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Dr. Sharp: [00:00:00] Hello everyone. Welcome to The Testing Psychologist podcast, the podcast where we talk all about the business and practice of psychological and neuropsychological assessment. I’m your host, Dr. Jeremy Sharp, licensed psychologist, group practice owner, and private practice coach.

This podcast is brought to you by PAR.

The FAW Interpretive Report, available through PARiConnect, provides scores for all FAW subtests and can aid clinicians in creating personalized and targeted intervention recommendations. Visit parinc.com\faw to learn more.

Welcome back, everybody. Today’s business episode is going to be highly useful to many of you, I think. My guest is Colin Carr. He’s the founder and CEO of CARR, the nation’s leading provider of commercial real estate services for healthcare tenants and buyers. Every year, thousands of healthcare [00:01:00] practices trust CARR to help them achieve the most favorable terms on their lease and purchase negotiations. Colin’s been involved in commercial real estate for over two decades and has personally completed over 1,000 real estate transactions.

So we talk today about a process that many of us go through but may not feel comfortable with. And that is finding and negotiating a lease for an office space. We talk through lots of aspects of this process. We talk about what a commercial broker even is, and we talk about why we should consider using a commercial broker. We talk about the ins and outs of lease negotiation and top items that we might consider negotiating in the process. We also talk about some of the main mistakes that healthcare providers make in lease negotiations that can cost us [00:02:00] tens or even hundreds of thousands of dollars, depending on the lease. So if you have ever been looking for office space and felt overwhelmed and unsure how to navigate that process, this is a great episode for you.

If you are a practice owner and you would like to connect with other Testing Psychologists in a beautiful setting where you get a few days to relax and rejuvenate but also learn a bunch of stuff and work on your business, then I invite you to check out The Testing Psychologist retreat this summer, August 9th-13th, Fort Collins, Colorado. You can go to thetestingpsychologist.com/retreat and learn more and register and book a call with me if you’re unsure, we’ll talk about it, let you know what it’s all about, and figure out if it’s a good fit for you. So hope to see you there. [00:03:00]

Let’s get to my conversation with Colin Carr.

Hey, Colin, welcome to the podcast.

Colin: Thanks for having me, Jeremy. I appreciate it.

Dr. Sharp: Yeah. I’m excited to talk with you for two reasons. One, you’re a Colorado guy, that’s rare to have a Colorado guest. It’s nice to see that.

Two, like I said before we started recording, this topic is so relevant for me right now. So I’m just going to go ahead and admit that there will be some selfish questions throughout this podcast.

Colin: But those are the good ones. So I like it.

Dr. Sharp: Great. Well, I know that folks are interested in this topic and we have a lot that we could get to. I’ll just jump into it. I always [00:04:00] lead with this question of why this is important to you. I’m always curious about this for folks outside the clinical realm because your options are relatively endless as far as what you could do with your life. And so I’m curious, why zero in on this realm?

Colin: I was always fascinated with real estate. I started managing apartments when I was 19, got into brokerage when I was 23. And for me, like a lot of people, you try different things, you see different elements or aspects of an industry. I liked real estate, but I didn’t feel like I really found my niche or my place where I was called until 2007 or 2008.

Basically, I was a generalist. I was doing all types of real estate and I was doing a lot of landlord work. The long story short for me was, I had two transactions where I was on the landlord side. [00:05:00] I was working for two of the large, actually the largest medical REIT in the country, so landlords that take your money and invest in real estate, the largest publicly traded company in the country. I was their listing agent on a handful of properties.

Essentially what happened was I did a plastic surgeon deal, a dental deal, an ENT deal, and in all three of the transactions, the doctors did not have representation. And the terms that they ended up agreeing to and signing were so inferior and such terrible deals compared to where they should have been if they understood the market. If they would have had professional representation, they would have had a posture and strategy.

These guys paid hundreds of thousands of dollars on these deals. Two were renewals. One was a new deal. These guys just got crushed. The difference is they didn’t know they got crushed. [00:06:00] They thought they got a decent deal. And so I had a handful of deals where I was on the landlord’s side. I was doing what I was supposed to be doing, helping the landlord maximize their profitability. That’s what I was hired to do. So it’s a fair fight. Both sides could have representation. They chose not to.

And so anyways, I witnessed firsthand healthcare providers just… these people, I talked to a bunch, I worked with them. These were good people. They liked what they did. I assume they were good at what they did clinically. I wasn’t a patient, but they seemed like they were pretty in the know. They wanted to make an impact with their patients, their staff, their community. And so they had good motives but they lacked a skill set and they lacked representation and it cost them hundreds of thousands of dollars.

So for me, I saw that happen a number of times and I realized these guys need help. These practices, they need help. They’re here to help people, people come to them because they don’t know how to fix this issue or they want to help with this issue where they have a concern here. So the healthcare community [00:07:00] exists to help people. It became evident to me, I’m like, the people that are helping people need help as well in this area.

So I launched the company in 2009. Our focus has been exclusively helping healthcare providers. We only do health care. We only work on the tenant/buyer side. Our game plan is to help the healthcare providers maximize their profitability, reduce their overhead and save as much time as possible as they can to the transaction and essentially just protect their interests.

Dr. Sharp: I love that story. I talk all the time on this podcast about how we don’t get this kind of training in graduate school or medical school like you. I think there are very few programs out there that actually talk about this kind of professional business stuff and the nuances of negotiating a lease or a buying situation, that’s not happening in our graduate education. So we do need help. [00:08:00]

Colin: Absolutely, yeah. If you ask most providers, do you want to stay in school for another year or two and learn all the business stuff? It’s like you guys have been in school long enough. I can see you don’t need to borrow any more money or waste any more time. It’s time to get out there and do it. The healthcare community would be well served to have like a 1-hour course of here’s how you find an expert in these industries. Don’t tax your own taxes. Don’t touch your own real estate. Don’t touch your own legal documents. Get people that are good. Here’s how you find these people. That’d be a worthwhile course, but it doesn’t happen very often.

Dr. Sharp: Yeah. Do you find or have you found in your past experience of all the professional populations that you might’ve worked with, are medical healthcare folks outliers as far as being relatively naive or are there other groups that also have trouble? I’m just curious about the landscape out there.[00:09:00]

Colin: Yeah, I think there’s people that need help in any industry, no question. I would say, though, without sounding disrespectful because it’s not intended to be disrespectful, I would say that the healthcare community as a whole is fairly uneducated when it comes to how a lot of negotiations or businesses are run because they just don’t have the ability to be the expert in everything.

And that’s not to say that there’s not super savvy, super intelligent healthcare providers. There are, no question but you only have so much time in a day, if you’re running a practice, whether you have staff or not or whether you’re a sole practitioner, but you’ve got patients and you’ve got all these things you’ve got to do. And then you have a personal life as well. And you’ve got family or friends and other commitments. You don’t have time to become a commercial real estate expert or an insurance expert or an expert in tax law. You just don’t have the bandwidth.

I think a lot of healthcare providers just assume that [00:10:00] landlords are going to be fair or that is there really that much of a difference? It’s like, well, I assume everyone gets relatively similar terms. And that is wrong and incorrect as you could possibly imagine.

Dr. Sharp: Yeah. You’re hitting on a lot of really intriguing points that we’re going to unpack over the next hour or so. I’m sure there are already some folks out there like what, I thought this was just, people are supposed to be fair and kind.

