Premise Lease Negotiations

Tenant Representation


Ian D. Toms


September 15, 2014

September 15, 2014

Your practice location is your most valuable asset, providing permanent access to your patient population and infrastructure for your fixed assets. Most dental clinics are located in leased space which is dependent on a landlord-tenant relationship.Over the past 20 years, a number of remarkable changes have permanently changed the tenants ability to manage its location. A savvy tenant must recognize and respond to the changes.

The commercial real estate industry has changed significantly – Times were when your landlord was a person who owned a building with a relatively small number of tenants. You knew the landlord personally, and knew that the landlord needed your tenancy. Now the large community of small landlords have sold their holdings to a small community of very large landlords who have accumulated vast real property holdings which has a number of effects for tenants.

 First, your negotiating power is now significantly reduced because in many cases you are just one in thousands of tenancies – in short, many current landlords could not care less if you threaten to leave. For example, Manulife Real Estate controls 38,700,000 square feet of real property; a 1,500 sf tenancy represents .0039 per cent of their portfolio. Second, large landlords set their rent on the basis of investment return rather than what the market bears, knowing that in many markets tenants have nowhere else to go. Third, contemporary plaza design favors large “big box” style regional plazas which provide little or no space for dental clinic tenants. Fourth, instead of dealing with the landlord, you now have to call leasing managers who don’t even return your calls because you are only one of thousands of tenancies for which they are responsible. Know that your leasing manager has a budget for vacancy and may not be motivated by your call.

The tenant community has changed significantly– Times were when your co-tenants were private owner-operated enterprises with bargaining power equal to small private landlord ownership. Notice that many independent tenants have been replaced by chains with hundreds if not thousands of locations which are able to pay a higher rent and are supported by in-house real estate professionals who deal with sophisticated leases and landlords. Secondly, almost every real estate development has at least one dental clinic tenant. Often several clinics bid for space creating a demand that results in a negative negotiating position which landlords translate into difficult lease terms and conditions.

Tenant representation has changed significantly – Times were that your real estate agent “found you a spot”, you had a chat with your new landlord to agree on tenancy terms, your lawyer reviewed the proposed lease, and you signed and were on your way.Just as the leasing industry has changed, so has the tenant representation profession. Tenants are no longer able to “do their own lease”. To choose who should represent your interests, you need to understand your options.

First, boutique consulting firms are small, specialized lease consulting firms providing professional services to a limited number of clients who expect superior performance and service based on professional qualifications and personal experience of many thousands of files. These firms typically operate under an ethical and professional corporate philosophy, providing excellent results while keeping client costs to a minimum. Office overhead is often minimized through a referral network of experts instead of carrying in-house staff.Another option is large brokerage firms. But large real estate brokerage firms do just that; they broker properties in exchange for a commission paid by the landlord which is based on what rent you pay. Not only is your representative paid by the “other side”, but the more rent you agree to pay, the more your representative gets paid, both of which are conflicts of interest. Representatives of these firms may sell their service on the basis of superior market knowledge, but it’s your lease terms and conditions and not the market that’s important here. Few if any representatives specialize in lease negotiation because their primary focus is brokerage.Finally, a number of small to medium sized lease consulting firms have formed. These firms are in growth mode, collecting staff who may not have any particular experience and charging fees which appear to be related to high overhead and their company growth rather than what they accomplish for their client. They appear to be less specialized, attempting to be all things to all people all the time. More staff, a smooth intense sales pitch, and higher fees do not translate into effective performance.

At the end of the day, regardless of which tenant representative you choose, it boils down to one key issue. Is the one person who will be completing the negotiation on your behalf the right fit for you? Trust your instinct.You are the only one who can make the final decision about when you are ready, given all these variables and risks. But make sure you know what number you should be working towards. It would be a shame to have already reached it and never get to enjoy it.