Tips, tricks, what to dos and what not to dos on how you can save money as a healthcare provider on your commercial real estate (Part 1)

Colin Carr, founder and CEO of CARR, chats with Ophthalmology Times® executive editor David Hutton in this part one episode of the EyePod.

This transcript has been lightly edited for clarity.

David Hutton:

Welcome to EyePod, a podcast series from Ophthalmology Times®. I'm David Hutton, your host for today's episode. I'm joined today by Colin Carr, the founder and CEO of CARR.

CARR's team of healthcare real estate agents span coast-to-coast, and the company is a leading provider of commercial real estate services for healthcare professionals. Colin has been involved in commercial real estate since 2000, and has personally completed more than 1,000 transactions. He's here to share his expertise with us today. Thanks for joining us.

Colin Carr:

David, thanks for having me.

David Hutton:

First off, how much is really on the line in healthcare real estate negotiation?

Colin Carr:

It's a great question. And most people would dramatically underestimate the answer. But the answer is there's several $100,000 that are on the line in a traditional commercial real estate transaction. So I mean, break down the numbers, let's say you've got a space, that's three or 4000 square feet, if you are overpaying by three or $4 per square foot, you take 3000 square feet, times $3 per square foot higher rent than you maybe could have paid or should have been paying if you were properly represented, and you had a really aggressive negotiation. And so 3000 square feet times $3 per square foot is $9,000 per year, and excess rent that you could have potentially avoided paying. Take that over a 10 year period of time and all of a sudden you've got $90,000. Look at other concepts like what are your annual increases, if you're paying a 4% annual increase, instead of three and a half percent, or three or two and a half percent, here comes another 20, $30,000 in additional rent that you could have avoided paying. And then you get into other questions like free rent allowances, renovation allowances, or tenant-proven allowances. And you could add up to a couple $100,000s very quickly in a standard negotiation.

David Hutton:

What are the top mistakes that healthcare providers make with their office space?

Colin Carr:

There's quite a few of them.

So well, let me start with just maybe the top three or four. The first mistake that healthcare providers make with the real estate, is they try to take the do-it-yourself approach. They either think they're gonna save money by not working with someone, or they don't know where to go find a good advocate or advisor, or good agent, or they just, they all of sudden get a phone call from their landlord or from the property manager, asking them if they want to renew their lease, and they all of a sudden start scrambling and they start the process all by themselves. And the problem with that is several fold.

Number one, when you're dealing with a commercial real estate transaction, that is gonna be worth hundreds of 1000s of dollars or even millions of dollars over a 7-10 year period of time. There's a lot on the line. And if the landlord thinks that you don't know what you're doing, or if you're not qualified, or if you don't have time, they're going to use that against you. They're going to take advantage of you in the transaction. And here's the reality: if Chipotle shows up to do a deal, they're going to have a professional agent right presenting them. If Starbucks shows up, they're going to have an agent. If Charles Schwab or Lockheed Martin, or Visa or any large company shows up to do a deal, they're going to have professional representation. And so when a healthcare provider who maybe does two or three real estate deals in their entire career from the commercial perspective, shows up against the landlord that landlords going to assume they don't know what they're doing, they don't have the expertise, they don't have the time. And the landlords would give them a dramatically inferior deal. And we can break that thing down 10 different ways. But the bottom line is the do-it-yourself approach is going to cost the doctor, or the office manager, 40 to 50 hours of their time, they're going to probably lose 100, $200,000 in the negotiation, they're going to open themselves up to a bunch of pitfalls and complications that they shouldn't have been exposed to, and at the end of the day, they're not going to have any peace of mind that they got the best terms possible. So it is a lose, lose, lose scenario. So I'd say that the do-it-yourself approach, that's the top mistake that healthcare providers make.

Second mistake that we see them making is that they only choose one property to pursue. Maybe they drive by a property and they fall in love with it. Or maybe they've been in the same property for 10-20 years. And they go to do either a new deal or renewal, and they don't negotiate with any other landlords or sellers. That is a huge mistake in commercial real estate, because you have no basis to compare the terms that you negotiate on the one property to the market. And so this is where commercial real estate differs dramatically from residential real estate.

In residential real estate, you might go look at, you know, X number of houses, or you're looking at properties online, you know, via Zillow, or Redfin, or Trulia, what have you. And then when you find the property you like, you submit an offer and a contract, and if the seller says yes and signs, then you're under contract right away. In commercial real estate, there's too many variables to submit a binding offer, if it's a lease; if it's a purchase, yes, you can submit an offer, but typically, even then, you're still negotiating on what's called a non binding letter of intent, an LOI, or an RFP or request for proposal. So in commercial real estate, the top companies in the world, they'll go look at their options. And they'll negotiate on three, four or five properties simultaneously. Like they might look at 20 properties, whittle it down to the top four or five, and then they start trading paper with four or five different landlords. And they might go three or four rounds of negotiations before they finally get to the place where they're ready to choose which property they're going to move forward with.

And the benefit of doing that is they're not wondering if the terms of each property are competitive or aggressive, because they have a benchmark of three or four other landlords that they're all asking for the same, the same concessions are the same terms from so they know, unequivocally, this is either a good deal, this is an average deal, this is a terrible deal, this is a phenomenal deal, because they have all these things to compare it to. It'd be no different than shopping for an item if you went to four different stores and got four different prices. And if you couldn't negotiate it, you would wonder if you got the best deal possible.

Unfortunately, a lot of healthcare providers will just take one property, submit offers and get so far down the road, and they have no clue if it's a good deal or a bad deal. They might be able to compare the deal compared to where they started the negotiation where they finished the negotiation, but they could have started in a really bad place and not known it; they might have thought they're starting at a decend place, and then they end lower, they think they got a great deal. And they could still be overpaying by $200,000 over a 10 year period. And that happens all the time.

