make it rain, right?

spk_0:   10:49
So it's crazy. And listen, if you know me and you're watching this, you know that I could get excited about things if you see him on stage. This is one of those things that I can't unsee now that I've seen. So this isn't stuff that I'm putting on a white board and talking to kid about? This is stuff that I'm actually attacking in my own portfolio of dental practices like this is a fantastic time, and I don't know, I want to go back to I want to make sure that I'm not coming across. It's like, Go do this. Go do this. You need to have some strategy here, right? I am in a good cash position that I could do something like this. Uh, you If you are in a good cash position, you need to consider this. You need to consider and ask yourself this question. Do I think the sun is gonna come up tomorrow? My God, tomorrow being 90 days. Might that tomorrow be, I don't know, eight months. But do I think the sun is gonna come up? And if your answer is yes. Holy cow, set yourself up for success winning like this in these short buying windows. This is how people become very, very well. So, um, I could go off on this forever. I feel like I feel like we broke it down in a positive way. People are seeing this What maybe many of these people are in the situation of those is the fact that they have and they're not looking for expansion and they don't want another practice. What they really want is to use this leverage, talk to their landlord. And so maybe that's where we had on this now, and I know that he's a whiteboard. But walk me through that. Let's say that I just I I have been there for a few years. I have maybe a term coming up. You set the term when it's expiring. What do I do And how can I do this in a positive way to win? Yeah,

spk_1:   12:25
absolutely. So So there are a couple of different ah, couple of different scenarios there. Let's go with the 1st 1 Which might be you're in the middle of the leaf. You're only a year or two are halfway through your term. Um, and and now you're looking at the fact that, you know, the government said, Hey, you can't go in or you can only do emergency service's or whatever. So you're in a position where you're like Well, what do I do now? Um, I would say Make sure you have a good team of advisors around you, right? Giving you good, solid council, Not fear based, right? Not not. Not all doom and gloom. You wanna have multiple voices telling you and helping you in this season what I would say, Um, what I would say most of our clients are doing right now. Number one they're looking at. They're reaching out to their insurance agent to find out if if, uh, you know what their policy looks like in terms of business interruption, you know? So so is there an opportunity there with the insurance policy Most. Most of our clients were saying Reach out to the landlord. Right now we're seeing a ton coast to coast, giving 234 month deferral. So it's not that your rent is going to go away or your term is gonna shorten, but you just won't have to pay it for a few months. Every landlord different. Some are in a position where they really don't. They don't feel like they can. They can whether that but most landlords, I would say, especially all the institutional landlords are doing, uh, somewhere in the, you know, 234 month range of deferral. So let's say you have eight years left on that term. You know, we'll have eight years and four months because the next four months you're not you're not paying. So I would say that your first you want to call your landlord, reach out to them. Um, going directly to them is a lot, in my opinion, is gonna get you way more mileage than, um, then even having us reach out or your attorney or C. P. A. You need to be the one calling and saying, Here's what we're seeing I can't go in. We need you know, we're gonna be here for the long haul, but But I just need a little relief on the front end. Reach out to your landlord, reach out to the your insurance company. Obviously, on your excuse me on your loans on your financing Now's a great time, obviously, to reach out to them to reach out to your banker and see what kind of relief they have. You know, most of the national dental lenders have programs that they're offering right now. Um, they're great refi opportunities. If you're in a position where you haven't looked at that for a year or two or three or longer, now is a great time to be looking at that. But even if you can't refight there are there are relief opportunities with that. You know, with every with every lender out there, Um and so I would say those are Those are honestly the best step. If you're If you're within the first few years of your lease now, the the opportunity is a little bit different. I think if you're you know, if you're within a year or two years 2.5 3 years of the lease expiring. I think that's a different conversation.

spk_0:   15:29
Okay, so this is fantastic. This is great. I'm gonna summarize it from a dentist CEO to too many dentist CEO watching this, What we're talking about is using opportunities to become a better business and be in a better position when the sun comes up. So a lot of a lot of experts out there talking about training your team and the systems and may free yourself of old mind sets that you've been loyal to. I'm 100% alignment with that in addition to that, Now go look at what you're fixed. Costs are inside of your piano. Well, one of them is a bank term. Can you get that rate lower right now? Attack that. Can you get some sort of relief on your rent? We'll attack that now. The next type of person which I'm excited to hear your thoughts on, is what if I'm in a position where I might even be able to go to that landlord and re negotiate my terms?

