Don't Sign That Lease Yet: Crucial Advice for Practice Owners

0:00 I'll record your intro actually after this. So we'll just jump right into it, if that's all right. Okay, sounds great. So last time we had you on the show, I remember like half the time, I remember my mind just spinning. I was like, this guy just focuses on real estate for healthcare. I'm like healthcare providers. I'm like, this is where we are in the world where it's like niches are this powerful, powerful thing. So you've got sort of like a courtside seat at a lot of things that could go right and wrong. So I'm more than a thousand real estate deals across healthcare. I want to know what your biggest... if they only knew mistake that a practice owner still makes when it comes to their space because this thing sticks around when you sign that lease it's good for that term yeah yeah you're locked and loaded I think a lot of times people have this idea like well just you know I'll just do it again or I got a mulligan or I can change it it's like no man you're locking into a typically a ten-year contract for a lease.

0:57 If you're buying a building, you cannot come in and out of commercial real estate deals the same way you do residential. There's a lot more time and energy. So you want to make sure you do it right the first time. So if I could only give people one piece of advice, and certainly I can give a lot more, but if I could only give one, it would be you have to have a strategy and posture in every negotiation that you go into. So that's kind of like the high level statement. And then like the underlying statement there is, well, people say, well, how do I do that? The only way you can have a strategy or posture in a commercial real estate negotiation is you have to have multiple options.

1:42 And this is the number one error people make is whether they're in a current building and their lease is coming up for renewal and they're like, well, I'll just negotiate with my current landlord and see what I can get. That's a fool's game plan to get completely crushed in a negotiation and lose hundreds of thousands. Or they just drive around and see a property for a new location. They call them, oh, this would be great. And so the problem with that is you have nothing to benchmark terms against. All you can do is look at what they said in their first offer, where they started, which is never going to be a meaningful place. People go, oh yeah, I got the landlord to come down, or I got him to go from this amount of concessions to this amount.

2:22 The landlord's smart enough to know that you think you getting a little bit of movement makes you feel good, but that deal could be terrible compared to what you could have received from three or four other landlords. In order to have posture and strategy in a commercial real estate negotiation, You've got to have multiple options. In order to have multiple options, you've got to know the market. You've got to take time to get in the market. You've got to make sure that you can put one landlord up against another landlord, and you've got to go two or three or four rounds of negotiations because landlords are not just going to give you their best terms. They're not just going to say, oh, you submitted an offer. Here's my best deal where I'm going to give you an extra three hundred thousand dollars over ten years more than I would have just because you asked.

3:04 That's not how it works. I would say that's my number one point. And I gotta say one more thing that's tied to it is, hopefully this does not offend people, but it's a reality. There's not one out of a hundred landlords that's gonna assume that a healthcare provider knows what they're doing. And so if you're going into a commercial real estate transaction without representation, the landlord will be cordial to you. They'll be accommodating to you. They'll get you in the space or the listing broker, whoever you're talking to. They'll send you information. They're not going to assume you know what you're doing. They're going to assume that you are a fool.

3:46 do you do you honestly think like that like jp chase morgan bank or bank of america or lockheed martin or chipotle or starbucks or whether it's office user or retail user you know whether it's an industrial manufacturer do you think there's gonna have some random person in the business who's whose expertise is clinical handling the real estate like No way. When a doctor shows up, the landlord's literally thinking themselves, I'm going to take this guy for literally three hundred, four hundred thousand dollars more than he would pay or she would pay if they had an agent. And it's just it's the unfortunately, it's just a really common mistake that doctors or health care providers make. It's I'm intelligent.

4:26 no one's doubting your intelligence when it comes to health care but you're not a real estate expert like it's it's not it's it'd be no different than a patient being like well I can just do my own procedure like you know I saw a video online like you know it's like oh yeah this guy went to school for like six eight ten twelve years he's been practicing practicing for x number of years since that time it's their only their primary and only craft like they know what they're doing they spend eight ten hours a day doing it you're not going to get the same result taking it for a drive once every ten years. It's the same thing for real estate. I was going to say, my follow-up question was going to be, why would healthcare providers maybe not be equipped to this?