Colin: Yeah. I think it’s like you’re standing in line at Chipotle and you’re like, well, everyone pays $9 for a chicken burrito. The difference between a properly negotiated lease or a poorly negotiated lease depends on the size of your space. If you’re in 800 feet versus 2,000 or 4,000, 8,000, it scales with the size obviously, but in a space that’s 2,000/3,000 square feet, there’s $200,000 on the line that you can either capture and win in the negotiation [00:11:00] to where the landlord still wants to do the deal with you.

It’s still a win-win for the landlord, but you save a ton of money or you capture a ton of money or you can lose that money and you could still do the deal, but you overpay and you might have to borrow or borrow more than you should, or you don’t get the concessions that you should have. You miss out on free rent or other concepts and it can cost you $100,000/200,000 quickly. And then you can expound upon that further because when you bill a dollar, you don’t typically keep a dollar. You have overhead, you have insurance, you have sometimes staff, or you have other things, et cetera that you have to take care of.

And so you make a $150,000/200,000 mistake on your real estate, what do you have to produce to be left over with enough money to pay the bill for the mistake you made? I try not to make more of it than we should, but I don’t want to make less of it either. It’s not the end of the world if you overpay in a lease, hopefully, you’ll still stay in business and you can still pay the bills and live a good life but I don’t know anyone that wants to lose $150,000, $200,000 [00:12:00] that they could have helped not lose that money just by making a phone call or hiring somebody who knows what they’re doing.

Dr. Sharp: Absolutely, yeah. Well, you’re starting to dip into this territory, but I think it’s worth just setting some background for folks about what we’re talking about here and why it’s important to consider all these factors. Why it’s important to consider having representation or a broker, someone on your side. Can you keep going with some of those factors and things we might want to consider?

Colin: Yeah, so we’re talking about the commercial real estate industry. There’s different types of landlords, different types of properties but the consistent item here is that landlords want to make money. You don’t own a commercial property to lose money or just to waste your time. Most landlords, even if they seem like they’re not paying attention or they seem aloof, [00:13:00] they’re usually pretty savvy. They’ve got an asset that’s worth typically a million or millions of dollars. They a lot of times have a loan on that. They had to have a significant amount of equity to get into that property or down payment. They’ve got liability. They’ve got other things that take their time. They want to maximize that investment.

No one wants to have a multi-million-dollar investment and then lose money on it. It’s very important to them. So whether you think they’re paying attention or not, they usually are. Whether you like them or you don’t like them, they’re usually fairly savvy. And so you’re entering into an arena where there’s going to be physical contact. It’s like the idea like, if you’re playing football and the quarterback hands the running back the ball, don’t be surprised when the other side tries to tackle that person. I think they’re playing flag football. You’re playing real football.

And so what happens is these doctors or other providers or people, they get involved in a transaction [00:14:00] and they don’t realize what’s really on the line. They just assume that it’s going to be a fair deal. Everyone’s going to treat people with respect or even if I don’t get the best deal, it’ll be close enough. The reality is you’re dealing with people that negotiate professionally for a living. They’re typically smart enough not to disrespect you or do things that are going to cue you into the fact you’re being taken advantage of. A lot of times they’ll be respectful. They’ll be very accommodating to you. You might even think they are working for you. You might even be, unfortunately, uneducated enough to think, oh, this person, they’re really great to work with.

Meanwhile, the landlord’s taking you to the bank for an extra $,100,000, $,200,000, or more, and you don’t know the difference. So again, is it going to be the end of the world? Nope. Life’s still going to go on. People are still going to exist and keep moving forward but there’s a lot of money on the line.

Most people, if they knew that there was a risk of them losing $1,000 or tens of thousands [00:15:00] or hundreds of thousands, they’d be paying more attention. And so we’re just trying to get them to pay attention and say look, let’s do the best you can with what you have but realize you’re walking into big boys and a big girls arena. There’s going to be some physical contact whether you know it or not and that contact equates to a lot of money

Dr. Sharp: Yeah, I think even if we just ended the interview now, it would be valuable because I think you’re right. Folks, we like to assume the best and we’re pretty empathic individuals, I think, being in this field and the fact that things can get a little tricky and tough. And these landlords are trying to make money. That’s important. We can’t forget that.

I don’t know if you would agree with these, I don’t know, I’ve read somewhere and some negotiating book or something, if you walk away from a deal thinking that you got a great deal, then you probably got taken advantage of. There’s something wrong with that if you think you made out really well. [00:16:00] That point about, hey, if we think the landlord is working for us and really bending over backward to help us, there’s probably something going on behind the scenes that we need to be aware of.

Colin: Yeah. I wish I could sit here and say that every landlord, unless a broker is going to always tell the truth or be honest or fair, it’s just not the case. I’m not here to trash the commercial real estate industry. There’s some great people but like any industry, there are people that are just going to say whatever they want to say to try to get a deal done.

And so you’ll have landlords that’ll tell people, well, I’ve never gone that low or we have a company policy or our lenders won’t allow us to do that. These guys are just literally making stuff up on the fly. And then when you have an uneducated healthcare provider hearing that like, oh, well, the landlord has a policy. It’s like they don’t say the same. They’re not saying that to Chipotle or Starbucks or Charles Schwab or Lockheed Martin.

When you get these [00:17:00] Fortune 500 companies, landlords don’t play those games. They know they’re going to get caught. And so it’s a much different negotiation but when a landlord sees, here comes independent healthcare provider asking questions that they shouldn’t be asking or asking information they should have been able to be get the due diligence behind the scenes or asking things that no sophisticated tenant or buyer would ask, it sets the tone instantly.

People think, well, what’s the harm of just asking a question? Well, the harm is you’re showing your expose, you’re showing your weakness very quickly and you’re showing that you’re not prepared for what you’re about to enter into. And so it’s like everything. I don’t think healthcare providers should be doing their own taxes. I think if you have a legal dispute, you should hire a good attorney. I think if you’re doing a real estate transaction, you should have a good real estate agent. It’s really simple just like if a patient [00:18:00] has a need, they should go to the health care provider, not search online, self-diagnose and come up with their own game plan of how to fix that.

Dr. Sharp: That’s reasonable. It makes sense.

Colin: Let me say one more thing to just level it out here because a lot of times people will say, well, my landlord’s a bad guy. I don’t like them or whatever. They’re just trying to do the best they can while they have to. I’ll put it back for the health care providers that get reimbursed from insurance companies, which there’s a fee for service providers, so not everyone does that but if you are a provider that gets reimbursed from a insurance company, do you want the lowest reimbursement or you want the highest reimbursement?

Dr. Sharp: High, of course.

Colin: There’s no health care provider that’s going to say, yeah, give me a lower reimbursement, and yet on the other side of the table, don’t you care about the insurance company? Don’t you want them to be more profitable? You’d say, no, I could care less about the insurance company. Those guys make enough money. Landlords are saying, hey, this doctor [00:19:00] must make plenty of money. They make enough money. They want you to pay it. It must be worth it for them.

And same thing, or you’re going to go sell your house. You’re going to sell your house and it’s worth $600,000. Your agent says there’s two buyers. They both want it. Neither one of them really knows what they’re doing. I think they probably both pay $700,000. You want me to sell it for $600,000 or $700,000? You’d say, I will take the highest amount of money you can get from my house. I will take that check from the closing company and I will be very happy. You don’t really care. You just assume that it’s fair enough.

