Many therapists (even those practicing exclusively as an online therapist) will come to a point where they want their own private therapy office. For the practitioner fresh out of school or for someone who has been an institutional or group practice counselor, the ins and outs of a commercial office lease can be stressful and unfamiliar. This article should hopefully help out.
Commercial leasing is much different than residential leasing
The differences between the commercial lease and a residential lease are critically important to understand. Most people have some familiarity with how residential leases work. Residential leases, for example, have special protections for tenants with regard to evictions, required services and maintenance requirements. A commercial lease on the other hand is a pure business transaction where everything is fully negotiable and the protections are limited to those negotiated within the contract. For example, most states have a set eviction process where the landlord must follow very specific requirements and time lines. A commercial lease however is governed almost exclusively by contract law.
The origins of these differences stem from the fact that most residential leases are between a “business” and an “individual.” This means that the business has presumably more experience with contracts while the individual is simply looking for a place to live. This is similar to a “Business-to-Consumer” business where the customer is the general public. A commercial lease on the other hand is always between two business entities with equal standing in the eyes of the law. This means that there are two businesses participating and it’s presumed that both sides are competent and fully understand the parameters of which they are negotiating. Essentially that means that in a business-to-business transaction, both sides are considered competent while in consumer leases, the individual is more protected by various laws because they aren’t professionals (compared to the landlord.)
Some key differences between residential and commercial leases:
- Commercial leases are highly negotiable. Residential leases are typically only negotiable in terms of duration and monthly rent. Most residential leases use a standard form without much modification.
- Commercial lease documents can be in the dozens to hundreds of pages. Residential leases are far less complex.
- Residential properties are generally rented “as-is,” with repairs and maintenance completed by the landlord. Residents rarely can undertake renovations, modifications or other construction. Commercial property is often modified by the tenant to suit their use (such as a restaurant building a kitchen, adding or removing walls, installing fixtures, signage, etc.)
- Residential leases are typically “gross” which means the tenant pays a fixed rental price. Commercial leases are typically “net” which means the tenant pays a base rate plus extras such as property taxes, insurance and/or maintenance.
- Residential leases are typically for a shorter term (generally 1 year or less.) Commercial leases are often for several years or longer.
What is a single, double or triple net lease?
As mentioned above, commercial leases are typically “net” leases which mean there is a base rate plus additional costs.
- A single net lease means base rent plus property taxes.
- A double net lease means base rent plus property taxes and insurance
- A triple net lease means base rent plus property taxes, insurance and maintenance.
You want to attempt to avoid a triple net lease if possible! This isn’t always possible, but there are several big disadvantages to the triple net lease. The main one is that you can’t predict your exact rent costs each month. It’s very hard to manage your therapy practice business when your rent is variable. However, assuming you can’t escape the triple net, there are some things you can do to mitigate the uncertainty. Of course, remember to negotiate this before you sign a contract!
Joseph Sanok from Practice of the Practice has these recommendations:
Ask for a triple net limit
See if the landlord can cap these net expenses. You may have to pay a higher base rent or agree to a longer term, but capping the triple net provides you with a key advantage: predictability.
Ask to pay a percentage
Many building owners can be convinced that your triple net contribution be a percentage of your therapy practice income. This can be very helpful to you when you’re just getting started and don’t have a strong client base yet. Landlords aren’t always as receptive this approach at first, but if they really want to rent the space, it’s certainly within the realm of possibility.
Lease from another therapist
This is a great strategy to simply get around worrying about the triple net. You agree to a gross lease with another therapist and you pay a fixed rate to use their space. Let someone else worry about it!
What is a tenant improvement allowance?
The tenant improvement allowance, also known as an upfit allowance is a payment from the landlord to you in exchange for improvements you make to the property. For example, if you rented an empty warehouse and converted it to offices, you can negotiate a tenant improvement allowance to help offset some of this expense. Essentially, the landlord gives you a discount for the work you do to improve the building. So for example, if you have a tenant improvement allowance of $25, this would mean that for a 1000sf rental, you would get an allowance of $25,000 for improvements. Of course, the longer the lease, the higher this allowance would be so the landlord doesn’t lose money! This allowance depends on the type of work being done. You can even get a tenant improvement allowance for lease renewals as well. So if you’re thinking of renovating your therapy office space, using the TI allowance can certainly help defray some of those costs.
While this article hopefully got your feet wet in understanding commercial leases, it’s certainly not a complete guide! We’ll have future posts about therapy office space and you’re also welcome to leave a comment or talk to us on Facebook or Twitter if you have any questions.