5:09 Are we just bleeding hearts? But you answered it, which is like, it's not our bag, so you brought a knife to a gunfight. yeah no I mean the the question of like can you do it yes like you have the ability to do it you can pick up a phone you can call a landlord or listing agent say send me a pro a brochure can we meet can I see the property send me a proposal like you can do those things um but the landlord is going to look at the person showing up without representation and again I worked for landlords for almost ten years before I before I started this company I I did a lot of landlord work and when especially healthcare providers would show up without representation. The landlord's thought was like, literally like what an idiot, like what a fool, like, again, there's no possible way that, that fortune, five hundred companies are just having some random guy or gal show up.

5:59 So the landlords, when they'd see these doctors show up without representation, they would be like, let's make a deal. And they'd even say stuff like, Hey man, like, you know, I want to take care of you. You seem like a good guy or, you know, like I like you. Like they would say things like I'd listen to the landlords or other listing brokers or property managers, like make comments to the doctors. And I'm just like, Oh man, like, this is just such a bad, like, like subpar, like high school drama that you're like, you're just watching this really bad performance. You're just like, and the doctors are just like, oh, this is great. Now he said he had to take care of me or he says he really likes me. So he was going to give me a better deal. Or he said, because I didn't have an agent that he'd give me a better deal as opposed to paying an agent at commission.

6:43 He'd give me the, he'd give me a discount. And it's like, it's like, dude, it's not how it works, man. Sounds like what you don't know. can hurt you and can hurt you bad deep and for a long time that you can't take a mulligan on no no so yeah I mean it's one of those things and so then the next question is people say well you know well why wouldn't someone hire someone um there's a couple reasons why um number one a lot of times the they just doctors health providers office administrators they don't have a lot of time and they're like I don't know what to do I don't know where to start I'll just just give it to me and I'll do it and out of like desperation or frustration Or just timing, they're just like, I just had to do this.

7:24 I don't have time. Let's figure it out. That's one reason. Another reason is they think about it, but they don't know who to call. Or maybe they get introduced to a couple commercial brokers that primarily represent landlords. They don't give them the time of day. They don't show them respect. A lot of landlord brokers don't like doing tenant and buyer rep for a lot of reasons. And so they talk to a broker or two and they're like, well, this guy doesn't seem like he's going to help me at all. And so they're saying, well, I don't have anyone good. And then the third reason is they'll just say, I don't have the money or I don't want to spend the money. And this is where, again, what you don't know hurts you at a high level. Commissions and commercial real estate are paid just like in residential real estate.

8:08 They're paid by the landlord or the seller. If you're selling your house, it's incredibly rare to tell the buyer that they're going to pay their agent. It's just not the real estate industry. Sellers of houses set aside a commission amount that's negotiable with the percentage of the deal. And then they say, look, to the listing agent, you get half and then give the other half to the buyer's agent. if the buyer shows up without an agent, that listing agent gets a double commission. So in a scenario, commercial real estate healthcare, when a doctor shows up or health provider shows up and they don't have an agent, the listing agent gets a double commission or the landlord just keeps that money. And so it's not a for sale by owner. Like if you're a doctor, health care provider, you're not you're not the owner of the property deciding who gets paid what commission.

8:55 And if you don't use an agent, you keep it as a tenant or buyer. You're literally just telling the listing agent, hey, take my commission that would have gone to my agent. You get fat off that and I'm going to get completely hosed because I don't have anyone to help me. So it's a no brainer. So when health care providers realize you're not saving money by not having an agent, The money is already set aside and you're just basically forfeiting this benefit. Then the light bulb comes on. They're like, okay, well, this is a no brainer. But then the next question goes back to that other question of how do I find someone good? That's a whole nother situation. But once they realize they're not paying for it, it's not going to cost them tens of thousands of dollars. You can't afford it because it's not going to cost you anything directly.