And so anyway, I always want to say that because it doesn’t matter whether you like a landlord, don’t like them. They’re a good person, they’re not a good person. Just realize you’re playing a high-dollar negotiation game.

Dr. Sharp: Yeah, that’s good to know. As we keep going with this, I wonder if there are folks out there who even aren’t aware or maybe vaguely aware of the [00:20:00] fact that you can have a commercial representative, just like in residential, that you can have a broker when you’re looking for commercial property even when you’re looking for a small office. Can you just briefly describe the role of a commercial broker and what that means?

Colin: Yeah, the commercial agent or broker, synonymous terms, their purpose is to help the tenant or buyer in several ways. Their purpose is to do due diligence on properties, find the properties that meet the right zoning, have the right requirements, the right size, the right co-tenants, maybe the right ancillary practices or groups nearby, they’re going to be referral sources or be beneficial. Also to keep other people, you don’t want to be next to certain people. You don’t want to be next certain uses.

So there’s site selection concepts. There’s demographics due diligence. There could be insurance research for people in the area. And so there’s the finding the location and doing the due diligence side but then [00:21:00] the more important side or the weightier side is the negotiation of the economics and the business deal points.

And so a lot of times people say, well, I can just call the property myself. You can but that’s not really what we’re dealing with here. That might be like, well, I could diagnose myself but that doesn’t get you the solution you’re looking for. You want to find the right property or properties but then you want to achieve the most favorable terms possible.

A real estate agent’s there to protect your time, protect your interests, help you avoid costly pitfalls and complications, level the playing field, and make sure you’re not taking advantage of, all of those things. And in each transaction, it’s going to be a little different. Just like in residential, they’re there to help.

The difference between commercial and residential, there’s quite a few is there’s just a lot more variables in commercial. Commercial real estate, you got what’s the lease term? You’ve got what’s the square footage? You’ve got who does what maintenance. When you own a home, you’re doing your own maintenance. In a lease situation, does [00:22:00] the landlord do it? Do you do it? Who pays for utilities? There’s annual increases. There might be use restrictions. There’s all sorts of clauses for if things break, who fixes them. Can the landlord put on a brand new roof and charge you $20,000 to pay your proportionate share?

There’s just so many variables that are there. I just listed a few, I could list more but you just want to make sure that you’re getting the best terms possible with the highest level of protection. There’s always going to be risk. There’s always going to be exposure. It’s the landlord’s building after all as well, too. They’re offering you a chance to lease it so don’t don’t misunderstand that too. The lease is always going to be in favor of the landlord. It’s their property. They are the one that has a multi-million dollar loan, insurance et cetera. You just want to do the best you can with what you have.

Dr. Sharp: Yeah, it makes sense. A question I get a lot when I advise people to look for a commercial broker is how do I pay for this person? [00:23:00] I don’t want to lose money. I don’t want the cost to get in the way. People are hesitant. Can you explain how commercial brokers get paid?

Colin: Yeah, I definitely can. So the quick and the great answer to that one is that if you’re a tenant or buyer, you should not be paying your commercial agent. They are paid by the landlord or the seller. And so this is where commercial real estate does parallel residential real estate. If you’re selling your house, you’re going to pay a commission to your broker and the buyer’s agent. If the buyer shows up with no agent, that listing agent typically just gets a double commission.

So there’s a misunderstanding with healthcare providers saying, well, if I don’t use an agent, then I’m going to save the money but you’re not the one determining the commissions. You’re not paying the commissions. You’re not saying I’m going to pay one agent versus two. You’re not the payor.

And so there’s a lot of people that have that idea, I’m going to do it myself and save money. Not only are you not saving money, [00:24:00] the listing broker is getting a double commission or the landlord is just pocketing that money. You’re going to get an inferior deal and you’re going to waste a bunch of your time and you’re going to be exposed to complications, pitfalls, delays. So it’s a lose scenario for you in that area.

I always joke, people will think it’s like U-Haul. On the side of every U-Haul it says, move yourself and save. We’re not talking about you cutting a check. We’re talking about you not having representation that in most cases would be free for you.

Dr. Sharp: Yeah. So let me ask maybe the obvious question, which is, how can we trust that a broker is going to advocate for our needs when they’re being paid by the other party?

Colin: Yeah, and that’s a great question. I love answering that one as well. So here’s the reality, you can take the person’s word, you can just hope that you have someone who’s integrous but that’s one way of doing it. The superior way, the way that we recommend and the [00:25:00] way that we operate personally, is we always negotiate on multiple properties simultaneously. Okay. And so that’s another difference between commercial and residential.

If you’re doing a residential transaction and you’re looking at houses, whether it’s online or in person, when you find the property you want, you submit a real contract that you have signed. If the seller signs it, you’re under contract, you’re submitting a binding contract. Now you can get out of that contract in a lot of scenarios with due diligence provisions, contingencies, clauses, et cetera. But in commercial real estate, you’re typically negotiating in a non-binding letter of intent or request for proposal. Yes, you could submit a purchase contract the same way and go under contract but typically even our purchases, it’s usually done in a non-binding LOI, letter of intent, or RFP request for proposal.

And if it’s done properly, if you do it the way Chipotle and Starbucks, professional companies do, they’re negotiating with three or four [00:26:00] landlords simultaneously. The benefit of that is severalfold. One, you don’t have to wonder at that point, is my broker working hard for me? Am I getting the best terms possible? I guess it’s possible for a broker to sandbag on four landlords but if you have three or four landlords you’re negotiating with, and you go 3 or 4 rounds of negotiations, it’s a typical commercial negotiation, you might be going back and forth two, three, four times. That’s how you substantiate or prove to yourself that you are getting the best terms possible.

And so if you just pick one property and you negotiate with one person, you don’t have a benchmark of, is this an aggressive deal or not? The only thing that you can benchmark it against is what was the starting or advertised lease rate? Besides that, you don’t have anything to compare it to but if you negotiate with three or four landlords and you go two, three, four rounds of negotiation and your advisor, your agent is telling you, [00:27:00] hey, let’s push here. Let’s leverage this. Let’s tell this landlord they’re in third place because their lease rate’s too high. Let’s actually put one against the other and really get competitive with it. That’s how you substantiate and prove that my agent or broker is not sandbagging on a landlord to make an extra $200 on a commission. They’re truly advocating for me and they truly do have my interest first.

And so that’s why I love that approach because it takes care of that but then the other thing it takes care of, even outside of the question about their broker is you don’t want to sign a deal for a 5-year lease, 7-year, 10-year lease, what have you, and then wonder every day for the next five, seven, or 10 years, if you missed it. Like, should I have called another property? Should I have pushed harder here? You eliminate that. And so ultimately what that does is it brings you peace of mind. And as I know you and your audience is very aware that peace of mind is priceless. [00:28:00]

Peace of mind in any transaction, whether there’s $10 in the line or there’s hundreds of thousands, you don’t want to have to worry about stuff and think about it later. It just eliminates that second-guessing and it gives you peace of mind and then you can move on with other things that require your attention.

Dr. Sharp: Yeah, I’m glad that you highlighted that component of, we get one shot every few years. There’s some of us out there who are maybe negotiating a one-year or a three-year, both of the major spaces that our practice has occupied have been five-year terms and we’re looking at long, they’re much longer terms that you could look at as well. And so do you want to wonder for that five years or seven years or whatever, whether you missed it and are paying too much? That’s peace of mind is valuable.

