If TIA, triple net, and exclusive rights are terms you haven’t come across yet, this episode will be a great starting point to learn what to ask for in a lease. Jeff Hallberg returns to the podcast to shed light on the topic. If you would like to connect with him, go to AlignLifeFranchise.com/AYP and type Jeff Hallberg in the comments.

About the Guest:

Jeffrey Hallberg is a top performing commercial real estate professional specializing in high-level real estate development and brokerage with history of guiding daily work routines and logistics relating to commercial development projects and brokerage activities. Previously, Jeff worked with landlords, tenants, developers, and investors during his tenure with Peregrine Group Development and Ascent Property Advisors. With Lee & Associates he specializes in industrial, retail, office leasing and sales across Colorado. He has represented landlords, tenants, sellers and buyers on more than 4 million square feet of space and has been involved in more than 400 transactions in the last 4 years. He received his BS in Business from Auburn University and has been with Lee and Associates since 2015. 

About the Host:

Dr. Joseph Esposito,CEO

Dr. Joseph Esposito, D.C., C.C.N. C.N.S., C.C.S.P., D.A.B.C.N., F.A.A.I.M. C.T.N., is the Founder and Chief Executive Officer of AlignLife. As such, he is responsible for the direction of AlignLife as it expands further across a dynamic and rapidly changing healthcare landscape. Dr. Esposito has more than 20 years of experience in a broad range of businesses, including chiropractic, nutrition, technology, and internet marketing.

Dr. Esposito has extensive post-graduate academic accomplishments, as well as 15 years of experience managing successful chiropractic clinics in multiple states. He also is the founder and CEO of Aceva LLC, a service-based nutritional company providing products and services to the AlignLife clinics. As the former CFO of an internet publishing company, Dr. Esposito understands the power of leveraging the internet to impact the lives of millions of Americans.

Connect with us!

AlignLife.com

AlignLife Clinicoscopy

AlignLife Opportunity

https://youtube.com/@AlignYourPracticePodcast

https://www.linkedin.com/company/alignlife

https://www.instagram.com/alignyourpracticepodcast/

https://www.tiktok.com/@ayppodcast

 

Thanks for listening!

Thanks so much for listening to our podcast! If you enjoyed this episode and think that others could benefit from listening, please share it using the social media buttons on this page.

Do you have some feedback or questions about this episode? Leave a comment in the section below!

Subscribe to the podcast

If you would like to get automatic updates of new podcast episodes, you can subscribe to the podcast on Apple Podcasts or Stitcher. You can also subscribe in your favorite podcast app.

Leave us an Apple Podcasts review

Ratings and reviews from our listeners are extremely valuable to us and greatly appreciated. They help our podcast rank higher on Apple Podcasts, which exposes our show to more awesome listeners like you. If you have a minute, please leave an honest review on Apple Podcasts.

 

Transcript
Jeffrey Hallberg:

Joe, how are you today?

Jeffrey Hallberg:

Dr. Joseph Esposito: I'm doing good Jeff doing good, I'm excited for at least negotiations, I don't think it's a topic people get too excited about. But when they save money and sign a good deal, they always smile. So let's break it down and lease negotiation, it's you push some buttons, and you get some deals done that I haven't seen too many people do. So I think you're the guy to be on the team of chiropractors that they want to sign a lease. So I'll let you start taking it away. And I'll I'll add some of my insights.

Jeffrey Hallberg:

I appreciate that. Yes, when you're signing your lease, you know, when you're opening your practice, one of your biggest monthly expenses and overhead is going to be that lease that you do sign. So you want to make sure that you set yourself up for success by getting the most value as I should say, in your lease, you know, a couple of the key points when you're looking at your lease. And if you settle on the location, you know, it's a good location, and key things to getting you off the ground. Number one is getting some time, time that you can control the space have possession of the space, while you're not paying the landlord rent. Many landlords will give you somewhere between three and six months where they've given you the keys that allow you to go and control space, this can be done used to you know your your construction, and maybe even get construction done into in a short amount enough amount of time where you can start seeing patients and get in front of the overhead of your rent right out of the gate. So that is one of my biggest points to negotiated some getting somewhere between three and six months of what we call rent abatement where you are controlling the space but not actually paying rent.