9:38 That changes the narrative. So then it becomes, how do I find good people then? So I'm not letting you go until you tell me that. How to find someone good. So the criteria of what you're looking for determines the course of action. You're looking for someone who understands healthcare. So that's really important. Someone that does industrial warehouse manufacturing deals, like sure, they can get a deal done, but you want someone who understands healthcare. That's number one. Number two, you want someone that does not have conflicts of interest. A conflict of interest is when someone's trying to represent two opposing parties. And this is super obvious, again, when you hear it, but a lot of people don't think about this one. If somebody sued you, you're not going to ask the attorney who is suing you to help you out of the situation.

10:22 You've got to have your own representation. Same thing, if you get a tax audit or the IRS says, what's going on here? You don't call the IRS guy and say, Hey, give me some advice. Like you get your own CPA or attorney. You can't work for, or you can't, you can't have a listing agent that's working for a landlord also helping you. So you've got to have someone who is conflict free, who's doing tenant buyer representation. They're not listing properties in the area, and they're also not going to use your deal as bait to get a relationship with the new landlord and like just kind of glad hand the landlord, get your deal done. Then all of a sudden, two weeks later, their signs in front of the building that, that you're leasing now, and they were formerly your agent.

11:03 Now they're the landlord's agent. That happens all the time. So healthcare experience, tenant and buyer rep, expertise and focus, no conflicts of interest. So you can search that online. You can Google like healthcare tenant buyer rep. You can use terminology like that for whatever search engine you're using. But another great way to do it is you just talk to industry experts. Like you find lenders that specialize in healthcare. You find CPAs or attorneys or architects And if you ask a few people, Hey, who do you know that that really specializes in healthcare tenant buyer rep for real estate, no conflicts of interest, you're going to probably hear similar names in a certain city or market that are prominent.

11:47 And then that gives you a short list of people to start talking to interviewing and then trying to find someone that you like. But when all else fails, if you don't have those relationships, just get online, search it, start making some phone calls or emails. And you know, the, The direction is pretty simple. Just don't stop until you find someone you like. Talk to someone. You're like, I'm just not feeling this person. Even if they come highly referred, just go on to the next person. There is more than one fish in the sea, especially in this situation. And there's enough people out there that you should be able to find someone that you like, trust, want to work with, and that you actually believe is going to help you. All right. You mentioned this word before, which is lease. You mentioned another word was just buy. I'm feeling like there's a health care phrase going to come up like it depends.

12:30 But a lot of people are thinking, should I lease or buy? I'm guessing there's a lot of depends. How should a practice owner really think through that big decision, especially maybe early in their growth as a practice owner? Yeah, so I'm a huge fan of owning commercial real estate if it's a great location, a great building and the numbers make sense. And so it's kind of like leasing a house versus buying a house or renting versus buying. If you can find a great house in an area that you want to be in and the numbers make sense, I think there's a lot of arguments why ownership is better than renting. But it also depends on the season of your life and it depends on a lot of factors. But here's some of the criteria I tell you.

13:12 Number one, when you go into a market, let's say you said, hey, I want to be in this area, this sub market within a two, three mile radius of this location, whatever it might be. There might not be any options to purchase in commercial real estate. Like in residential real estate, there's almost always another neighborhood or another building or a house to buy. In commercial real estate, if you're in a certain area, you could run a certain two mile radius and not find one property for sale. From a scarcity standpoint, there are a lot less commercial properties that are for sale than there are for lease, and then there's a lot less properties that are inside of a certain price range that work. A four story office building that's a hundred thousand square feet is not going to be an option for most healthcare providers.

13:54 They're not going to have fifteen million dollars. They're going to say, I have a million and a half dollars. you know, the first question is what's the inventory, what's the availability. Um, the next question is, you know, could you have the down payment and can you afford the monthly payment? You might say, Hey, that's a beautiful property. Um, it's right where I want it to be. But again, if, if the cost of buying that is going to give you a monthly payment of and you can rent for six thousand, you might say, look, the juice isn't worth the squeeze. Like Sure. I love to own my own building. I love principal pay down. I love depreciation. I love tax deductions that you get when you own, but it's, it's not, it's not conducive to, you know, me being successful in my practice.

