How Medical Office Building Tenants, Landlords Can Work Together to Optimize Lease Terms

High demand for medical office buildings gives landlords and owners of these spaces opportunities to optimize lease terms and implement cost-saving initiatives by amortizing capital investments back to them, according to a new report by Colliers.

This is particularly viable for energy-saving projects such as installing LED lighting, BAS enhancements, and HVAC equipment upgrades. All are bill-back investments landlords may include in their leases.

This may also work for high-usage equipment or running after-hours HVAC.

For tenants, when negotiating leases, as healthcare staffing wages continue to rise, noting these potential expenses could be key during lease negotiations or for controlling occupancy costs.

Collaboration can help create better relationships.

“Historically, relations between medical tenants and owners have been a tricky game, with each side trying to “win” at the other’s expense,” Eric Hoffman, Vice President at Project Management Advisors, tells GlobeSt.com. “But a more creative and collaborative approach is necessary, both to optimize lease terms that are agreeable on both ends and to implement cost-savings initiatives.

“My advice to medical office landlords is to put the focus on win-win strategies and plans that address your tenants’ needs, wants, and pain points. Consider these negotiations as a dialogue, not an argument, and you may find both sides are fighting for the same things.”

Lucia Hedke, JLL Managing Director and Healthcare Lead for Florida, tells GlobeSt.com another approach to optimizing lease terms is having a centralized reception area, waiting rooms, or conference rooms that are shared by multiple practices or specialties.

Gabriel Fernandez, CPM, director of management – national healthcare, at Ryan Companies, tells GlobeSt.com, that tenants should encourage lease language that allows for capital spending particularly if it’s tied to quantifiable, cost-saving measures that directly benefit them and can be amortized throughout the term of the lease.

“Landlords are incentivized to continually improve the facility while the tenant experiences reduced operating costs and a higher quality facility,” Fernandez said.

Scot Snitker, Executive Director of Property Management, Commercial Properties, Inc./CORFAC International, tells GlobeSt.com, a landlord should always be on the lookout for new technology and upgrades in existing facilities. These can be anything from cooling systems to security systems.

“Replacing old units with new energy efficient management systems can save energy use and reduce overall cost,” Snitker said.

“Many times, even replacing a unit rather than continuing to repair units can show an ROI in a short period of time with the bonus of lessening their environmental impact. Security and entry systems can be put in place with an upfront cost, but many times can save money over the long term by reducing security personnel hours and providing a safer more working environment.”

Colliers cited that the average lease term in medical offices is 19 years, compared to an average of 4.3 years for general offices in the US.

Jason Goldman, Founding Partner of Davis Goldman, tells GlobeSt.com, “Tenant improvement allowances, especially when converting non-medical office space for a new medical tenant, should be considered carefully in relation to the length of a lease and whether the tenant is guaranteeing performance and repayment of the allowance in the event of a default or early termination of the lease.”

Jason M. Wolf, Managing Principal, Wolf Commercial Real Estate/CORFAC International, tells GlobeSt.com that tenant improvement allowances should be negotiated.

“Offering attractive tenant improvement allowances can entice potential tenants to lease the space and help cover some of their upfront costs for customizing the office to their specific needs,” Wolf said. “This can make the property more appealing in a competitive market.”