Colin: It is. There’s certain things that you acquire or services you pay for where you can get a [00:29:00] redo or you’ll choose next month. I’m not going to pay the same thing for the same commodity or service. This is a once every, usually five, seven, 10 years, but even if it’s a three-year lease, a one-year lease, you still would like to do the best you can with it.

Dr. Sharp: Absolutely. Well, can you walk us through, I would love to just stick with leasing for a little bit. I’m going to ask you some questions about buying as well, but just to stick with leasing, I think that’s probably the majority of my audience is probably leasing an office at this point. What are some of the, maybe we could tackle these different ways, some of the mistakes that people make in negotiating a lease or we could go to the other side and talk about what are some of the must-do strategies when we’re looking for new office space.

Colin: Yeah, so let me hit the what not to do and I can hit it quickly because I’ve already had two of those. I could give you the [00:30:00] exhaustive list but I’ll just give you the top three or five. So the first thing that you can do to make a mistake is doing yourself. Landlord sees you show up. I don’t care how professional you seem or how strong your communication is, they’re going to assume you don’t know what you’re doing because you’re not a real estate professional. So the do-it-yourself approach puts you at a disadvantage.

Two, if you don’t negotiate with multiple properties, you’re again at a disadvantage because you can’t leverage one against the other. If you’re in a negotiation with the landlord and they’re not budging in a certain deal point, well, if you have two other landlords that are budging and are doing what you want them to do there, you can tell them that. Again, you don’t want to expose other landlords. You want to keep certain things confidential but you can say, I’ve got two other properties that meet all of my requirements that I think would be a great fit and they’re willing to do X.

It takes the emotion away. It’s not, hey, would you please do this for me? I’m begging you, please lower your lease rate. Please give [00:31:00] me more money, why? It’s hey, listen, I like your property, but I got two other landlords are going to give me six months free to build out and I can’t pay rent during my build-out. I’m not willing to do that. Maybe somebody else is willing to, I’m not. And so if you want to get more competitive and keep me on the line, I need this. If not, I’m going to the other two landlords. Very factual and there’s more than that but that’s it. So negotiating with multiple people helps big time.

The next one is timing the transaction incorrectly. If you are a tenant and you are in a leased space and you have a lease renewal coming up, which by the way, just for what it’s worth, lease renewals are the number one transaction. It’s the most prevalent transaction in all of commercial real estate. So for every time you see someone lease a new space or move into a new property or start a practice, there’s 10 to 15 lease renewals happening for every new office. Okay.[00:32:00]

And then you mentioned earlier, again, just some random points just for the audience, commercial real estate for most markets is over 90% leases versus purchases. They’re just more in the lease. If I’m in Tulsa, Oklahoma, 30% of the deals might be purchases but in most major metros, 90 to 95% of the deals happening are leases. Sometimes it’s even higher.

If you’re in a lease scenario, if you don’t start the transaction at the right time, you lose your posture. If you wait until there’s two months left on your lease to then negotiate with your current landlord, your current landlord is going to realize, hey, the bus has left the station. You’re running down the road, trying to catch it. You’re not going to catch it. You’re behind, you don’t know what you’re doing. You probably don’t have very many options. If you do, it’s going to be highly inconvenient. And so they’re just going to assume that you’re not going to relocate. Well, if they assume you’re not going to relocate, [00:33:00] then you are going to pay more.

They’re not going to just voluntarily give you reduction of tens of thousands of dollars in lower lease rates and increases just because you ask. No one just voluntarily gives people tens of thousands of dollars because they asked. They only give you tens of thousands of dollars if they have a fear of losing you. And you don’t get that fear of loss if you’re late to the game. So timing is a big one.

And then again just for putting an end to the conversation or for that portion of it, I’ll give you one more, that is, most healthcare providers say things that they should not be saying in the discussion. They think that they can operate just with complete transparency.

Dr. Sharp: I’m laughing because I know I’m guilty of this, but let’s hear it.

Colin: Yeah. It just doesn’t work. A lot of times landlords will ask you, hey, if we come up with good terms, would you want to stay in the space? [00:34:00] Well, that seems like a fair question. The second you say, yeah, that I would like to stay, what you just communicated is I don’t really want to move and I’m willing to pay a premium not to move. Well, guess what? You are going to pay a premium not to move now.

They’ll even say stuff like, well, if I give you everything you’re asking for, would you stay? Well, yeah, if you do anything I’m asking for, I’d love to stay. They’re not going to give you anything that they’re asking for, and they’re going to charge you a premium, too.

Landlords will say, what other properties are you looking at? People will answer that question. You can’t tell them what they’re competing against because then they can size up that property and then if they think they’ve got better terms, they’re not motivated. You’ve got to keep that a mystery as well. You can talk in general terms, you can talk intelligently, you can talk factually.

We’re telling the truth. We’re not lying. We’re talking about having an antagonist negotiation but you got to keep your cards close to your chest. If you’re playing a card game, you don’t show the other players what card you’re holding otherwise, you’re at a disadvantage. [00:35:00] And so I know it sounds funny and we’re comparing it to a card game but a lot of health care providers are saying things to listing agents, property managers, owners and they think they’re just being honest. You’re playing a card game and your hand is on the table and everyone can see what you’re holding.

And most time you’re holding, like two nines, a four or seven in a… it’s like you don’t have the good hand in that scenario. You don’t want to show them how bad your hand is.

Dr. Sharp: Yeah, I think it is so counterintuitive for a lot of us because it feels manipulative and combative at times. It’s just not like in a lot of our wheelhouses. It’s good to have permission to be a little more vague than we might otherwise be.

Colin: Well, and that’s why a good real estate agent, they’ll do it for you. They won’t put you in that uncomfortable position but they can do it. They can just say, listen, we’re talking to three other landlords and here’s the deal. [00:36:00] It should be a true statement. You shouldn’t be lying. You should not be saying things that are not true, but they can just say, look, we’re talking to three other landlords and you guys are competitive in some areas, not as competitive in others. And if you want to stay in the race for this deal, you have to do X, Y, and Z.

It’s the same thing in a lease renewal. Number one transaction in commercial real estate, if you don’t have other properties that you know you could relocate to, if you don’t know what other landlords would be willing to offer for your tenancy, for you to occupy their space, what are you saying to your current landlord? You’re literally saying, please lower my lease rate. Please give me free concessions. Please help me out financially because I’m asking you. It just doesn’t work that way with landlords.

Dr. Sharp: It makes sense. It’s hard to hear but it makes sense.

Colin: Here’s the mental image. I’m being repetitive but for reason. You’re playing any card game you can think of where people are not supposed to see your cards [00:37:00] and you put your cards on the table. That’s not being transparent. That’s being stupid. I’m not trying to be mean. It’s just not how you play the game.

Dr. Sharp: Okay. No, I can get on board with this. So what about the flip side then if those are the things for us not to do? How could we approach looking for a new space? What are some positive strategies?

Colin: Positives would be the opposite of what I just put the most five, hire professional representation. Have the person who’s helping you have no conflicts of interest. Don’t work with the listing agent or the landlord. Have someone who doesn’t work for the landlords in the area, who’s going to put your interest first. Who has a fiduciary to you personally. Negotiate with multiple landlords, go multiple rounds. Don’t fall in love with one property. You don’t want to be locked up in the alter in case that doesn’t work out. Keep things arm length until it’s done. Just keep [00:38:00] an even keel on this thing. Hire experts, hire a good real estate attorney. It’s not either or, it’s not well, I got a good real estate attorney. No, it’s it’s attorney is needed, real estate agent is needed as well.