14:35 Other times you find these buildings that the price works, the numbers work, et cetera, but it's not a good location. Like, you know, you gotta turn right, turn left, turn right. And it's the third building behind the, you know, behind the, the warehouse. And you're like, that's not gonna help me because, While the numbers make sense, patients are not going to like it. It's not going to help my referrals. Staff's not going to be as excited to show up to work here every day compared to the other options. So the simple game plan is this. If you're open to purchasing outside of leasing or additional leasing, go to the market, look at all your top options, narrow them down to the top three or four properties. negotiate simultaneously on three or four properties, whether it's for lease or for purchase.

15:18 And then you compare the numbers and you say things like, what's the cost to get in the lease? What's the cost to get into the purchase? What does the monthly payment look like on a monthly cashflow basis? And then you factor in things like principal pay down. Every month you cut a check to a mortgage company or a bank or a lender, your net worth goes up because a portion pays down principal. What's the depreciation look like on the purchase of the real estate? Because you can depreciate the real estate and pick up a lot of times tens of thousands of dollars per year in extra tax deductions. And then what do the tax deductions look like in a lease, in a purchase? How do they compare? That's called the purchase versus lease analysis. And once you get to the bottom of that equation, you'll see the effective cost of owning versus leasing.

15:59 And then it'd be really clear, like either yes, this makes sense to buy or no, it's too expensive. Um, but the numbers will basically tell you very quickly whether it's even an option or not. And sometimes you might have three or four options to purchase and you're in a really good place. Other times, like you might want to buy, you have nothing to purchase it just doesn't make sense so inventory will determine that for you a lot of times too smart a lot of good questions you should be asking and one of them I bet you would say your biggest advantage is time you mentioned earlier these things sneak up you're running a business then a lease ending is coming up and you're like I'll get to it I'll get to it until you're like man we got to solve this thing so those things can sync up quick what's what's a piece of advice you wish every provider would follow months, a year before that renewal date actually hits.

16:45 Well, you actually just hit it yourself and start the process at least twelve months in advance. A lot of landlords are very, very savvy with this and they will run the clock out. And so, you know, whether you're a sports guy or not, or, you know, you watch like you watch football and you know, the team who's on defense is down and the team on offense is like, look, we're going to run the clock out there. They're staying in bounds at all costs. They're going to run the ball, not pass it. They want that clock just to keep taking down because they know that if they can keep the defense from getting the ball, They're not going to have time to win. So a lot of landlords will wait till the tenant is like a month or two or three from their lease expiring.

17:27 And then they'll realize that that tenant has no ability within a reasonable timeframe to go find another location, get it built out, relocate. And so then they get stuck in this corner with like, I guess I have no option besides to stay and take this deal. And then at that point, the landlord knows whatever that tenant asked for, they're literally begging like, would you give me a better lease rate? No. Would you give me TI allowance to renovate? No. Can you give me some free rent? No. Eventually, they might give them some little carrot to get them just to do the deal and go away. But the landlord knows at that point that person doesn't have a viable opportunity to move in time. And so the timing is really important.

18:08 Ten to twelve months in advance. Ten months should be the minimum. Twelve is ideal. Fourteen, fifteen, sixteen months. Fantastic. You don't want to start at three years in advance because there's no option for you to get out of your lease. You're just wasting time because what's available three years from your lease expiring is not going to be available twelve months. But twelve months gives you time to go to market, look at options, negotiate multiple properties, select the best option, decide to move forward. And then if you are relocating, it gives you the time to design it. Get construction documents, get a permit, build it out, equip it, move in, work the kinks out, get the IT and all the wiring done. And then you open the door to see patients again. But if you don't have at least ten, twelve months, you can get it done.

18:51 But you're going to be on a more rapid time frame than you'd like to be. Yeah. Want to buy some time. All right. So my rudimentary knowledge of real estate. Right. The first three rules are location, location, location. Right. But in healthcare real estate, are there myths around things like visibility? You mentioned make a right, make a left. It's behind the warehouse or square footage. Are there myths around those things that we take too much to heart and that hurts us? Things that maybe are repeated because they sound good that actually aren't true? Yeah, no, I mean, location is exceptionally important. I mean, the quality of your location, the accessibility of it, if it has visibility, that's great. But you can find all those things that not have parking.