David Hutton:

How do you decide when it's better to purchase or lease the property?

Colin Carr:

The best way to decide that is to let the numbers tell you which property, or which option, to choose. And this goes back to what I was just mentioning, if you only look at options to lease or only look at option to purchase, you don't have the ability to compare a purchase versus a lease. If you take the approach that I just gave you, which is you hire accurate representation, that advisor goes to the market and looks at all the properties that meet your top requirements, and then they whittle it down to the top maybe eight properties that best fit your requirements, you tour those properties and then you pick the top three or four to negotiate with. If you've got options, the lease and options the purchase in the running, then the numbers will start telling you very quickly which one makes more sense.

Now, if you like one property better, that's probably what you're going to choose if you love the option to purchase, and the option to lease is not that nice of a building. That's an easy question or scenario. But let's just say the option to lease is every bit as good as the option to purchase. Both are phenomenal locations. Both are beautiful properties and buildings. And you would be happy to either one, the way you decide that are the numbers: What's the downpayment? You know, how much how much money do you have to inject into the deal to get the financing that you want? What is the actual cost of the property after you pay down the principal, how much tax deductions and how much depreciation you get in an ownership versus a lease, and you could end up paying more for the property per month in a mortgage payment, but end up paying less per month or per quarter on taxes significantly. So you maybe pay your lender more, but you pay the government less.

And it actually, you could have a scenario where maybe it costs $10,000 a month to own, $6,000 A month the lease, but once you factor in principle paid on a tax deductions, the effective cost of owning could actually be less to own, even though you're paying a higher amount per month upfront. Once you factor in those benefits, it can be a lower effective cost of owning. And so the best way that you get there is to run a very detailed purchase versus lease analysis or to have your agent do that for you. And then that'll tell you quickly, "Hey, this property makes more sense economically, or financially than the other property does." The numbers speak very loudly.

David Hutton:

Everybody likes to save money, how can health care providers save say $100,000 or more on their next lease renewal?

Colin Carr:

So lease renewals are the number one transaction where healthcare providers lose money, right? Healthcare providers are very good at losing money in a lot of different types of deals, which is not a compliment by the way, but lease renewals are the number one transaction where healthcare providers leave money on the table.

And here's why: A lot of healthcare providers, they're in a space that maybe been there for 5,10, 15 years, and they go into the transaction thinking "I don't want to move," or "I don't have time to move," and the landlords are going to assume that that's true, regardless. Okay, so a landlord's going to go into a deal and say, "This person, he or she probably doesn't have the time, they probably don't want to deal with the inconvenience, they probably haven't hired an expert agent to show them the market. They are in healthcare, which means they want to help people, they're not in aggressive negotiations for a living, so they don't like to be uncomfortable. And if I make it uncomfortable for them, or I don't cooperate within the way they want to, they'll probably just do whatever I say that I need them to do the probably just sign the deal at the end the day, they'll push back a little bit, but I won't get them to leave over it." And so a lot of landlords go into the transaction thinking, "If I charge them a little higher lease rate, they're probably not going to move because of it; if I give them lower concessions, they're probably not going to move over that." And so they just start kind of chipping away at these deals. And ultimately, the deal is so much further in favor of the landlord than the tenant than you could possibly imagine.

So that's me setting the table to say, if you want to save money in a lease renewal as a healthcare provider, you got to go to the market, you've got to look at what your other options are. And you've got to be willing to relocate. I didn't say you have to relocate, but you have to be willing to.

If you showed up at a car dealership and said, "I have to buy that car right there, no matter what the price is, I will pay it," you're not going to get a good price in the car, like this is terrible negotiation strategy right there. And we laugh at that, but that's literally what doctors are telling landlords: I don't have time to move, I don't want to move. It's too inconvenient, I don't have the money. I don't even know where to start. What will you give me? And the answer is you're gonna get a terrible deal.

And so if you want to save money on a lease renewal, you hire an expert agent to represent you, they go to the market and find all your top options: top options to lease, top option to purchase, looking at different square footages, different types of properties, office versus retail, what have you, standalone, multi-tenant, they look at all your options, they whittle it down to the top top five, seven properties. And then you start negotiating simultaneously with three or four of those people.

Once you know what terms you can accomplish, if you were to relocate or go somewhere else, you then have the basis to negotiate against your current landlord, because you know what a competitive deal is in the market. You know if you were to move, what it would cost you, or what you would be offered. And so when you negotiate with your current landlord, you're not going to be taken advantage of, you're not going to pay your current landlord $30 a square foot, if the other top three properties in immediate area are $25 a square foot, you're not going to overpay like that. If your current landlord says "hey, there's no free rent, there's no tenant improvement allowance." And yet, you can get a huge free rent package and a huge tenant proven allowance right next door down the street. You know your current landlord's not offering you a competitive market deal. And so you use other properties to leverage against your current landlord or your current your current property manager. And that ensures that you don't overpay.

And at the end of the day, when the landlord knows that you are serious that you're not going to be taken advantage of, they'll treat you like a respectable company. A landlord is not going to go to Starbucks and assume they don't know the market. They're not going to go to Amazon and assume they don't know the market. They're going to assume these guys are savvy, they've done the research. If I don't come with competitive terms, I'm going to lose the chance even to do business with them. So they come with aggressive terms, competitive terms, you know, fair terms, and the difference between that type of a proposal versus you know, "hey, landlord, send me an offer. What would you do if I was willing to stay there?" That's 100, $200,000 like that.

David Hutton:

Thank you for joining us on this episode of EyePod, be sure to tune back in for part two with Colin Carr.