Dr. Sharp: Oh, can I interrupt you real quick? What role does the attorney play?

Colin: The attorney is going to be the one who makes sure what your real estate agent negotiates for you is actually what you’re actually getting. When you’re negotiating with a landlord, you’re talking about a two-page letter of intent or a two-page RFP. Well, when you come to terms on those seven or eight major deal points, economically maybe three or four major deal points from a business perspective, that one or two-page document’s going to turn into a 70-page lease. And in that scenario, you’re dealing with all sorts of situations of what happens if the building burns down or what happens if the landlord defaults in the building goes into foreclosure or who pays for what?

And so the attorney’s [00:39:00] job is to take what your real estate agent negotiated for you and to make sure that that makes it into the lease in a manner to which you’re protected. And so people will make the mistake and they’ll have their attorney negotiate the deal points. Well, the attorney doesn’t know the market. Most attorneys are in their office 50, or 60 hours a week. They’re not market experts. And so they lose credibility with landlords or sellers.

And then the other side is true. A lot of times people will ask their real estate agent to play attorney. Well, would you look at my lease? No, first of all that’s called practicing law without a law degree, without being licensed, having passed the bar in that state and that’s a no, but you need both. It’s not either or. It’s a good attorney. You need a good real estate agent. You need a good CPA.

And then I’ll say one more thing about the attorney. You need a real estate and a contract attorney. Okay. So just like this, [00:40:00] if I need a set of braces, I’m not going to an orthopedic surgeon. Well, we’re both doctors. No, it doesn’t work that way. If you have an issue with family law, you go to a family law attorney. If you’re dealing with estates and trusts, you go to an estate or trust attorney. If you’re litigating, you get a litigating attorney. If you’re dealing with real estate, you have a real estate or contract law attorney because it’s a real estate contract et cetera.

So again, just like healthcare providers are specialized, attorneys are as well, real estate agents are as well. Contractors oftentimes can be as well. And so you want to find somebody that can help you that has the experience there.

Dr. Sharp: I hear you. Thanks for clarifying that. All right.

Colin: Yeah, absolutely.

Dr. Sharp: What else can we do to help ourselves?

Colin: You can start the transaction at the right time. If you’re buying a practice and you’re going to be inheriting a lease like that, then you just have to deal with it on the spot. But if you are going to be starting your own practice, just realize [00:41:00] if you require any level of build-out in the space or if you’re doing a new office or relocation, it could take 3,4 months just to get a permit to be allowed to swing a hammer and put up a sheet of drywall.

Potentially you walk into a space and all you’re doing is carpet and paint, changing some ceiling tiles, and putting a name on the door. You might be able to get inside that space in 2, 3 weeks, or a month. But in most scenarios, you’re going to have a few weeks of negotiating or even a month or two of negotiating. You might have a month or two months of attorneys working at a lease and you might say, how in the world does it take that long, which depends on the landlord’s motivation, who their attorneys are, how busy they are. Is this 1 of 30 deals they’re working on across the market or country?

But you’re going to have two months typically with negotiating, two months with leases et cetera. And then if you have to build out, it could be another four or five, six months before you get permits, construction documents, approvals, and then actually get in there, swing the hammer, [00:42:00] build it out, and then just take an occupancy. There’s a lot that goes into it. So just realize it could take you six to nine months to move into a new space.

And if it’s the least renewal, same thing. If you’re talking about moving or relocating, you need to build out in a new space and you call your landlord with two months left or they call you. You’re in a really tough place or at a disadvantage. So timing the transaction is important. And then another thing with timing to people say, well, can you start too early? The answer on that one is also yes, you can. If you have three or four years left in your lease and you try to renegotiate with your landlord, you got to ask the question, why would they do that? Why would they renegotiate your lease when you’re locked into place and you’re committed for the next three, four, there’s just no motivation there.

The only thing you can say is, well, I’m going to move in three or four years. And they’re going to say, well, we’ll see where the market’s at in three or four years. So you can be too early. You can be too late. You want to have the right timing. [00:43:00] The other thing is you want to have the right team. If you want to have a good architect, a good contractor, you want to have a good attorney.

It’s advantageous to have a really good CPA because they might be able to give you some information of hey listen, let’s get more money from the landlord. Let’s borrow less because here’s why it’s going to be advantageous for you from a tax standpoint. Maybe it’s worth paying a little bit more per month on the rent than it would be to borrow money and pay less because you pay for the improvements, you got to depreciate them over their useful life, maybe 10, 15 years, you sign a five-year lease, you’re writing off that rent payment on a monthly basis.

And so a good CPA can help you realize if you’re better to pay a little bit more and have the landlord put more money into the space, or if you’re better to get a lower lease rate, and then borrow it yourself. There’s things where CPAs can weigh in and help you as well.

Dr. Sharp: Sure. I’m glad you went into the timeline. [00:44:00] From personal experience, we have started about a year ahead of time for a lease renewal or potentially moving. And for all those reasons you listed, the permitting in itself is mind-blowing how long it takes sometimes, and then, of course, construction and things go slowly.

Colin: Yes. One year is typically the answer. If it’s going to be a relocation or a renewal or a new office, one year typically is the sweet spot. And then the one caveat I’ll give to that is, if you are looking at buying a piece of ground or piece of land if you are looking at developing a property from the ground up, that is a solid 24-month process.

Dr. Sharp: Yes.

Colin: And people, every time they hear that, they’re like, wait, what are you talking about? We bought a house in this community and they built it in six months. It’s not the same thing.

Dr. Sharp: It’s different.

Colin: Yes. It’s not a master plan community where they’ve already got the floor plans approved. And literally, the same guys have built the same house 45 times in the neighborhood. [00:45:00] It’s a solid, you couldn’t even swing a hammer in most jurisdictions for probably 12 to 16 months, believe it or not. So if you’re looking at, I’m going to buy a piece of land, build my own building, which that’s the most expensive and the most time-consuming transaction, but people do it all time for different reasons, just realize that that’s playing on 24 months.

Dr. Sharp: Let’s take a quick break to hear from our featured partner.

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All right. Let’s [00:46:00] get back to the podcast.

Sure. Yeah. Good to highlight that. I also ran into that and was very shocked just like the majority of folks you seem to talk to, but I get it. Let me see, I wanted to check in on negotiating. So theoretically, if we do the right thing and get a broker, they will do a lot of this for us, but I think it’s worth talking about everything that could be negotiable in a commercial lease because some of these things, even things you’ve mentioned today are surprising to me. So I would love to talk about that a bit.

Colin: Yeah, let’s do that. Let me say one thing too, because you’ve used some really good terminology. A lot of times people hear a word and it just triggers an idea or a thought. There’s a connotation that’s associated with it. So when someone, and this happens with healthcare providers all the time, when they hear someone else is going to be negotiating for them, they get a little concerned. Well, no, I want to keep [00:47:00] control or I’m not comfortable with someone. Here’s the reality, no good real estate agent or broker is going to do anything for you that you haven’t first approved.

