If you’re reading this post, you’ve found a property that you’re interested in and have done your due diligence to know you’re okay with this property for at least next 7-10 years for operating your dental office.

You should also know exactly what you’re getting for the $/sqft and other variable costs such as common area charges and taxes.

If you don’t know this information, STOP and read my previous post – Dental Office Lease Negotiation: What You Need to Know Before Starting –  before moving forward to putting in your initial offer.

As you’re going through the lease document, you’ll come across some terminology which you may not be aware of, but I’ve made a  list of some major terms and clauses to help you understand.

Download the pdf file with a list of terms you NEED to know. Print it out and keep it handy as you’re reviewing your dental office lease document.

When you’re ready to start negotiating, the first step you MUST take is to find your self an attorney to represent you. The attorney will not only help with negotiations, but also review the final lease prior to signing.

As I’ve discussed already in my first post on dental office lease negotiation, I worked with George Vaill who took care of all the lease negotiations. But before I signed on the dotted line, I still had a lease attorney review the contract.

I worked with Dr. Eric J. Ploumis who is an orthodontist as well as an attorney! He provides comprehensive legal services for all dental professionals.

Before signing, I reviewed every single clause on each page of the contract over the phone with Dr. Ploumis.

Having all the negotiations done by George Vaill and then having the final contract reviewed by my attorney Dr. Ploumis, I was able to move forward to the next phase of my startup journey having known that I had secured a great lease for my location for the long term.

During the writing of this post, I consulted with Dr. Ploumis to find out the top three most important things doctors need to consider before signing on the dotted line of their lease document.

Here’s his response:

1.      Have you sought the advice and guidance of someone who reads and negotiates leases for a living? A lease is a dense and complex document. A misstep can have significant long-term consequences for your practice.

2.      Think big! Does your lease provide the flexibility to grow or expand your practice? Having a lease of sufficient duration, an option to renew, or the right to take over additional space will allow you to continue to thrive as your practice grows. Often, a start-up practice, in the interest of economy, tries to fit too much into too small a space. This hampers the ability of the practice to grow.

3.      Don’t be penny-wise/pound foolish. Everyone wants a great deal but your rent is fully deductible and is a fixed overhead expense. Don’t pass up a great location to save a small amount on your rent. Don’t do a “Home Depot” renovation that will look shabby in a few years when a better quality buildout will provide many years of service.

Dr. Ploumis is an attorney, an orthodontist, and an associate clinical professor at New York University. He limits his legal practice to business and transactional issues related to the practice of dentistry including practice transitions, partnership and employment agreements, office leases, and the defense of allegations of professional misconduct. He can be reached at www.DentalPracticeLawyers.com.

Getting back to topic, here’s a list of some terms and explanation:

1. Rentable square feet

   This is the usable square feet + pro-rata share of the building (%) – number of square feet on which your rent is based.

2. Initial Term and Renewable options

   Initial term is the minimum initial number of years you’ll be renting space from the landlord. Renewable options refers to your right as the tenant to renew the lease for a stated period of time at a rent amount that is predetermined.

Why is this important? – My lease initial term is for 5 years and I have three renewable options of 5 years each. This means after the first 5 years, I have the option to renew or leave the premises. If I renew after the initial term, at the end of my first option of 5 years (which totals to 10 years total), I have the option to renew again. This is in my favor as a tenant.

When you’re negotiating a commercial lease, the landlord wants the initial term as long as possible, which gives them a guaranteed rental income during the initial term and also they don’t have to worry about going out and finding another tenant. On top of that, the landlord wants the least number of renewable options.

As a tenant, you want SHORTEST possible initial term with multiple SHORT renewable options, which is NOT in the landlord’s best interest. If as a tenant you do renew, the landlord is bound by the lease to give you the space at a predetermined amount.

3. Base Rent Increase

   All leases will have a rent increase clause. You need to find out what the rent will increase by each year during the initial term, as well as during the option periods through the life of the lease.

4. Tenant Improvement Allowance

   Money the landlord provides you towards the build-out of your dental office space. Your goal is to get as large of an allowance as possible.

5. Landlord’s work / Delivery Condition of the space

   This refers to the work or improvements done by the landlord to the space BEFORE delivering the space to the tenant. This is done at the cost of the landlord, however, the landlord may deduct his expense from the Tenant Improvement Allowance. Both Landlord’s work and tenant improvement allowance are negotiable.

This is another reason why it makes sense to have a dental contractor come in  to do early scoping out of the space BEFORE you start negotiations.

6.  Assignment and Subletting

   Assignment and subletting are two different things. The assignment clause comes into play when you’re trying to sell your office in the future to another dentist who will take over your lease.

