By: Joseph Clark, Esq.
A medical practice should always be leery of the potential for hidden costs in the lease agreements it enters into. Commercial landlords are adept at hiding costs so it is incumbent upon potential tenants to guard against it. Nowhere is this more the case than in the negotiations for the build-out to meet the medical practice’s needs.
The cost of a build-out for a common medical practicesignificantly exceeds that of a general- office tenant. Besides the medical-specific equipment, there is added plumbing, woodwork,and additional compliance issues that simply exceed the costs associated with the general-office tenant. When landlords agree to take on the brunt of the construction of the build-out they do so because they know they can inflate the rent they charge, and tack on additional charges for utilities, taxes, and other fees. But, it is the landlord’s overall management approach to the construction of the build-out itself rather than these incidental fees which creates the greatest potential for mounting costs to the tenant.
The landlord’s main management tool to foist costs on the tenant is by asserting control over the build-out construction process. This is done is several ways. First, the landlord will agree to construct the build-out only if the tenant agrees to cover the entire cost of the project as part of the agreed upon rent. At first glance, this might seem palatable to the tenant since they aren’t paying a large block sum for the project but instead paying it over the course of the term of the lease. But in many cases, the actual square footage the tenant has bargained for is unclear. The landlord is in a much better position than the tenant to know how much space will actually be available. In fact, the landlord might inflate the square footage of the premises by including common area space which the tenant really will not have control over. Secondly, even though the tenant thinks all costs of the build-out will be paid for through the rent, odds are the landlord will charge a fee for their “construction management” which is really a tax to pay for the landlord’s project-manager and architect.
There are several counter-proposals which the tenant can insist on to avoid these costs. First, instead of allowing for the build-out to paid for through the rent and additional fees, the tenant can insist on paying the landlord a specific amount to pay for the entire construction process. In conjunction with the specific amount approach, the tenant should also cajole the landlord into waiving their construction management fee and allow for continued on-site access for the tenant’s project manager and architect, instead of the landlord’s project manager. That way the tenant will always have a clear idea of what their costs are and where the project is headed.
The tenant can also ensure that they are actually getting what they bargained for by insisting on having the ability to “re-measure” the space in question to determine if the landlord has inflated the real-square footage of the premises. The landlord will not automatically accept the measurement the tenant asserts is accurate so it is best that both parties agree in writing that an independent and unbiased party will measure the premises according to specific standard agreed to by commercial realtors in your geographic area.
While the landlord can always rely on their advantage in information, the tenant can control some of their costs by following these steps. By wrestling some control over the build-out construction process from the landlord, the tenant can control the excessive construction costs and fees that can harm a medical practice’s financial picture.
For assistance with a medical practice lease or purchase, contact Joseph Clark, Esq. at (516) 747-6700 x. 307 or email him at JClark@Kirschenbaumesq.com or Jennifer Kirschenbaum, Esq. at (516) 747-6700 x. 302 or email her at Jennifer@Kirschenbaumesq.com.