spk_1:   16:19
Yeah, Yeah, that's a very that those were some of the most exciting opportunities right now is if you are within about three years of your lease Expiring. The sweet spot is really about 12 months. Somewhere around that, give or take. But we have clients telling us, and they're saying they have two months left on my lease try of six months or 12 months. The opportunity for for that client is extremely, extremely exciting. So so, uh, we run, Are we? Do we do hundreds and hundreds of least journals every year across the country, and it's one of those transactions where if if if you're if you play it right with with the right strategy, you can really see that that high, high fixed expense come down for the next term whether that 35 10 years. And so right now you're in a position again where landlords air seeing are bleeding. Landlords are seeing tenants going by the wayside right now in closing up shop. And so, if you're within a year, we go way would go to that landlord and say, Hey, look, you're gonna have to sharpen your pencil If you wanna retain this tenant for another five or 10 years, Um, we've been hired by Dr So and so to evaluate the market. They're looking at some purchase options right now. They might be looking at a piece of dirt right now they might be looking at Hey, these other three landlords right across the street maintain their buildings better, and they're offering some crazy concessions to come over. So you want to retain this tenant that you're gonna have to get aggressive, you're gonna have to sharpen the pencil. You're gonna have to come to the table, maybe with money. For for tea. I freshen up the space tenant improvement allowance to maybe get a new carpet, our new paint and flooring and and, um, could be You know, a lot of a lot of offices have issues with H back or with things like that. Now is a great time to get some of that taken care of. But then big to get the landlord to take care of it. But then the other thing is, is, let's say you are paying, you know, $10,000 a month and right now Ah, and that is market, right? So every year the lease is typically gonna escalate by 3234%. So over the average turnover 5 10 15 years that that keeps creeping up. Well, now the markets here, your lease rates here, right? And the landlord's being a nice, nice guy by just keeping you here knowing, knowing very well that you're overpaying. But if you don't actually know the market, you're not looking at other opportunities, Other spaces. What other landlords are offering, you have no leverage, and you have no market knowledge to know if you should be paying that or not. So the dental practices that are that are going that are that are within that window to renew their lease. They're gonna be able to see some of the most dramatic savings as long as they have the right, uh, strategy and approach to renegotiating and renewing that leak.

spk_0:   19:12
So here's what I couldn't say it any better, so I'm not even gonna summarize a dentist invented you. You just spoke it at a level weekend. This is this is a fantastic opportunity. This is if you're watching this. This isn't about us right now. Isn't about Ken and I. This is about you. This is reald dollars that could set you up in a really good situation. If you recognize the opportunity right now. So what I imagine that a lot of viewers are going to need is a little bit of assistance here and what I would like. And maybe I'm putting you on the spot. And I'm hoping you will follow with this is can we set up some sort of way to get them to some sort of consultation where you can just in the cove, in crisis look at their situation and say, this isn't You don't need me. You don't need me or you know what? I really think we could help here. Can we get that set up on and will provide a link in the email after this? Yeah,

spk_1:   20:06
absolutely. So we were kind of talking about it earlier. For for for you guys, we would love to be able to offer maybe a free lease evaluation. Where, where if you everybody's working at home right now. And so you have your computer, you have your laptop. You should hopefully have a digital file of your lease. If we can just set it up so that so that they can upload that lease, we'll offer you guys a three leaf evaluation where the broker. The agents in that market in your area will be able to look at the cops, see what the landlord's air doing there and be able to reach back out with some information on. Here's what I think the right timing and the right posture and the right strategy would be for that renewal.

spk_0:   20:46
Yeah, this is this is fantastic. I hope that everyone is listening. Takes advantage of that. My fingers across Aigoo, my rooting for I'm a dentist. I'm rooting for the dentist. This is a great opportunity for all of us to kind of just go back and become a better business when the sun comes up. So, do you have any final thoughts that you want to share here?

spk_1:   21:06
The only thing I would say is is you're sitting at home right now. You're trying to figure out which way is up, what what to do next and all that. I would just ask. I would I would ask you to ask yourself this question. Where do you want to be in 12 months from now? So if you're if you don't have a practice and you're thinking about opening up or you have one and you've been kind of on the fence. Should I should I should I, um, branch out and you to expand my space or open an additional location? But this whole all everything you're seeing, the daily ticker on the new speed and the and the press conferences and all that has got you kind of worried or scared or anxious. Um, now, when everybody is running out, Warren Buffet says, When everybody is running out, that's the time to run in

spk_0:   21:49
and

spk_1:   21:49
and you have the lower. You are sitting in a position where you have the lowest default of any industry out there, right that the major lenders that give money out. You make up the people, the companies that default next to never. And so So you're The risk is so is low from that standpoint. And the opportunity with what's going on in the market is so huge. The upside is huge. So if you're sitting in that position, I'll just ask yourself, Where do you want to be 12 months from now? Is it in the same spot you're at now or three weeks ago, or is it with that additional growth? Because you can set yourself up for the next decade and a really powerful way.

spk_0:   22:34
So good, so good a man. Mike drop. I hope that everybody takes advantage of of the lease analysis. I hope that you're thinking and hearing what Ken and I have been saying and then, you know, apply whatever works for you. You know, if now is not the right time and it causes too much anxiety, don't do it. But listen, if you're feeling aggressive and you're feeling like, Where's the opportunity? I know it's somewhere. We just identified one big one. So thank you so much, Jim.

spk_1:   22:59
I absolutely think them