Jeffrey Hallberg:

Dr. Joseph Esposito: So think about that, guys, if you're an associate and you're looking at opening your first practice, you got your loan, with Jeff saying is let's say it's $4,000 Is your lease. Imagine six months is $24,000. abated or not charged to you in the lease. So that's some big numbers guy. So having an expert like Jeff kind of study and work that lease, because you may get one month or two months, when you have someone work for your professional. What Jeff saying is average is three to six months, and I've gotten a number that were six months, which seems odd, but it's out there, especially if they need to move the space and it's been sitting for too long. That's where the deals can really happen. That's a good first one, what's your next one,

Jeffrey Hallberg:

and understanding your round rate. So depending on the location, you go into a lot of Doc's go into retail type spaces, some go into medical office spaces. Understand that many times when a broker or someone's conveying the rental rate to you, they will say a number like $22 per square foot triple net, which you have to understand is that there's another number that back on the backside of that 22 That you're also going to be charged so the key is understanding what your gross rent will be. So if you're paying $22 Triple Net, that means you're paying 22 plus some other number, usually somewhere between seven and 10 bucks. So in reality, your rents gonna be closer to $32 Gross, and then you multiply that number times the square footage that you're going to be leasing. And that is going to be your annual rent. So you divide that number by 12. And that'll be your monthly rent that you should expect to pay on top of your utilities.

Jeffrey Hallberg:

Dr. Joseph Esposito: So let's break that down a little so you have your rent. And as someone says the word triple net to triple net for the doctor.

Jeffrey Hallberg:

Yeah, so triple net is the taxes insurance and common area maintenance for a center that you are you're you're going to be leasing. So landlords do not make money on the triple net PUC thoroughly making the money on whatever base rent they agree to on terms with you for your lease. So say your triple net is $8 a foot that's going to cost you're going to be paying your pro rata share for the taxes. There's a direct pass through from the city to the landlord, you're gonna be paying for the insurance, which is also a direct passer from the insurance company to the landlord. And then you're gonna be paying for the commentary and maintenance such your landscaping, if you're somewhere where it snows up snow removal, upkeep of the center, property lighting, and then in depending on the location not get too in the weeds. It might be some form of amortize capital expenses say that a building needs a new roof for the parking lot needs a new coat of asphalt, things like that those all factored into the triple net. So the key is when you're negotiating your deal, the try and control that triple net as much as you can to telling the landlord that those that triple net can only increase on uncontrolled expenses versus things that they can control because there's many things that they can control as a part of triple net.

Jeffrey Hallberg:

Dr. Joseph Esposito: So you're saying if it snows an extra five times you're not going to restrict them from plan your your parking lot plowed and allow them to put a new roof on every other year

Jeffrey Hallberg:

they exactly

Jeffrey Hallberg:

Dr. Joseph Esposito: something like that. So

Jeffrey Hallberg:

if it's 10 days, you're gonna get one bill one year if it snows 100 days you're probably getting another bill than that. Sure, yeah.

Jeffrey Hallberg:

Dr. Joseph Esposito: So what Jeff's said is good to take a note of if you have your rent, payment per square foot, that is annual. So if it's $20, a square foot and you have 100 square feet, that's 20 times that 1000 square feet, that's $20,000 divided by 12, like you said, and that's your lease for the year. If they say triple net, you've got to get that second number. Without that second number, you don't know what you're actually paying. There's a lot to break down on that triple net, when we talk about the lease itself. What you said is controlling some of those variabilities, because you could get hurt there. I will say I've seen some triple nets where I look at a rundown parking lot a rundown building something that's really rundown, I look at their last year, it was only 250 $2.50 $3 for, you know, triple net? Well, obviously, they didn't do anything to that building. So low does not always mean good. It could be that they're not taking care of their place, right? We don't want to high, but you need some dollars to keep the facility looking professional if you're gonna bring a doctor's office there. Exactly. It's gonna be reasonable. So that's the that's the second really good point. Guys, if you have any questions, while you're listening to this, we're always have just contact information below in the show notes. Because I know some of this can become technical. She's never even heard of any of this stuff before. What's another one, and

Jeffrey Hallberg:

another is making sure that when you negotiate your lease that you get renewal options, whatever renewal option is to say, when you sign your lease, you sign up for a five year term, by negotiating renewal options into your lease. So you negotiate one five year renewal or two, five year renewals. What that renewal option is, is the benefit, it's to the benefit of the tenant mean that you're coming up on your five years, you've been in the space and you're like, hey, it's working great for me, I'm not it's not too big, it's not too small, I want to stay another five years, that gives you the option, not the landlord, the option for you to stay there. So you can exercise renewal. So what it does is it gives you control of that space, when you start your lease. If it's one five year option, you actually have control of the space for 10. You don't have to stay there for 10. But you have the option to stay there for 10. And the landlord can't put you out on the street, because he found another tenant wanting to pay double what you're paying, because you've already negotiated the option to control the space.

