Medical office leasing is complicated. Beyond the exhausting process of finding the right physical space for your practice, when you finally have a lease agreement in hand it’s hard to understand how that language can impact your practice.
Knowing these terms is not only critical to understanding your lease but can help you filter out properties that may be non-starters. But, since sifting through the minutiae of legal documents is not what you got into medicine for, we picked eight terms to help demystify the medical office lease.
1. Rentable Square Feet (RSF) vs. Usable Square Feet (USF)
The distinction between rentable and usable square feet can be confusing. After all, many people in the real estate industry use both terms. But the distinction is far from inconsequential and can be the difference between a bad deal and a great deal.
Put simply, usable square feet (USF) refers to the area that the tenant can use to run their business. It consists of the entire space within the boundaries of the building floor and can also include some non-usable areas such as mechanical rooms and janitorial closets. Rentable square feet (RSF) represents this usable area plus a pro-rata share of common areas. This includes things like lobbies, restrooms, corridors, and stairways – the common areas in the building, which are often calculated as a proportion to the amount of office space being leased.
2. Loss factor
Loss factor represents the percentage difference between rentable space and usable space. This is valuable because it gives you a clear understanding of the value of the usable space. The standard formula to calculate the loss factor is:
1 – (Usable Square Feet / Rentable Square Feet) = Loss Factor Percentage
Loss factor is also not a uniform metric – it varies depending on who’s determining RSF and USF. The two main entities that are responsible for calculating RSF and USF are BOMA and REBNY, and their standards vary in space measurements (BOMA takes them from the center-line of the window, whereas REBNY takes them from the exterior).
3. Rent escalation
Rent escalation is a provision that requires the tenant to pay a rate that increases by some factor over the life of the lease. From a landlord’s perspective, this ensures a consistent increase in revenue and helps keep the base rent current with inflation. The rate that the base rent increases is agreed upon in the initial lease agreement and rent escalation factors are generally between 2 percent to 4 percent per year.
How the base rent escalates can vary, but the most common method is through step rent. Landlords can use this method when a tenant is unwilling to lease the space at the current asking rate, but by introducing a step rent structure, payments are structured in a way that satisfies both parties.
Here’s an example that illustrates how stepped rent works over five years with an asking rate of $30 per rentable square foot:
Lease YearPrice Per Rentable Square FootYear 1$28Year 2$29Year 3$30Year 4$31Year 5$32
4. Triple net lease
Different types of leases vary in how rates are calculated. Commercial real estate leases fall into two main categories: gross and net. Gross leases include all expenses, and net leases do not. One type of lease that is increasingly common is the triple net lease.
This lease requires the tenant to pay property taxes, insurance, and common area maintenance charges (CAM). Examples of CAM charges are things like landscaping, portering, pest control, and elevator maintenance, and often, expenses like common utilities and operating costs are included as well. Landlords determine these expenses based on the tenant’s pro-rata share and build them into the lease. For example, if you lease 800 square feet of a 10,000 square foot building, you will pay 8% of the building’s expenses.
5. Tenant improvement allowance
A tenant improvement allowance is a coveted landlord incentive and refers to the amount of money that a landlord is willing to contribute to office space renovations. So, how exactly does this work? Generally, before receiving the allowance, you’ll likely have to pay the expenses out of pocket and the reimbursement can be structured as progress payment or as a lump sum. The size and structure is an important consideration for a new space that requires a build-out project.
6. Demo clause
A demo clause allows the landlord to end the lease if they decide to redevelop or demolish the building. This type of clause can be very tricky due to the ambiguous nature of the language commonly used, leaving tenants at the mercy of the landlord who is within their right to end the lease without tenant consent. As you might imagine, an abrupt lease termination can have a disastrous impact on your practice.
A commercial real estate attorney can help you amend the clause by placing several restrictions on the landlord, such as limitations on redevelopments or requiring a number of days or months that notice must be given.
7. Relocation clause
This provision shares a lot of similarities with the demo clause. It gives the landlord the ability to move your practice to another premise. This is usually done to assist larger tenants in their expansion plans.
It’s important to note that a relocation provision is not a standard clause in most cities. This kind of clause can be quite draconian and especially harmful to medical tenants where a sudden and unexpected relocation can be devastating to your practice.
If you can’t avoid this clause in your lease, we’d encourage you to get as specific as possible the details of the provision so that any potential new office is equal to, or better than the current office. Include details like ceiling height, the number of windows, ADA compliance, and anything else that may impact your practice or your patients.
8. Union vs. non-union building
The question of union vs. non-union comes into play when you’re undertaking a build-out project. Generally speaking, most buildings don’t have regulations that require the use of union contractors in their buildings. If you do come across this, it’s an important requirement to consider before you sign a lease. Union contractors will have been vetted and there’s a greater chance of a higher quality job, but this work often comes at a higher cost.
Conclusion
This list is far from exhaustive, but we picked a few of the more common and often overlooked terms in our experience with medical office leasing. A proper evaluation of the language around these terms should be carried out by a commercial real estate attorney who can help you understand any potential impacts on your practice.
If this feels overwhelming, you’re not alone. It’s why a growing number of doctors are turning to medical coworking as a convenient alternative so they can focus on their patients and on the work they love to do.
Frequently Asked Questions
What is the meaning of a medical office?
A medical office is a facility where healthcare professionals, such as doctors, nurses, and medical staff, provide medical services to patients. These offices may be standalone buildings, parts of larger medical complexes, or even spaces within commercial buildings. Medical offices are specifically designed to accommodate the unique needs of medical practices, including exam rooms, waiting areas, and specialized medical equipment.
What should I look for in a medical office lease?
- Space Requirements: Determine how much space you need, including both usable and rentable square feet, and ensure that the loss factor is acceptable.
- Financial Terms: Understand all the financial aspects of the lease, including rent escalation, the type of lease (gross, net, triple net), and any tenant improvement allowances.
- Flexibility: Look for clauses that provide you some flexibility, like subleasing options or termination clauses under specific conditions.
- Legal Provisions: Examine any demo or relocation clauses carefully to understand how they could impact your practice. You may want to negotiate these or have them removed.
- Compliance: Ensure that the space meets all local, state, and federal regulations for healthcare facilities, including ADA compliance.
What is a tenant improvement allowance?
A tenant improvement allowance is a set amount that the landlord is willing to contribute towards the renovation or modification of the leased space. This amount is negotiated before signing the lease and can be structured in various ways, such as a lump-sum payment or periodic reimbursements.
What is rent escalation, and how does it work?
Rent escalation is a clause in the lease that allows the landlord to increase the rent at predetermined intervals. The rate at which the rent increases is usually agreed upon in the lease and often ranges between 2 and 4 percent annually. There are different methods of escalating rent, with step rent being the most common. In a step rent structure, the rent increases by specific amounts at set intervals over the lease term.
Can a landlord terminate my medical office lease?
Yes, if there is a demo clause in the lease, the landlord has the right to terminate the agreement under conditions specified in the clause. However, you can negotiate restrictions and conditions with the landlord to limit the impact of such a termination on your practice.
What happens if my medical office needs to be relocated?
If your lease includes a relocation clause, the landlord can move your medical practice to a different space within the same building or complex. It's crucial to negotiate the details of this provision to ensure the new space meets your practice's needs and minimizes disruption.