Under an Assignment, the original tenant’s rights and obligations under the original lease are assigned or transferred to the new tenant (i.e another dentist that buys your office in the future). With subletting, the original tenant is liable for everything under the terms of the original lease.

Most leases will have provisions that will keep the original tenant on the hook financially throughout the existing term of the lease even if you’ve sold the office to another doctor who has taken over the lease. Depending on the lease, it will also keep you liable financially throughout the option periods.

For my lease, this was brought to my attention by my attorney who was able to negotiate exclusion of the option periods after the current lease term expires. For example, if my current term has three more years left and I sell my office to a doctor tomorrow, I’m still liable financially should the new buyer default on rent payments for some reason. However, after the current term expires in three years, I’m no longer financially liable during the option periods should the new buyer default.

 Point is this: Your goal is to include a clause in your lease that releases you from obligations of the lease either when you go to sell or at least after the current lease term expires, so you’re not on the hook for the entire life of the lease during your option periods.

7.  Rent Commencement vs Rent Abatement clause

Here’s the Rent Commencement and Rent Abatement clauses from my office lease:

Rent Commence Date: Payment of the Base Rent and CAM, as defined below, shall commence on the earlier of (i) 120 days after this lease is signed by all parties; or, (ii) the date Tenant opens for business in the Premises.

 Base Rent Abatement: Landlord grants to Tenant an abatement of Base Rent for an additional period of Sixty (60) days starting on the Rent Commence Date. During this 60 day period, the Tenant shall pay its share of the CAM only.

Interpretation: According to the rent commence date, the rent will start either ~ 4 months after signing the lease, or the day I’m ready to see my first patient in the office. This clause had to be negotiated. Initially, the landlord offered no free rent grade period. After negotiations, I was able to receive 4 month of free rent, which allowed time for construction of the office.

According to the base rent abatement clause, I received additional two months of free rent, but I was responsible for paying the CAM (Common Area Maintenance) charges.

So in total, I received 6 months of free rent on top of the $10/Sq-ft Tenant Improvement allowance.

Why is this important?

The construction of the office took 5 months in total. Of the 5 months, almost a month and half went in just trying to get permits from the Building Department. The time it takes to get a permit to begin construction will vary from town to town. Some towns have more strict requirements than other, and therefore, it may take longer to get the permit to finally start on the construction.

Of the six weeks it took to get permits to start construction, first two weeks were spent in getting the paperwork together and finalizing the design of the office with the architect.

What I  should’ve done differently:

I should’ve delayed signing the lease by a week or two (without getting the landlord too angry). I could’ve used these two weeks to get everything finalized regarding the design of the office with the architect, and have other necessary documents ready to go to file my application for Permit with the local building department, this way maximizing my free months of rent.

What you should do before you sign the final dental office lease:

1. When your potential dental contractors are doing the preliminary inspection of the space prior to negotiations, find out if they’ve worked in the town before and if they’re familiar with the building department officials and the application process of filing for permit.

If they tell you the local officials have strict requirements, you should immediately pay a visit to the building department and get a list of all things you need together to have your Permit application started.

2.  Start talking to an architect. The dental contractors you talk to should be able to give you some names.  Start working on the design of the office and get almost everything finalized prior to retrieving your official stamped Architectural Plans of the office. You’ll need these stamped plans as part of your permit application. As you’re getting closer to the end of negotiations, give the architect a go ahead and get your official stamped Architectural Plan for the office. This alone took me 3 weeks to do AFTER signing the lease.

3. You should be finalizing who you hire to build your office prior to signing the lease. Once you’ve decided, have them get all paperwork ready for the permit application.

4. Sign the lease if you’re ready. Immediately, hand over all paperwork including the stamped Architectural Plans to the building department and have them start your permit application!

The dental contractor I hired took more time than expected to get the paperwork together before starting the permit application. To avoid wasting time, do everything yourself. You should find out from the building department and make a checklist of things you need to get the permit application started. As soon as you sign the lease, you should immediately hand over all documents to the building department, so they can begin to review the application for building permit.

Conclusion:

The more quickly you can get to the point of opening the doors of your office to your first patient while still in your free rent grace period, the better.

By the time I saw my first patient, I only had one month remaining in the grace period. After going through it all, I realized if I had my paperwork together for the permit application prior to signing the lease, I would have saved another month – which means I would’ve had TWO months of free rent after opening the doors to my office.

In the beginning, cash flow is KING!

If you have any questions when you’re in this phase of your startup journey, and if this post did not answer it for you, then leave your comment below and I’ll do my best to get you an answer.

If you found this post useful, and you want your friends to see it too, then don’t forget to share the knowledge!