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PRACTICE MANAGEMENT
 Real Estate: The Second-Highest Expense in Your Practice
By Fred Schaard
Carr Healthcare Realty
When it comes to managing expenses in your practice, there are dozens of categories to evaluate: equipment, technology, loan costs and interest rates, sundries, marketing, and on and on they go.
Many practice owners are quick to shop-out what they believe are the most obvious expenses, but few understand the impact of one of the largest expenses and how it can be dramatically reduced to increase profitability. The highest expense for most practices is payroll, followed by real estate. Real estate encom- passes your monthly rent or mortgage payments, along with the property’s operating expenses, main- tenance fees, utilities, and janitorial costs.
If you consider these top two expenses, payroll
and real estate, only one of them is really negotiable. With payroll, you can either pay people their value or they usually find another job that will. You may decide that you can cut staff, but if you need people you need to pay them what they deserve or they will eventually leave.
Real estate however, is 100% negotiable. You have the choice of leasing or owning, as well as being in an office building, retail center, a stand-alone building, or large medical complex with many other providers. You can choose the size of your space, the design, and the landlord you want to work with—or to be your own landlord. And if you do own, you get to decide whether to buy an existing building, an office condo, or to develop your own building from the ground-up.
When negotiating the economic terms of a lease, you get to have a say in the length of lease, the desired concessions including build out period, tenant improvement allowance, free rent, lease rates, annual rate increases and many other provisions.
With this many choices to evaluate and understand- ing that each one affects the final economic outcome, why is it that so many practices fail to capitalize on their real estate opportunities? The short answer is
that most practice owners and administrators
simply don’t have the knowledge and expertise in commercial real estate to understand how to make the most of these opportunities. They view real estate as a necessary evil instead of an incredible opportunity to improve profitability, reduce expenses and improve the quality of their patients’ experience. When the correct approach is taken, you may actually look forward to it instead of dreading your real estate negotiation.
Let’s take a look at three key ideas that will help you make the most of your next real estate transaction.
1. Timing
Every type of transaction has an ideal timeframe to start the process. When starting too early or too late, you communicate to the landlord or seller that you don’t really know what you’re doing. When that message is communicated, it hurts your ability to receive the best possible terms. For example, don’t wait for your landlord to approach you on a lease renewal negotiation. Start by consulting with a professional so you can understand the ideal time- frame to start your transaction, come up with a specific game plan for what you want to achieve, and then you be the one to approach your landlord with renewal terms.
2. Representation
Landlords and sellers prey on unrepresented tenants who don’t really know the market or what their options are. If the tenant was a Fortune 500 company, the landlord would approach them with a high level of respect, expecting that they either have a real estate broker hired to represent them or have a team of professionals internally that are well equipped to handle the transaction.
In contrast, when a landlord or seller starts speak- ing with a tenant who isn’t represented, and who they don’t believe knows the market as well as they do, that tenant is not going to get the same level of respect through the process. This is because the landlord senses an opportunity to take advantage of a small tenant who is not an expert, doesn’t have a
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