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Seven Lease Investment Tips

We speak with tenants everyday who are overwhelmed by what they don’t understand about their lease, the real estate market, and the art of leasing property in general. They are bewildered by so many variables, overbearing personalities, industry standard language, and all the unfamiliar strategies. They don’t know where to begin. Typically, these individuals are accustomed to being “the expert” in their field so they charge ahead and try to unravel lease issues on their own. A lease is an important investment and to work on it without the necessary training and experience is inappropriate. Here are seven tips to help you manage your lease affairs properly:

1. Think of your lease as an investment. A carefully managed lease will provide you with operating profit returns on an ongoing basis, and an improved value when you sell at a high point in the market cycle, just like a stock that pays dividends. You need to make periodic investments in lease evaluation and negotiation to grow your asset. Making sure your lease has all the features it should have in every stage of the market cycle is the goal. Features such as protected use, lengthy event horizons, ability to assign, and options to extend will all increase the value of your lease and improve the sale value of your business.

2. Think like an investor. Prudent investors know what assets they should invest, and where those assets will be used most effectively. If your assets are your time and your clinical skill, you should be putting your efforts into your practice, not negotiating your lease and worrying about real estate issues. Learn as much as you can from a professional commercial real estate advisor to make educated decisions and keep matters in perspective during lease negotiations. Having an expert on your team will help you direct the big picture rather than getting bogged down in unfamiliar territory. Watch your lease timeline. Know when to hold, when to make changes, and when to sell. 

3. Remember the “Field of Vision” investment rule. Your Lease is not the right vehicle for short term gains. Look for long-term, stable returns and value appreciation. Saving 50¢ per square foot in base rent at the expense of an option to renew could cost you the sale of your practice. Keep your eye on the far end of your career and always make sure your current term and options to renew are equal to or greater than the loan amortization period of your future purchaser.

4. Watch your investment return in terms of practice profitability instead of fretting about the real estate market. The residential real estate market has little to do with your rent value or your day-to-day operation. Don’t fret about real estate values, focus your efforts on what will have a direct impact on your business.

5. Be a conservative investor. The ideal lease will provide a stable, long-term return. It shouldn’t be a gamble. You wouldn’t borrow money to invest so why borrow to pay your rent? Lease appropriate space, at an appropriate rate, and take care of yourself and your patients. Focus on the profitability of your day to day operation. For example, an increase in production could be achieved by extending operating hours rather than relocating to a larger, more expensive space.

6. Choose your investment advisor carefully. A firm that understands your needs, has significant experience in your industry and a proven track record of negotiating success will create as much flexibility and opportunity for your current and future business goals as possible. How much is your time and peace of mind worth? Saving a relatively small amount of money in professional fees by retaining the wrong advisor or attempting to negotiate your lease on your own might cost you the ability to sell your practice down the road.

7. Have realistic investment return expectations. Real estate is a slow process. It can take years to shape and prune a great lease. Understanding the various asset classes of real estate and the features each offer will help you determine your needs and plan your investment over the long term. For example, it would be unrealistic to expect top-end office space to provide ample free parking or pylon signage, or that retail, street level, storefront space will rent for the same as office space. Accurate expectations of your real estate and lease investment will help you develop a solid, long-term plan.

 

Written by
Ian D. Toms and Jennifer J. Miles

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