Jeffrey Hallberg:

Dr. Joseph Esposito: So huge, because if you put 130,000 and build out, five years later, you're still happy and someone wants to pay an extra $2 a square foot, you're on the street, you got to redo your build out again, like that's a CVS, you don't want to miss that in the agreement. Tell me about the attire how to lease two spaces side by side for our corporate offices. And it was a wild scenario. I don't know if it was hail or there was some damage, but both our age vacuum and its giant ones went out. And they said was 14,000 Each because they were pretty big. It was 28 grand. I added a clause to my lease that says I'll pay maintenance up to $500. But we will not replace any units. And they wrote a check for 28,000 and put two new units on our roof. I mean, you've seen this happened, right where they're blamed and having to pay for that. What are your thoughts on that? Yeah,

Jeffrey Hallberg:

so definitely when you're negotiating your deal. And before you sign any lease, you always want to do a somewhat of an inspection, get your contractor over there, of course, to give you an idea where your construction costs are going to be and make sure it's in line with your budget for which you've set aside out of your loan to put into construction and what you want to negotiate with the landlord for his contribution in his tenant improvement allowance that he's going to give you to help towards that construction. But as you mentioned, a big part of that is understanding a track. So when you're looking at an HVAC system, if the system is brand new, more likely than not the landlord's going to want to take you take full responsibility for it. If the system is 10 years old, what you definitely want to negotiate is like what you just mentioned, Joe, is some form of a cap, typically like an annual cap of 500 to $700 on repairs, so long as you have a quarterly maintenance program, because more likely than not the landlord is going to require the tenant himself to maintain his own H vac. And usually that's annual, I mean, excuse me semi annual or quarterly to the tune of 125 to $150. So that you keep it maintained. But should there be big ticket items like full replacement or anything over the cap that you've negotiated annually that the landlord would be responsible for?

Jeffrey Hallberg:

Dr. Joseph Esposito: Yeah, great, great point. What about negotiating? We talked about in a previous podcast that tenant improvement. Explain that and how do you heard that? Yeah,

Jeffrey Hallberg:

so a tenant improvement allowance TIA is the amount of contribution a landlord will be willing to add to your construction budget. and so on average if you're if let's take a second generation space that you're going in retrofitting it used to be a cell phone store attacks, like an h&r block or something like that. And you're gonna go and build two exam rooms, three adjusting areas and X ray suite, a front office for yourself in your car and reception area, you're going to turn into a chiropractic office, on average to build that floor plan that's generic is running about $80 per square foot today. So you want to try and get a portion of that ad dollars from the landlord to add to bring down your bases and what the total construction costs are going to be because you are adding value to the landlord space by creating a new space within his building. On average, landlords are willing to put in usually 20% of the base rent over the primary term into a construction allowance. So using quick math, if you have, you're signed up for five years, and your total rents 100 grand over five years, the landlord's willing to put in 20 grand so one year is where the rent on a five year deal. Typically when they get in, when they're getting less than four years on a five year deal, then they start to associate Why do I want to take this risk and take the property off the market, I might find another tenant who's willing to take it as is or take a less amount of an allowance for me to lease it. So really, with landlords, they ideally on on the low end would want at least four years of rent on a five year deal.

Jeffrey Hallberg:

Dr. Joseph Esposito: Okay, yeah. So trying to negotiate 10 improvement allowance where you're trying to get 40 grand to be put into the project, you're trying to sign a three year lease, it's usually not going to happen,

Jeffrey Hallberg:

they will not happen typically, at minimum, you'll probably need five years to get any form of an allowance from a landlord because it can't charge you. He can't charge enough rent to get it back in time to make it worth his while.

Jeffrey Hallberg:

Dr. Joseph Esposito: Have you seen a number of deals I've sometimes negotiated with our amortize the build out in my lease. Do you see that happen?

Jeffrey Hallberg:

Well, not not often, usually, when a landlord puts puts a space on the market, he's in his mind, he's saying hey, the space is 22 bucks a foot triple net, as is. He's not thinking you're going to offer he's offering you any allowance. Then he gets a guy like me that comes in says, hey, I want your space for 18 bucks a foot. And I want $20 A foot and TI allowance. So we start from polar opposites and kind of work our way towards the middle. But he'll find a number in that rental rate that will make him feel comfortable and giving you cash upfront or within 30 days of the build up being completed, where he feels he can get it back over the next five years, versus actually adding it onto your monthly rent on a monthly basis. Or he might say hey, you know what you want 20 grand, or whatever you want. So you want $20,000 from them on a $20 rent, then he'll say, Well, I'm going to charge you 22 bucks a foot versus the 20. I was asking. So he's getting another $2 A foot over the five years to cover the 20 that he offered you.

