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Table of Contents

• How do I determine what I can afford for rent?
• What location is best for me?
• Where do I begin?
• Is your proposed space appropriate for what you want to do there?
• Lease types
• Terms I must know
• Negotiating the best commercial lease
• Key to success!
• Important reminder!
• Resource Links

 

 

 

 

 

 

 

 

 

 

 

How do I determine what I can afford for rent?

You must complete all sections prior to this one in order to answer that.  The worksheet you completed in the prior section (3b) should give you a good idea of what your startup and first years financial needs will be.  If you don't have enough money than you will have to downsize your plan and the rent is a great place to start!

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What location is best for me

You have many options when deciding where you want to operate from.  Remember, if you follow all the steps in positioning yourself to be in demand, the location you choose is mere geography.  If you have a large startup budget with strong contacts and resources in your community then and only then do I recommend any space beyond 1,000 - 2,000 ft2 at startup.

For most of you who are solo starters, I would recommend subletting from an existing private practice such as a physician, physical therapist, chiropractor, health club, etc. Do not get tied into a space that is beyond your means.  After succeeding in your first location, then open another that is larger and better.  Some beginners make the mistake of doing this backwards.  They try to open a large facility from the beginning which takes longer to startup and establish.  And when they finally open another it's a mere "satellite".  Don't make this mistake because the sooner you can open your second site, the sooner you can begin reaping the rewards of duplication such as:

• Quantity discounts when buying supplies and inventory
• Marketability and credibility with multiple locations
• Referral convenience for your referral sources
• Marketing advantage of advertising two for the price of one
• Two income sources, and more... 

The key to choosing a profitable location is determining the factors that will increase patient volume for your practice. Ask yourself questions such as:

• What type of location is best for the niche I've carved-out?
• How much rent can I afford?
• Is the potential location appropriate for what I plan to do there?
• Will patients/customers come on foot?
• Will patients/customers drive and, if so, where will they park?
• Will more patients/customers come if I locate near other businesses?
• Will the reputation of the neighborhood or even of a particular building help draw patients/customers?

Ultimately, the perfect location for your practice is a very individual matter. Spend some time figuring out the habits of the patients/customers you want to attract, and then choose a location that fits.

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Where do I begin?

Determine the average rent in your area by contacting commercial brokers and agents.  They are great sources of information on rental costs in various neighborhoods. They'll generally give you an average figure for the cost of commercial space per square foot per year in a given area. Once you have this figure, you can compare it to the costs of other spaces you're considering.

There are several ways to research potential locations.  The way I recommend is blow up a map of the city/area you are in (kinkos or copy centers can do this for you) and do the following:

Mark where other physical therapy private practices are.  Even though they you should not view them as competitors because of your specialized niche it behooves you to keep a little distance from them (if you want to join PTPN - not recommended - they have a rule where you must be a certain distance away from other provider members).

• Mark where acupuncturists, chiropractors, podiatrists are
• Mark where the nearest hospital is.
• Mark where primary MD's are.
• Mark where orthopedists are.
• Mark any outpatient surgical centers, etc.
• Where are the health clubs?
• Where are the professional massage therapists (not parlors)?
• Where are the senior communities?
• Where are the residential communities, high schools?

Once you do this and get a birds eye view, you can strategize a better area/location based on your niche service.  Think about issues of traffic, people coming home from work, where new developments may occur, what part of the city is newer, etc.

Once you choose the best area for your niche service you can either approach an existing business listed above or lease your own space.

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Is Your Proposed Location Appropriate for What You Plan to Do There?

Communications Wiring

Another consideration that's important for practice these days is having modern phone and other data lines into the business. When you're considering a specific space, ask the owner, agent or landlord for information about communications wiring, such as whether the space is connected to a fiber optic network or is wired for DSL or a T1 line (high-volume Internet connections). Also, find out to whom the landlord has sold the rights to the risers (wire conduits) in the building. A commercial landlord cannot enter into exclusive contracts with a single telecommunications provider such as MCI or AT&T. However, to bring in another provider of your choosing could be expensive.

