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The hidden link between the dental lease and practice profitability

April 9, 2018
Dentists: Your lease might be legally sound, but is it bad for business? If so, you're not alone. Dentists are often underrepresented in lease negotiations, leading to risk being shifted away from the landlord. Learn the keys to negotiating a business-smart lease in this article by Pamela and Norman Gelfand.

There is a hidden link between the dental lease and dental practice profitability. That link is the business protection within the lease. The key to understanding this concept is recognizing what a lease reallyis and the important part it plays in practice financials.

A lease is a binding agreement between a tenant and a landlord. It is a risk-shifting structure full of complexities. Leases offered by landlords are always skewed to favor the landlord by shifting risk to the detriment of the tenant. A lease can be a tenant’s best friend or mortal enemy, with the difference being largely dependent on how the lease is negotiated prior to final agreement. Should a conflict arise, all parties look to the lease for resolution.

Operative functions of a lease

A lease is comprised of two operative functions: legal and business. The legal function should be handled by a licensed attorney who is experienced in dental leases to make sure all stipulations are legally valid in nature, both in verbiage and in enforceability. A dentist should always obtain legal review prior to signing a lease.

The business function addresses the business stipulations in a lease that are outside the legal framework. Many hidden business stipulations contained in the dental lease can threaten the financial stability of a practice. These stipulations are perfectly legal but very bad business for the dental tenant. A classic example can oftentimes be found in the relocation clause, which can be skewed to adversely affect the financial health of a practice.

Understanding business protection

Business protection is a defining feature in any well-negotiated lease—especially for dentists. A well-negotiated lease is a game-changer because many of business risks can be shifted away from the dental tenant. Yet the concept of business protection is most often overlooked during the course of a dental lease transaction.

Why is this the case? Many commercial brokers and some attorneys are unaware of the business stipulations that are particular to dental practitioners. Dentists have a need for a heightened level of protection due to the large capital investment in start-up costs, as well as shouldering the ongoing responsibilities required in day-to-day operations.

There are many myths about commercial real estate. Don’t drink the Kool-Aid! It is not a one-size-fits-all endeavor. Believing in these myths can cost a dentist thousands of dollars. The top three myths are:

  • All commercial leases are the same.
  • All commercial real estate brokers are the same.
  • The landlord will offer a discount to the tenant if the tenant has no broker. (In reality, the dental tenant is wading into unchartered waters with no one to watch his or her back.)

What you can do

Dental leases are complex. They contain ambiguities that place the dental tenant at a much higher risk than a general commercial tenant. Make sure to hire a broker who knows dental leases and the importance of business protection.

All parties to a real estate transaction have the right to licensed real estate representation. Doing so levels the playing field between the parties. Written appointment of an exclusive tenant broker will protect against conflicts of interest and should define fiduciary responsibilities to protect the dental tenant.

There are hundreds of horror stories told by dentists who blindly believed the myths mentioned above. The results: low-performing locations, over-market economics that lack build-out and other landlord allowances, and commitment to a lease that doesn't contain the necessary business-protective stipulations. Dentists have lost their leases through no fault of their own with no way to recover their capital investment. They have had latent defects occur in the building structure that cost them employees and patients. They have had their financing ability inhibited—and the list goes on. These horror stories rob wallets, cause sleepless nights, and can be avoided with tenant-protective stipulations within the lease agreement.

The takeaway

A tenant broker who specializes in dental leases will know the keys to selecting the right location, negotiate market-savvy economics favorable to the tenant, and understand that the dentist is in a heightened risk situation. A tenant broker will make sure to incorporate business-protective agreements into the lease that are 100% outside of the legal realm. It’s all about business risk avoidance for maximum protection in the here and now, as well as far into the future. There are no predictors in life. Expect the best, plan for the worst.

Dentists should be able to focus on case acceptance and patient treatment—free of worry about the real estate portion of their practice. Take the right steps with your dental lease so you don't have a horror story of your own.

Norman Gelfand has 30 years of experience as a commercial real estate broker. Pamela Gelfand joined the firm in 2001. Together, they’ve represented more than 600 tenants in lease negotiation. Both have exclusively represented dental tenants and buyers for 17 years. They help dentists in securing ideal locations, negotiating money-saving, market-savvy economics, and tenant-protective lease negotiation. Their firm’s unique lease negotiation begins with the identification of hidden business risks within the lease that are outside of the legal framework that are typically not addressed by most brokers and many attorneys. They negotiate tenant-protective leases by shifting these hidden business risks away from the dental tenant to safeguard the tenant’s capital investment—a key element in profitability and practice value. Learn more at Contact Norman at (512) 833-5300 or [email protected], and contact Pamela at (512) 468-1938 or [email protected].

Editor's note: This article first appeared in the Apex360 e-newsletter. Apex360 is a DentistryIQ partner publication for dental practitioners and members of the dental industry. Its goal is to provide timely dental information and present it in meaningful context, empowering those in the dental space to make better business decisions.

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