Jeffrey Hallberg:

Dr. Joseph Esposito: Yeah. So sometimes they add it. Sometimes they they don't add it, they amortize it in and just raise your rate. That's what they try to do often. And you got to you got to watch that because what I had happened once is I built it out in a Gold's Gym complex. And it ended up being like $30 a square foot, they just amortize the entire built out, which was cool. I didn't need that money in a bank loan, they did it for me. And they raised it Oh, and I resigned Three years later, five years later, they didn't bring down that rate. It was all the amortization dollars from the build out. And I was $10 Higher. And they I totally forgot about it five years later. So you got to be cautious of those things.

Jeffrey Hallberg:

Yeah. And for a lot of Doc's, you know, I mean, I would rather pay a little bit more in rent on the front end to get a larger allowance as well on the front end, because I know, I'm going to believe in myself and believe in the success of my business. And when you're opening a business, cash is king. So getting money from the land, and upfront, and then having to pay him back over time is a much better scenario than coming right out of your own pocket out of your own business operating account. When you need the money the most of the front end of the business is less advantageous. Yeah,

Jeffrey Hallberg:

Dr. Joseph Esposito: those are great points. What about cost to resign where there's a percentage increase, like while so you got these two options, but they could price you right out of that option where you're stuck because there's too much variability or too much percent? You're not really looking at that a lot of times when you sign the lease,

Jeffrey Hallberg:

yeah, well, typically in most spaces. Today, landlords are looking to try and get three to 4% annual increases. And then for the option period, they'll either right in languages states they'll continue on that same trajectory. And or they'll say, the new rate will be negotiated to a market rate at time of the option. If it does say that it'll be negotiated at a market rate, typically that you get your real estate broker back involved. And he'll run a search of comparable properties in the area for what the market rate might be, and then the negotiation will start from there. It's it's rare that I mean, ideally, it's it's gives you some comfort, to have know what that rate is going to be year six on day one, to have it set in stone. But what I've also found that if you're a good paying tenant, when your renewal comes up, and less if the landlord has people lined up to backfill that space, you have a little bit more leverage. And whatever's written in your lease can be renegotiated. You might want more ti loans, you might want to redo the carpet, redo the pain to stay for another five years. So once you get to that renewal point, a lot of things can still be put back on the table and renegotiated. The key is just being able to control that option. So in a worst case scenario, if the landlord says nope, this is it either stay or leave, at least it's you have the option to stay and he just can't put you on the street. That's great.

Jeffrey Hallberg:

Dr. Joseph Esposito: That's great. Awesome, great points. Any other ones that come off the

Jeffrey Hallberg:

a couple a couple other quick ones. One is making sure that when you negotiate your deal that you have an exclusive, right, what that means is you have an exclusive use provision that allows you to be the only chiropractor in the center, you don't want to go and lease a space, put $130,000 of construction and make it really nice. And then the landlord puts another chiropractor to use two doors down. That's a big one that I always try and push for, I would say 90% of time, landlords are willing to offer exclusives because they don't want to competing tenants in their same center to begin with. But at the end of the day, you want to just make sure that the physical therapist all of a sudden doesn't have a chiropractic table. Right? Maybe he's it's not his primary use, but he's kind of picking and choosing when he does chiropractic, which you can I have an exclusive again as well, Pts will do the same thing back towards chiropractors, I see it all the time. That's, that's a big one that I always try and push for in my negotiating, as well as how the landlord delivers the space to you. You want to make sure that when you take possession of the space, that space is up to code, it's compliant with ADA standards, that everything's all your mechanical, electrical and plumbing are in good working order. If you're doing X ray, you want to make sure that you have at least 200 amps of power, because you're gonna get 100 for the the office, you're gonna need 100 to run the X ray, all these things that I'm that I right into my letters of intent, with a letter of intent, a non binding agreement to get the negotiation started, I put all this in there. Because if you are setting aside money for a construction project, if all of a sudden you have to upgrade the panel from 100 to 200, or you have to bring the bathroom up to ADA compliant, or other things up to code. These are all big ticket items that will come right out of your construction budget that you were saving to build your exam rooms, your adjusting areas, your X ray suite, your front office, things like that. So you want to make sure that you hold the landlord's feet to the fire and it's written into your lease that all of these things will be done before you take possession.