And so the brokers are out there just going rogue, making things up, saying things. They’re going to present to you options, when you say, let’s negotiate in these three or four, they’re going to tell you what we’re asking for. When you counter, they’re going to be in agreement. They’re going to say, all right, Jeremy, I think we should push for two more months of free rent. I think we should ask the landlord to do this. They should pay for this. Are you in agreement? Yes. Great. And then they submit it.

A lot of times, especially, people will even admit, they’ll say, hey, I’m a control freak. I don’t like not being in control. You are in full control. You’re just not the one clicking send on the email or on that phone call, but you keep full control. So that being said, some of the major economic items you’re negotiating [00:48:00] certainly it’s going to be lease rate or purchase price. That’s the most obvious because people’s attention.

The next thing that’s closely tied to that in a lease scenario is 99 out of 100 leases are going to have an annual increase built into them. Okay, and you said, why is that? It’s an industry standard. It’s the same way that insurance contracts go up. Cell phone contracts go up. Property taxes go up. Things go up each year.

Most leases and I say most, it’s like 99% are going to have an annual increase built in there. And so that annual increase is negotiable. Is it a 2%? Is it 3%? Is it 4%? You’re going to hear people all the time say, well, this is a standard. Well, that sounds good because it makes you feel like you have no control over it. Just accept it but a lot of times it’s negotiable. Okay?

Dr. Sharp: Okay.

Colin: You say, well, is it really worth it? The difference of 2% or a 4% annual increase over a 10-year [00:49:00] period of time could be tens of thousands of dollars. So it is worth negotiating. People sometimes will say, well, if it’s worth negotiating, let’s try to negotiate it out of the lease. That’s more challenging for a lot of reasons because most things have it built in there but annual increases, that’s one.

The next one is tenant improvement allowance. In commercial real estate, landlords will put money into the space. They’ll invest money in the space. They’ll give the tenant money to improve the space in exchange for a longer-term lease. If you want to do a month-to-month, don’t expect to get anything. If you want to do a one-year lease, maybe the landlord will paint the wall or clean the carpet, but they’re typically not doing a whole lot. And this is where you have to separate residential from commercial.

People are used to going into an apartment and do a six-month lease. Landlords don’t underwrite deals the same way. It’s not the same thing. Not everyone needs a kitchen, a restroom, a living room, and a bedroom. These are specialized spaces. They want long-term leases. So [00:50:00] if you’re willing to give them a five-year or seven-year lease, they’ll give you money to improve the space. And so if you need to add a second point of entrance or a private exit, if you want to soundproof the walls, if you want to improve the window coverings or the lighting or the ceiling tiles, if you want to change the statics and so forth, they’ll oftentimes invest in the space in exchange for a longer-term lease. So tenant improvement allowance, that’s also synonymous with TI allowance, build-out allowance, renovation allowance, same thing.

Dr. Sharp: And just to check in, I’ve seen this two different ways, I’ve seen some landlords who will give you an allowance per square foot for tenant improvement and I’ve seen some landlords who will do all of the improvements but then roll it into the lease and amortize it over the course of the lease. Maybe those aren’t mutually exclusive but is there anything else to say about how those improvements [00:51:00] get financed and whether we’re responsible for it?

Colin: That’s a really good question. I’m glad we’re stopping there for a second because there are several ways to do this. What I will say on this topic is that there’s typically an amount of money that a landlord will contribute towards a deal without putting it back into the lease rate and increasing the lease rate or amortizing it back in.

Sometimes people will think, well, if they give me even one dollar, it’s going to make its way into the lease and they’re going to charge interest on it.

I’m going to pay more. There are some landlords that think that way but it’s very few and far between. Typically there’s an amount of money that the landlord is willing to contribute based upon the length of the lease, where they know, look, if it’s not you leasing the space, someone else is going to want new flooring and new paint. Someone else is going to say, hey, we need to build some walls. We need to put in a private restroom, whatever it is.

And so the landlords know there’s some amount of money. When I say some, that can be a big amount of money too. [00:52:00] It can be tens of thousands to $100,000 or $200,000 depending on the size of the space. They might put that entire amount of money in there and not touch the lease rate.

And then there is a threshold where you do go beyond what they’re willing to invest in the deal with that lease rate and with that length of term to where they will amortize it in. A good real estate agent will find that threshold. And then they’ll get you an option of hey, listen, Jeremy, we can either get $100,000 at this lease rate of $24 a square foot but if you want anything above $100,000, they’re going to put it in the lease at 6%. They’re going to give you that option and then you can decide, is this worth me amortizing it in there or would I rather borrow the money?

And then it depends, if you don’t want to lose the cash flow, like you say, hey, I have the cash to pay for, but I don’t want to lose my cash. I don’t want to put $50,000 into the deal. You might say, look, it’s not worth me going to the bank, getting a $50,000 loan. [00:53:00] And then I’m going to pay the same interest rate of 6% or 6-9%. And then I’m going to have loan fees and attorney’s fees. I’d rather just have them do it. Or you might say, no, I might pay it off sooner. I want control over it. The whole idea is you should be in the driver’s seat.

9/10 times or probably higher, honestly, but just to use somewhat simple numbers, the landlords got money they’re willing to put into the space without changing the lease rate. And you might even get a lower lease rate than they’re advertising with that money. And that’s also true with free rent. It’s true with build-out allowance or build-out free rent, build-out time to build it out where they’re willing to give six months free to build it out.

They’re willing to give you three or four months free upon leasing a new space. They’re willing to give you a certain dollar figure for the TI allowance. And you can get all that without increasing the lease rate.

And where a lot of people will make the mistake is they just assume that anything they get is going to go into the lease and so they ask for nothing.

They’ll say, hey, give me [00:54:00] the lowest lease rate without TI, free rent, build-out, brokers, and they’re leaving a ton of money at the table because the landlord would have given a lot at the same lease rate.

Dr. Sharp: Good to know. All right. Thanks for talking through that. What are some other things that we can negotiate?

Colin: Well you start getting into some of the business economics as well, too. You can get into concepts depending on your field, do you want to be the only provider in your building or in your center that does what you do? Sometimes people say no, the more the merrier. I’m unique in my practice. I’m not concerned about competition or it’s complimentary. Other times people will say, no, I do not want someone that does exactly what I do right next door to me, who might try to out-market me or outdo me as far as aesthetics or whatever it is and I want a little space.

So you get into concepts like exclusivity. You get into concepts like is there an automatic renewal option that you can negotiate that forces [00:55:00] the landlord to either re-lease you the space in the future at set terms or they at least force them to renegotiate in good faith with you. That’s an option. Could there be an option to expand into the adjacent space? If the space next to comes available, you get the first right of refusal. If you don’t need it, we’re not going to waste time negotiating things that aren’t necessary but if you say, listen, this space will work now, but I know for a fact, I’m going to need twice the space in 5 years, then a first right of refusal could make sense. You get a right of first refusal on buying the building at times, depending on who you are or your ability to purchase, that’s one.

You can get into concepts like assignability. What happens if you want to sell your practice? You want to step out. You want to sell your practice. It’s not enough just to have an assignability clause because the assignability clause might say, yes, you have the right to sell your practice but it might not let you off the lease. And so you might be a personal guarantor on your lease [00:56:00] which most people do have to personally guarantee their lease.

Well, the assignability clause might say, yeah, you can sublease or you can assign it, no problem but it doesn’t address the fact that you’re still on the hook. And so that’s a bad place to be, by the way. That’s the equivalent of like selling your house to a new person and then you’re still a guarantor on the mortgage.