Electricity and Air Conditioning

Besides high-tech communications wiring, don't overlook plain-old electrical power as an important consideration in choosing a business space. Make sure that any space you're looking at has enough power for your needs, both in terms of the number of outlets in your space and the capacity of the circuits. Check to see if any of your equipment require 220v, if so then make sure the space offers it or ask them to install prior to you moving in (if you don't it could cost roughly $300-$400 later).  If you'll be running machinery or other electricity-hungry equipment, make sure to find out from the landlord how much juice the circuits can handle and whether a generator is available during power outages. Also, if you'll keep sensitive computer equipment at your office, ask the landlord how many hours of air conditioning are included in the terms of your lease, and negotiate longer hours if necessary.

Parking

Another common need for many businesses is adequate parking. If a significant percentage of your customers will come by car and there isn't enough parking at your chosen spot, it's probably best to look elsewhere. In fact, the city planning or zoning board might not allow you to operate in a space that doesn't have adequate parking.

Zoning Rules

Finally, the location that you choose needs to be legally acceptable for whatever you plan to do there.  Most physical therapy services can be offered almost anywhere (even in peoples homes) but if you need a pool, floor drain etceterra you should consult with your landlord.

You should never sign a lease without being sure you'll be permitted to operate your business in that space. Your city planning or zoning board determines what activities are permissible in a given location. If your zoning board has a problem with any of your business activities, and it's not willing to work out a way to accommodate your business, you may have to find another space.

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Lease Types

Even though you may work with a commercial real estate broker in your area, you should become familiar with the different kinds of leases available as they can substantially impact whether or not your business will succeed.  These vary from property to property and include:

Gross Lease.  This is the most common kind of lease in which you as the tenant willl pay rent and your landlord takes care of taxes, insurance and maintenance costs related to the property. Generally, gross leases contain escalation clauses allowing the amount of your rent to be adjusted (usually each year) to offset you landlords increased expenses.

Net Lease. A net lease transfers some or all of the expenses a landlord is traditionally responsible for to you as the tenant. With a single net lease, you will pay rent plus taxes related to the portion of property you are leasing. Under a double net lease, you will also pay proportional part of the building's insurance premium.  With a triple net lease, you will pay all of the charges under a double net lease plus maintenance costs.

Fixed Lease. This kind of lease provides for a fixed amount of rent over a fixed rental period (term). This kind of lease seems most non-threatening at first glance, since you are not obligating yourself for rent increases in the future (as with a gross lease). However, there is a downside to a fixed lease.  If you want to renew the lease when it expires, the landlord may choose to raise your rent substantially (especially if your business appears to be doing well and would suffer from relocating elsewhere).  It may be better to opt for a longer term lease with a pre-fixed or determinable rent increase so you know what you are getting into in advance.

Step Lease A step lease provides for pre-set rent increases that go into effect at stated times. This can provide you with peace of mind insofar that you will know in advance what your rental amounts willl be for a longer period. However, you should take a careful look at each scheduled increase and determine if they seem reasonable; i.e., in keeping with historic consumer price indexes or local rental increases.

Percentage Lease. This kind of lease allows your landlord to share in your success or bad fortune. A percentage lease provides for a fixed amount of rent plus an additional amount that is set as a percentage of your gross receipts or sales.

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Terms I Must Know

Lease Term. This identifies the amount of time the lease will be in effect. If you think you may want to stay at this same business location beyond the initial term, you should negotiate an inclusion in your lease agreement that entitles you to renew the lease for a specified period and rent.

Rental Rate. This defines what your rent is and when it must be paid. Most leases also include late payment provisions that impose additional charges if you fail to pay the rent when it's due or within a specified time period. If your business experiences seasonal or irregular sales activity, try negotiating a flexible rental rate that will correspond to the anticipated changes in your cash flow.