19:32 Like, I can give you an example. I'm in Denver, Colorado. And like, you know, we had this retail center, where this, this, you know, healthcare provider went in, and then this brand new restaurant concept came in, which I said, everyone would know what it is. And If you're there at eight or nine in the morning, no problem. But when it hits eleven o'clock, this restaurant literally there's you cannot park. There's not a single parking space. And then if you get there on four or five, it's the same thing. And so, you know, it's a combination of the location. If you can get accessibility or sorry, visibility, that's great. Sometimes it doesn't make sense. Sometimes an office building makes more sense than retail. Um, parking obviously is a big factor and then you have other concepts though.

20:14 Like what's the leash rate. And then you've got to go deeper from there. How much money is the landlord giving you to build out the space? Like how much free rent are they giving you? Cause you can have a scenario where one landlord's charging you a higher leash rate, but what if they gave you enough money to pay for your entire build out? And so, you know, you look at one landlord's at twenty dollars a square foot. One guy's at twenty five dollars a square foot. But the one at twenty five a square foot is going to give you seventy five dollars a square foot to build out your space. If you run the math on not borrowing seventy five dollars a foot, paying seven or eight percent interest over ten years and then factor in free rent, you'd be better off to pay a higher lease rate, not borrow that money. And so, you know, the economics always come into play no matter what you're doing.

20:58 You know, what's the total cost per month? my lease and then any money I have to borrow to get the space built out how do you factor in free rent you get one land that gives you four or five months of free rent to start a new deal I mean that could shave off you know a dollar two or three dollars a foot on the lease rate if you factored over you know five seven ten years so Location's important. Visibility, signage, if you can get it, great. Sometimes office makes more sense. Sometimes the cost savings is worth not having a sign, especially if you've got a really established practice with really good referral patterns. And then the economics. And again, that's why. Somebody might hear this say, well, that's overwhelming.

21:38 It's not overwhelming when you take it step by step and you have an advisor, but that's why you can't just pick a property and then hope it works. You've got to take property one, two, three, and four, go three or four rounds of negotiations. And then when you're looking at it, you can say, look, this property is going to cost me a thousand dollars a month more, but it's worth it to me because it's a way better location and the free rent's fantastic. And I like this or that, or you say, look, this is not worth paying an extra two thousand a month. I'd rather go to the office space. I can use that money for targeted marketing. I don't even probably need that because my practice is thriving and I'd rather save, you know, twenty five, thirty grand a year in rents and either put it in my pocket or invest it somewhere else.

22:21 And it's not worth getting assigned for thirty thousand a year. Yeah, a lot of factors. Compare apples to apples and make sure you, I mean, again, I think that time element you're saying is if you're rushed, you can't make those decisions properly because you're not able to invest the time while you're running your business. Colin, we're going to play a game called Deal or No Deal, clinical edition. Are you ready for this? Let's do it. All right. I hit the button twice. So I'm going to give you a scenario. You give me deal, which is like a green flag or no deal, red flag. And then you can give a little one sentence or you can go deep into why.

23:03 First segment on deal or no deal clinical edition with Colin Carr. My landlord says I don't need representation. They'll just handle everything for me. I mean, you already tipped your hand on this. No deal. No deal. Yeah. I mean, that person is the person you're negotiating against. They're not going to negotiate in your best interest. Yeah. The reciprocal statement to the landlord would be great. Then you don't go to the doctor or health care provider ever. You just do it yourself because that's what you're asking me to do. If a health care provider told a landlord never go to the doctor, you can just do it yourself. The landlord say that's foolish. I'm not a doctor. Then you'd say this is foolish, too. I'm not a real estate specialist. Yeah. My lease auto renews, Colin, and I forgot to negotiate it.

23:48 That's a bad place to be. A lot of leases do auto renew or you miss the option to renew and they kick you out or they charge a good twenty five percent premium. So there's a couple of things you cannot miss and you cannot miss lease expiration deadlines and time frames that you need to exercise options to renew or exercise options to negotiate a renewal. Yeah. There's no free rent or build out allowance in the offer, but the rent is low. Bad deal. No deal. There is a lease rate that landlords will typically not go below because when you lower the lease rate on a space or a property, it devalues the property.