In a practice scenario, you sell your practice, most scenarios unless you have a contract to keep working there, if it’s a walk away, you don’t have a legal right to enter that space again. You can’t pursue or talk to those patients professionally, otherwise, you’re infringing upon non-competes. And yet you could end up in that scenario where you can’t walk into the space, can’t talk to the patients or staff, and yet you’re a personal guarantee on the lease, that happens all the time believe it or not.

There’s other business concepts like that too. So there’s economic stuff, there’s business stuff. It’s not rocket science. It’s not stuff that you wouldn’t understand if someone broke it down to you. It’s just a lot of items that you [00:57:00] don’t know are even available or there because they’re not being readily advertised to you and the landlords aren’t going to bring them up to you and you want to know them.

There’s death and disability clauses. There’s reductions or trying to mitigate or minimize the personal guarantees. Maybe you have to guarantee it for the first lease term but the personal guarantee is removed after you’ve proven yourself. Maybe your practice is large enough to where you only need to guarantee 2,3 years of a 5-year lease.

So there’s things that limit your liability. All of these things, by the way, too, are dependent upon who you are, the type of practice, the success of your practice, your future plans. Each one is unique to the individual.

Dr. Sharp: I’m glad you brought up the concept of being a personal guarantor on some of these leases, a lot of these leases. I think that freak some people out sometimes. They think, like, oh, I have to sign on this personally. What [00:58:00] does that actually mean? And can they come take all of my personal assets if I have to close my practice? Can you just talk a little bit about what exactly that means and why we often have to sign as personal guarantors?

Colin: Yes, absolutely. So a personal guarantee means that you are personally committing to fulfill the obligation. And so sometimes you’ll have attorneys that are not very good in real estate, or they’re not a cost of the contract log, as we mentioned earlier, and they’ll say, well, that’s crazy. You should never personally guarantee at least, look at the liability. And so the response to that is, can you get a credit card without signing personally? Can you get a mortgage for a house? Can you get a student loan without a personal guarantee? Can you go finance a car without? No.

So here’s the idea, the landlord, whether you know it or not is giving you, they’re offering you credit. You might not look at it that way, but they’re offering you a lease and that’s a commitment to pay a certain amount of money [00:59:00] per month for the next three, five, seven, 10 years. They’re not giving you a check like you would if you bought a car, but even when you buy a car, they’re not even giving it to you. They’re giving it to the dealership and then you commit to paying. So a personal guarantee is not something to be scared about or to run away from but if you can limit it or mitigate it, it’s worth looking at.

But a personal guarantee basically just says that you are committing to fulfill the obligation. People will then say, and it’s valid to ask the question, what happens if I were to default? Let’s say the worst-case scenario happens, I can’t practice. Something happens. Well, good news is you probably have some form of malpractice or disability or death or whatever scenario might apply. You should have some insurance to mitigate the situation, 1.

2) In the vast majority of states, I’m not giving legal advice now, by the way, too, there’s my disclaimer. In the vast majority of states, most states have laws that landlords also have to mitigate damages. So here’s an example. [01:00:00] If you have a lease and you were going to be there for five years and every month you were going to pay $5,000. So you got a $250,000 obligation. Actually, it’s more than that. It’d be $300,000 because it’s 12 months.

So you got a $300,000 obligation, in month one, something happens and you can’t practice anymore. The landlord can’t come to you and take you for $300,000 and then re-lease the space tomorrow to another tenant and have only lost $5,000. They have to mitigate as well. And so typically you’re left with, what are the landlord’s “reasonable” cost to re-lease the space. What are their damages?

And so in that scenario, you might have some free rent or some build-out allowance or some commission, some attorneys fees, but it’s typically mitigated. So not always, but it’s typically mitigated. I guess, in theory, the space sat vacant for 5 years. But even in that case, most states say that the landlord has to show reasonable efforts to have solved the [01:01:00] issue. It’s like unemployment. You can’t just sit there and collect the check. You have to show you’re trying to get a new job. That’s the way it’s supposed to work.

So personal guarantees, don’t freak out. Don’t run from them. And then just try to picture yourself in the landlord’s shoes. If you were extending somebody a $300,000 offer, and they were supposed to pay you $300,000, would you want a personal guarantee on that? The answer is, of course, you would. If it was $10,000, you probably want a personal guarantee.

So they’re going to be there but if you’ve been in a space for, let’s say, five years, and then you’re not asking the landlord for a whole lot on a lease renewal for another 5 years, you’re trying true and you’re proven, it’s fair in those scenarios to say, look, my practice speaks for itself and I’ll stay, but I’m not going to guarantee it personally moving forward. A lot of landlords will take that risk and say, you know what? No downtime. I don’t have to go find a new tenant. I’m not going to put a whole lot of money into the space. I’ll limit it to maybe six months rent, or I’ll [01:02:00] limit it to maybe just the free rent I give you, or maybe it’s no guarantee. And that’s reasonable as well.

Dr. Sharp: Great. Well, I want to transition to some buying questions before we wrap up, but I also wanted to go back and just revisit maybe basic concept that I still think trips people up, and that is how we calculate lease rate for commercial spaces. That it’s done per square foot, and there’s often a triple in cost added to it. And it’s not like a residential thing where they say, hey, this is going to be $800 a month pay, us $800. You have to do some math to figure out what you’re actually paying per month.

Colin: You do. In most states, the vast majority of states, it is a per square foot per year cost. Let’s say it’s $24 a square foot, you divide that by 12 months and then you get into your lease rate and so forth. [01:03:00] States like California, however, they do it per square foot per month. And so you might be in California and see their advertising at $2 per square foot. You’re like, wait, what the heck’s going on here? It’s $2 a square foot per month. And that’s now you have to multiply it by 12 to get to the annual number.

So assuming that it’s like in Colorado, where both you and I are, it’s a per square foot per year cost. You take the price per square foot, you multiply it by the square footage, and then you divide it by 12 months to get down to the per-month cost. In addition to what we call the base lease rate, typically, depending on the lease structure, you get into what you said, which is NNN or triple net. It’s also synonymous with operating expenses, taxes, insurance, common area maintenance.

There’s a lot of terminologies at play here that are not aimed at confusing people, but they do confuse people all the time. And so basically what you get into, if it is a triple net lease, the three different [01:04:00] nets or the NNN stand for taxes, property insurance, and then common area maintenance or operating expenses. And so people say our tax is pretty straightforward. It’s property taxes. You pay your proportionate share insurance. You pay your proportionate share. And by the way, that should be based upon the square footage. So if you occupy one-tenth of a building, you pay one-tenth of those costs.

If spaces are vacant, you should not pay any more. You should still pay your proportionate share because people sometimes will say, well, I’m the only tenant in the building. It doesn’t matter, if your lease is done properly you only pay your proportionate share of the lease. That’s another legal concept that people mess up all the time.

And then the last one, the common area maintenance or CAM or operating expenses, that gets into any cost it takes to run the property. All right. So not the mortgage for the landlord, et cetera, not commissions to brokers [01:05:00] but it gets into what’s the snow removal cost? What’s the landscaping? What’s the janitorial cost for outside the property, inside the property, washing windows, sweeping the parking lot, exterior lights in the parking lot, maintaining the HVAC systems, the property manager’s fees to process the cheques and the invoice people and to make sure the properties run well. Anything it costs or takes to run the property gets lumped into that, and then that gets paid out proportionally.