Escalation Clause. This clause provides for specified increases in rent over a specified time. These escalations can be fixed or determined with reference to an outside factor; i.e., increases in the landlord's operating costs, increases in a cost index, or increases in your business's gross receipts or sales.

Improvements and Modifications. This provision identifies whether or not you have the right to make improvements or modifications to the facility so that it better suits your needs. In some cases, a landlord will build or modify a space to suit a tenant's particular needs, prior to the tenant moving in. These agreements must be spelled out in the lease. Additionally, watch out for language requiring you to restore the space to its original condition: if you knock down a wall, you don't want to be stuck with a bill to undo the work.

Maintenance/CAM. This provision determines who is to maintain which portions of building and/or land. If you are responsible, you must make sure the lease specifies whether you can contract with anyone of your own choosing to provide these services, or if these service providers must be approved by the landlord.CAM is Common Area Maintenance—be clear on exactly what the landlord can charge back to you, such as installing a new elevator or stairwell, etc.

Competition. If you are leasing retail space in a larger facility, such as a store in a mall, there may be restrictions placed on the landlord's right to lease nearby space to businesses offering goods or services similar to your own. (If the lease does not include such a provision, you should push for one.)

Subletting. This provision spells out whether—and under what conditions and circumstances—you are entitled to sublease all or part of your premises to another. (Remember, even if you sublet, you are still the one legally responsible for paying the rent, etc. to the landlord). Should you outgrow the space and want to move, you'll want the right to sublease or assign the space to another company without a hassle from the landlord.

Taxes. This clause specifies who is responsible for the real property taxes or portion thereof.

Insurance and Liability. This provision determines who is responsible for casualty and liability insurance and the amount of coverage to be carried. Additionally, this provision may specify under what circumstances you and your landlord may excuse each other for liability for injury to persons or to the property. Watch out for language that would legally excuse your landlord from damages to persons or to the leased property caused by the landlord.

Renewal Option. This specifies whether you have the option to renew the lease when it expires and for what amount of rent. Including a renewal option in your lease can protect you from an unreasonably large rent hike when your first term expires.

Purchase Option. This provision spells out whether you'll have the right or obligation to purchase the facility at the end of the lease term. This provision should spell out the option price or range, and how and when the option to purchase can be exercised.

Destruction/Condemnation. This provision states whether the landlord is required to rebuild and specifies whether the rent will be abated and if your lease obligations are terminated in the event the facility is totally or partially destroyed. This provision will also define what rights you and your landlord will have if the facility is taken over by eminent domain (acquired by a government body for a public purpose). Most leases include a provision for termination of the lease following destruction of the facility based on the time it will take to repair or the costs involved. Insist on a cutoff time after which the lease is terminated to prevent your losing business while a landlord takes forever to make repairs.

Landlord's Solvency. This is a necessary provision protecting your rights as a tenant if your landlord's building—along with your leased premises—are foreclosed upon. If you are concerned about the landlord's solvency before you enter the lease, require your landlord to obtain a non-disturbance agreement from any mortgage holder. This would obligate them to adhere to the terms of your lease even in the event of foreclosure.

Zoning and Land Use Restrictions. This provision spells out the zoning and other restrictions that apply to the building and your use of it. If your intended use would violate a zoning rule or private land use agreement, insist-or have your attorney insist-on a provision that lets you out of the lease if you are unable to obtain a zoning variance or other judicial relief.

Going Dark. In a mall or office building, smaller businesses can be hurt when a major tenant "goes dark" by not renewing their lease or by going out of business. You may want to consider adding a clause to your lease that would give you a substantial rent reduction or the right to close your store if a major tenant or several other tenants go dark.

Security Deposit. This is the amount you'll pay in addition to rent in order to activate the lease. This is in addition to other costs spelled out above.