24:32 Investment properties sell or trade on a multiplier or multiple of rent. It's called a cap rate. And so, and so people sometimes will see a space that vacant for like, you know, a period of time, I'll say, well, this has been vacant. So the landlord should be motivated to do an aggressive deal. No, because the second they do a lower, a lower lease rate than the property should have, it just devalued the property. And especially if you have multiple tenants there, you know, A lot of landlords, if they got ten tenants in the building, one space vacant, they'll sit on a vacancy for two, three years. And people are like, why are they doing this? It's because they don't want to devalue the property. If you take that last lease rate and the last deal and you lower the lease rate and you want to go sell that property, whether you want to or maybe you're forced to if you have to as a landlord for some reason.

25:18 anyone who looks at it is going to say, well, the property is really worth this. Even though you have nine leases higher, it's not worth that because you would not have done this tenth deal at that lease rate if it wasn't. And so it's really interesting. In the game of investment real estate, you do one bad deal, especially if it's recent. It's one thing it's four or five years ago, you just slam someone in there to get a deal done. You can maybe talk your way out of that scenario as a seller. But if you're doing investment real estate and you just made a deal at, let's say, twenty dollars a foot and everyone else paying twenty five a foot. Anyone who looks that's going to say that's not market or you wouldn't have done that deal. And so landlords have a lease rate that they won't go below typically, but they will give you TI and free rent and other concessions even at that lowest lease rate.

26:04 And that's that's a long answer. But a lot of people think, well, give me the best deal possible with no concessions that that does not exist. The best deal possible on a lease rate is still going to have concessions available. because they're going to have money set aside for those other benefits, commissions, free rent, build that allowance. The lease rate might not come below a certain number, but if you don't capture the other benefits, even with that lower lease rate, you lost probably tens to hundreds of thousands of dollars. Oof. All right. Last thing we do on the show, Colin, is called the parting shot. What's a bit of advice or a mantra that you would leave with clinicians who are listening, you know, twenty eight minutes into this episode and saying, OK, there's a lot more than I need to know.

26:46 What's what's something you want to just burn into their psyche? Yeah. Let an expert, uh, do the process for you. Hold your hand for you. Like you'll cooperate. You are the ultimate decision maker. It's very similar to healthcare. No one's going to strap you to a table and force you to do a procedure or do something or take medicine. You don't want to take or do something you want to do. They're going to advise you. They're going to counsel you. They're going to give you the pros and cons. And at the end of the day, you're still fully in the driver's seat as the patient, but you've got someone helping you navigate the situation and trying to get you the best outcome possible. Same thing is true with tax strategy. There's significant tax laws that are on the table right now in Congress. There's things that changed last year.

27:27 You don't do your own taxes. You have a really good expert CPA. And the same thing is true for legal. You're not an attorney. You don't play games with contracts. You have a really good attorney. So it's really simple. Again, pick your sports analogy. You're going to have a pitcher. You're going to have a catcher. You're going to have a first baseman. You're going to have different people on your team. They each have a unique skill set. But trying to make your catcher or your pitcher doesn't work very well. And trying to be the guy that does it all himself or herself is a really bad game plan. Going to get in trouble. All right, hire a professional. And we'll make sure they can reach out in the show notes. But where should they go to get in touch with you if they're like, all right, this Colin guy sounds like he knows what he's talking about?

28:09 Yeah, our website is car.us. So car.us. We are a national firm. We're the actually only firm that's truly national that does healthcare tenant by rep. We're licensed in all fifty states. We're helping over fifty five hundred health care providers with their real estate right now as we speak. So we're not the only company that does this. We do believe that we do an excellent job and we've been doing it for Sixteen and a half years now, so we've got some time under our belt, but that's a great way to start. And I think that people getting representation, starting the process, reaching out to find an agent, having an initial conversation, you'll be glad that you didn't go it alone.

28:53 Colin Carr, appreciate you stopping by the show again, Colin. Thanks for dropping some insight on us. Thanks, man. Appreciate you having me.