Jeffrey Hallberg:

Dr. Joseph Esposito: All great points. I had one last one. What about restricting the type of businesses I've had two calls the last week and a half one has a robic studio next to them. One has a dance studio Kids Dance Studio. And I've heard horror stories coming through, you do restrictions like that.

Jeffrey Hallberg:

It's hard. It's very hard to get those restrictions on future uses. Because you have to remember your landlords or real estate owner and he needs to make money so he needs to back foot. What you can do though, is you can make it so it makes it very tough for him. So say he wants to put in a gym right next to you that plays music that if he decides to use that use, you have quiet enjoyment of your space. That means that you have a provision in your lease that stays quiet enjoyment that if the tenant next to you doesn't allow you to quietly enjoy your space that the landlord needs to rectify the situation by either removing that tenant or doing whatever needs to be done so that you do have quiet enjoyment be it soundproofing, extra drywall, insulation, the ceilings, a lot of big ticket items for the landlord, but if he wants to do that use he needs to understand that he needs to protect you and your right to quiet enjoyment of your own space. Or

Jeffrey Hallberg:

Dr. Joseph Esposito: let you out at least I've seen that as well if if if it doesn't require it doesn't prevent me That's a

Jeffrey Hallberg:

harder one if you just put $130,000 into your space if he's getting less he's gonna reimburse you for that which can be very tough. It's easier to hold his feet to the fire on the use next unit they might not even be sound it might be they put a subway in right or, or a food type of use for the smells that can kind of permeate your space. And the amount of times I've had tenants go in next to Subway and they're like, I can never use Subway sandwich again. Because all the smells, their bread baking, you know, it's more often things to things to be thinking about when you're looking at a space, if especially if the subways already there and or the gym, or the use next door to you might already be offensive to start, then you have less leverage if you to go in behind them.

Jeffrey Hallberg:

Dr. Joseph Esposito: I see that makes sense. Now to work with you, you get involved in finding the location, not just negotiating the lease. So explain to someone they just got out of school, they got the parents Co Co Co signed the lease on sorry, alone, now they have money, they're ready to go to the final location and call you do you think

Jeffrey Hallberg:

they should call me right away. And it's just because they want to insure me at the very front end of this process was I need to know from from a new client is where do they want to be? Ideally, we start with zip codes, hey, most of them know the exact zip code they want to be in, we can start from there and see what opportunities are in their size range and in their budget within their, their asset class if they want to go into a retail building, or if they want to go into an office type environment. And then we start from, you know, the zip code, the size and the asset class and work backwards towards the budget to a find their ideal space. Therefore, I'm interfacing with the broker that represents the landlord from the very beginning, making sure that he understands that my client is represented. And we'll be taking care of his interests while he takes care of the landlord's interests. And then I walk the client all the way through not only the site selection, then negotiating the letter of intent, which is a non binding agreement, helping them understand their financing and their construction, and then getting them through the lease stage that I co work with an attorney to make sure that all the legal bases are covered as well as the business points. Awesome,

Jeffrey Hallberg:

Dr. Joseph Esposito: great insights. And then when you work with our clinics, Allied live clinics, you also work with some of our design team, you work with some. So how do you feel about the cohesiveness of like us carrying the doctor through this cycle?

Jeffrey Hallberg:

It works great, it just the key. The key, as in anything is your team, you're as good as the people working around you. At least that's how I feel. And you have a strong team of people that are experts in which you're not experts in, that's going to help you. They're going to help you educate you. And so you can make the best possible decisions for yourself and your future practice. Like I like to say I give all my clients all the tools in the tool belt and then they get to use them how they see fit, because what might be one right for one doctor isn't right for another doctor. I give them all the same information so they can make the best decisions for their self, their family and their future practice.

Jeffrey Hallberg:

Dr. Joseph Esposito: Awesome. Great insights. Jeff, if you want to get in touch with Jeff Hills information will be below this podcast and the show notes. If you want to reach out to align life and how we use Jeff and other services, to bring it together to make as synergistic as possible process to open your dream practice. Please let us know reach out to a line. Jeff. Thanks again. I have in my mind five more ideas and podcasts. I think there's so much that students and even new doctors can learn by some of these, some of these educational sessions. So thanks so much. We'll do more in the future. I

Jeffrey Hallberg:

look forward to it show. Thank you very much.

Jeffrey Hallberg:

Dr. Joseph Esposito: You're welcome.