Ancillaries. Look at clauses related to parking and building hours, etc. when you negotiate your lease. If the AC or heating is normally shut off at 8:00 p.m. each night and your staff always works late, try to get those hours extended.
 

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Negotiating the Best Lease

Negotiating a good lease can save you money. Learn where landlords are willing to make concessions.  When you are ready to expand and are looking for available business space, chances are you'll be presented with a typed or printed commercial lease prepared by the landlord or the landlord's lawyer. As you read the lease, keep these points in mind:

• Rule 1: Understand that the terms almost always favor the landlord. 
• Rule 2: Know that with a little effort you can almost always negotiate significant improvements to the terms

In theory, all terms of a lease are negotiable. But your negotiating power depends on whether your local rental market is hot or cold. If plenty of commercial space is available, you can probably win many landlord concessions. If your area's rental market is tight or you are chasing a unique space, you'll have considerably less leverage.

Length of the Lease

One area of the lease you should always focus on is its length -- also called its "term." A short-term lease is almost always to your benefit. Shorter leases give you more flexibility if the needs of your business change -- for example, you want more space or decide that a different location would be better. There is a trade-off here, of course. A long-term lease ensures that you'll have an affordable business space for a predictable period of time. And landlords are often willing to make more concessions on longer-term leases.

If your practice isn't particularly location-sensitive and plenty of commercial space is available in your area, then a short-term lease makes sense. Even if the landlord doesn't renew your lease, finding comparable space won't be a problem.

On the other hand, if you have found an especially favorable location deciding on the best lease term is more problematic. If your business does well, you'll want the right to stay on for an extended period. On the other hand, you'll probably be nervous about signing a four-year lease in case your business goes kaput.

A good solution is to bargain for a short initial lease with one or more options to renew -- perhaps a one- or two-year lease with an option to renew for two or three more years. Typically, an option to renew gives you the right to exercise your option to stay by notifying your landlord in writing a certain number of days or months before the initial lease period expires.

If you ask for an option, expect the landlord to want a higher rent for the renewal period. If the property is particularly desirable, the owner may also want an extra fee in exchange for giving you the option of staying or leaving after your initial term is up. This is a common arrangement, and if the space is important to the success of your business, seriously consider paying it.

Rent and Rent Increases

Another primary issue to consider when leasing space is how much rent you'll pay. It's sensible to check out rates for comparable spaces. If the rent seems unjustifiably high, you could try asking for a reduction. Many landlords, however, usually won't consider lowering the rent (except in poor economic times or areas), but you may be able to get a few months of reduced rent to compensate for moving costs.

Landlords will usually include an annual increase to your rent in your lease terms. If the landlord insists on keeping the clause, try to get a cap on the amount of each year's increase, and try to exclude a rent increase for the first year.

When you're shopping around, look carefully at whether the landlord will pay utilities, repairs, taxes and insurance. With a "gross lease," your rent includes these costs. By contrast, with a " net lease" you pay for them separately -- potentially a large sum. In fact, the best approach may be to offer to pay a higher amount for rent in exchange for eliminating these extras.

Tenant Improvements

If you'll need lots of improvements to the space (called build outs), you may want to use the lion's share of your bargaining power to have the landlord provide them at no cost to you. If you're willing to sign a long-term lease, the landlord will be more willing to pay for improvements to the property.

Subleases and Assignments

Ask for an option to sublease or assign your space. That way, if you need to move out, you'll be able to have another company take your space and payt the rent without having to break the lease.  Or, if you rent enough space to grow into, you can sublease some of the space until you're ready to use it.

*Excerpts from Nolo Press

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Key to Success

Be prepared.  The key to saving money when negotiating a good lease is knowledge.

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Important Reminder

Do not get in over your head.  Start out in a space that humbly meet your needs and grow into a larger space later.

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Resource Links

• Nolo Press: Leasing Space For Your Small Business

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