Next question is how do I know that’s fair? Landlords are supposed to have the obligation to give you a line item breakdown of what those costs are, and they should be able to give you a historical operating cost of what each expense was over the last few years. Some landlords don’t, most do. Most are required to. Most states have statutes where they can’t just finagle and guess. But again, that’s where a good real estate attorney will make sure your lease is written properly to protect you.

Dr. Sharp: Great. [01:06:00] This is good. Hopefully, folks are in a place where they can write some of this stuff down or check out the transcript once that’s ready because there’s so much information to take away that we’ve been talking about over the last hour. I don’t want to dive too deep into buying. That’s like a whole other conversation, I think but I would love to get your opinion on, if it’s even possible to make generalizations at this point like considering leasing versus buying, when should we really seriously consider buying a property versus just leasing?

Colin: Yeah, no, you’re right. It’s a very broad conversation and we can spend two hours on it but you’re right. We can hit two of high points that I think will leave the listeners with some really good information. So here’s what I tell you, the criteria for me of the purchase or wanting to purchase are these;

  1. If you’re not going to want to be in this [01:07:00] space or in this area for more than a few years, don’t purchase. This is not like residential where you can get in and out quickly. These are expensive loans. They’re cumbersome loans. To get commercial loans are much more challenging to get than residential. And so there’s a lot higher cost to get in, like an appraisal and commercial is $340,000. An appraisal for a house might be free for the lender or maybe $300 to $500. Very different.

A lot of loans for residential have no fees. A lot of loans for commercial, if it’s an SBA, you’re going to pay over 3% when it’s all said and done on that loan. You might pay literally tens of thousands of dollars just to originate the loan. If you don’t want to be there for more than a few years, just lease. If you think you’re going to outgrow the space in the next three to five years or so, I would say just lease. If you don’t have the down payment or if you’re not going to be able to afford the monthly payment from a cash flow perspective, the same thing, just lease [01:08:00].

If you don’t have the desire to maintain the property or deal with issues like I need to hire my own HVAC person, or I have to hire a snow removal company, or if the front door breaks, I have to call a front door specialist to have them come realign. If you don’t want those responsibilities and you just want to show up, turn the lights on and then leave at night. And if there’s a problem, you put in an email or call, same thing, don’t look at purchasing.

And then other than that, too, I say, don’t forget that owning real estate for your practice, not for yourself personally, but owning real estate for your practice should be secondary to your practice. A lot of times, we’ll have healthcare providers say, I have to own my real estate or I want to own and we’ll say, that’s great. We love ownership, but it’s got to make sense for the practice.

And so what I mean by that is, let’s say you’ve got four options, three are leases, [01:09:00] one’s a purchase. If the option of purchase is in a bad location, or it’s in a building that’s really inferior, it’s not going to communicate aesthetically the quality of care that you provide, the atmosphere that you’re trying to create, sure. Maybe you’re paying down $2000, $3,000 a month in principle, but that’s going to pale in comparison to you having a weaker practice or not getting the referrals from patients that you would have or from colleagues because they don’t want to send people there.

It’s not that hard to figure out, your office space communicates something. If I have to go somewhere, do I want to ride in this vehicle or this vehicle? Pick a nice vehicle and a not nice vehicle. It does affect the experience. Real estate has to make sense for you financially and it’s got to make sense for you functionally for your practice as well.

If you do want to purchase and you say listen, this space would fit my needs for the next 15 years. [01:10:00] It’s the exact location I want to be. I do with the down payment then really gets into the economics. What’s the cost to get into the property? What are the monthly costs? And it really becomes an economics issue at that point.

And that’s where, to summarize, you need to know all the costs. Like you said, it’s not just one number. People will say, well, the mortgage is only $4,000 a month. Yeah, but the property taxes are $2,000 a month. The insurance is $800 a month. The operating costs of snow removal net, that’s in our $2000 a-month. And so your $4,000 a month mortgage, all of a sudden became $8,000 or $9,000 like that. You need to understand the full cost of the deal.

If you understand the full cost of the deal, it makes sense. You have the wherewithal to do it. Owning commercial real estate is a phenomenal investment. If you are confident in your practice, you’re betting on yourself to be the best tenant you’ve ever had. And so if you’re going to cut a check to a third [01:11:00] party, independent landlord, or cut it to your own lender, if you’re confident in your position, you owning the real estate can be a tremendous asset builder. It can increase your net worth. Every month you scratch a check, your net worth goes up, your balance sheet goes up. And so it can make a lot of sense to purchase and own as well, too.

But best way to see that, purchase versus lease comparison. The last thing I’ll say about that is, there’s a lot of really favorable tax deductions that you pick up when you do purchase, you can appreciate the real estate. There’s other elements that are there. And so a purchase versus lease comparison will help you figure out all the costs, not only expenses but also all the benefits you’re going to receive as well when you own.

Dr. Sharp: That sounds good. There’s so much to dive into there and I’m going to hold back from doing that. I think that’s a nice summary. If people want to think about the purchasing option, there’s good information out there. Thanks for [01:12:00] chatting through all of this. I feel like we packed a lot into about an hour and there’s a lot for people to take away. So really appreciate it, Colin.

Colin: Yeah, no, it’s been fun. I appreciate it too. I think we’ve covered some really good information. My summary is this, there’s a lot on the line. Hire professional representation. Do the best you can to save as much money capitalized that you possibly can. Don’t end up in a place where you have regrets or second-guessing and trying to make sure that you’ve got peace of mind when you sign that final lease or you close. You want that peace of mind. It is priceless.

Dr. Sharp: Yeah, I think that’s a good note to wrap on, peace of mind. We’ve said it during the conversation but just to close with that, peace of mind is super valuable. So highly recommend and consider getting some help in this process.

Colin: Awesome.

Dr. Sharp: Thanks a lot.

Colin: Thanks, Jeremy.

Dr. Sharp: All right y’all. Thank you so much for tuning into this episode. Always grateful to have you here. [01:13:00] I hope that you take away some information that you can implement in your practice and in your life. Any resources that we mentioned during the episode will be listed in the show notes, so make sure to check those out.

If you like what you hear on the podcast, I would be so grateful if you left a review on iTunes or Spotify or wherever you listen to your podcasts.

And if you’re a practice owner or aspiring practice owner, I’d invite you to check out The Testing Psychologist mastermind groups. I have mastermind groups at every stage of practice development; beginner, intermediate, and advanced. We have homework. We have accountability. We have support. We have resources. These groups are amazing. We do a lot of work and a lot of connecting. If that sounds interesting to you, you can check out the details at thetestingpsychologist.com/consulting. You can sign up for a pre-group phone call and we will chat and figure out if a group could be a good fit for you. Thanks so much.[01:14:00]

The information contained in this podcast and on The Testing Psychologist website is intended for informational and educational purposes only. Nothing in this podcast or on the website is intended to be a substitute for professional, psychological, psychiatric, or medical advice, diagnosis, or treatment. Please note that no doctor-patient relationship is formed here, and similarly, no supervisory or consultative relationship is formed between the host or guests of this podcast and listeners of this podcast. If you need the qualified advice of any mental health practitioner or medical provider,[01:15:00] please seek one in your area. Similarly, if you need supervision on clinical matters, please find a supervisor with expertise that fits your needs.

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