How to successfully negotiate medical facility leases in 8 steps

Published on: June 29, 2021

The demand for medical facilities continues to grow as the number of patients and their healthcare spending increases. In data published by the Centers for Medicare and Medicaid Services in the United States, it’s projected that national healthcare spending will grow to 6.0 trillion USD by 2027, a trend reflected by the increase in healthcare spending across the world.

As demand surges, many healthcare providers will have to negotiate leases for medical facilities. Some may end up repurposing officers or commercial properties for healthcare units. Setting up the lease agreement for medical facilities is not without complications, and landlords (particularly those whose previous tenants may have used the space for retail units or offices) may not always be fully aware of all requirements.

Although the leasing process for medical facilities is like other commercial leases, there are some variations. Healthcare is a highly regulated industry, and those setting up facilities need to be aware of the requirements and the risks involved. You need to make sure they can adequately care for patients and that the lease agreement mitigates any chance of unpleasant surprises for both tenant and landlord, establishing a roadmap for long-term success.

Below, you’ll find a checklist to guide you through lease negotiations and a breakdown of each point to help you ask the right questions so that you can lease a medical facility and avoid the burden of unexpected costs.

Checklist for medical facility lease negotiation A breakdown of the 8 steps to successfully negotiate medical facility leases

1. Measure the usable space accurately

Not all square footage is created equal, and you should accurately measure the usable space in a unit. A 2,500 square foot office may only have 1,700 square feet of usable space. Most commercial rentals have a unit lease price which is the price per square foot, so if there’s unusable space, it may help you to negotiate the price down to price per usable square foot. This tactic may knock thousands of dollars off your annual rent.

2. Research the rental market to get the best lease terms

Most of us know to research the unit price for similar properties in the market. However, it can be easy to fixate on a single location. It’s best to keep an open mind and research several possibilities within your target area rather than hyper-focusing too early. Knowledge is power, and shopping around may lead you to discover unexpected units at lower prices.

Don’t just pay attention to rental prices. Consider building traffic, other tenants, the neighbourhood’s prospects or growth plans, and the landlord’s reputation. Knowing this kind of information about several potential locations can help you negotiate more favourable lease terms.

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3. Conduct a commercial inspection and hire a real estate lawyer

Although these may seem like unnecessary costs (particularly if you’re inspecting multiple properties), it’s best to get a professional inspection of the property and lease terms. Medical facilities have little room for error, and conducting due diligence inspections will help you tackle any red flags before signing any contracts. Hiring professionals specializing in medical facility leases and property inspections will help you avoid structural issues (e.g., inadequate ventilation, inability to remove medical waste in keeping with regulations) and allow your negotiations for a substantial tenant improvement allowance.

4. Include specifications when repurposing non-medical spaces

It’s vital to include specifications regardless of what purpose the building served before. However, it’s essential that you do so if repurposing a non-medical space. Healthcare facility managers need to weigh up the costs and benefits of repurposing spaces and ensure all this is accounted for in the lease agreement. In some cases, renovations may be minor, but it may be necessary to tear down and rebuild parts of the existing structure in others. Many of the changes made will be to meet medical spaces regulations, so ignoring this step may lead to lawsuits over negligence. The lease must spell everything out clearly so that there are no misunderstandings between landlords and tenants.

Negotiate medical facility leases to include:

  1. Account for any medical equipment in the lease agreement
  2. Include terms for the proper removal of all medical waste
  3. List accessibility requirements in line with government regulations

Contain clause for the appropriate storage and destruction of medical records

Medical facility lease agreement 5. Evaluate exclusivity clauses as they may not be beneficial

Although it can seem like an exclusivity clause is beneficial, you may not want to be the only medical practitioner in your building or a commercial centre. Medical facilities are rarely chosen by people wandering from door to door, and people tend to do a lot of online research before committing to a healthcare practitioner. It may be wise to look for a location that lends credibility to a new medical facility’s services due to the established reputation of healthcare providers already present at that location.

A landlord familiar with other healthcare tenants may already have some of the extra amenities you need. For instance, accessibility and waste removal may be taken care of, and adequate power generators for specialized equipment. Another benefit of a location with other practitioners is that there may be a medical lab, allowing you to refer patients for additional testing conveniently. It’s best to carefully weigh up the pros and cons of exclusivity when you negotiate medical facility leases.

6. Write renewal terms into the lease agreement

Most medical lease agreements will have longer terms than typical commercial leases due to the cost of installing equipment and other necessary improvements. Healthcare providers should approach them as long-term commitments, writing the terms for renewal into the initial agreement. Lease negotiations should include a longer lease term (you may need at least a 10-year agreement), lease extension and renewal options, as well adequate time to negotiate renewals.

7. Pay attention to the end of lease and relocation clauses

Paying close attention to clauses is a key component of negotiating medical facility leases. Most leases will specify that the tenant must remove all alterations before the end of the lease term. It’s wise to include details in the lease of any alteration that the tenant does not need to take responsibility for removing at the end of the lease term. For instance, lead shielding can be costly to remove, and if the landlord is planning on installing another medical tenant, it could be beneficial for them to keep this alteration.

Another standard clause in commercial leases is the right to relocate a tenant. If this exists in the lease agreement, it’s wise to include that the landlord is responsible for covering the time and expense involved in relocating the medical facility.

8. Invest in a lease management solution as you scale

If you plan to grow the number of medical facilities in your practice, you need to worry about more than how to negotiate medical facility leases. It’s wise to consider a lease management solution sooner rather than later. Often companies can put this off, resulting in costly mistakes (e.g., missing renewal negotiation dates or failing to account for improvements to all locations adequately). The right software automates all this, enabling you to focus on scaling operations so that your practice can provide the best care for as many patients as possible.

Further reading for healthcare administrators:

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