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Negotiating Your Lease Letter of Intent: From Heartache to Triumph
Put down the pen! Before you sign the letter of intent for your dream office, it’s important to closely examine what you are about to sign. Like the sirens of Greek mythology, the letter of intent is written to ensnare you before you fully understand the consequences. Below are the areas you need to watch out for to ensure you complete a favorable lease agreement.
Term of the Lease/Options. This may ultimately be the most important point you negotiate. The length of your lease, and the options that come with it, will make your lease either an asset, or a liability. The longer the lease term (including options), the greater the chance of being able to eventually sell your dental practice for a very favorable price. Without a long-term lease (at least 10-15 years with options), lenders will be hesitant to loan money to potential buyers of your practice. Also, lease options are almost always personal to the tenant, making them worthless to a potential buyer. Therefore you must make any options you have assignable to a potential buyer.
1. Office Build-Out Time Frame. To avoid delaying your build-out period and paying unnecessary rent, it’s critical to obtain time commitments in writing from all involved parties. Your landlord will give you a period of time to build out your office prior to charging rent. Try to get at least 90 days and preferably 120 days with a provision that if you open for business early, you will begin to pay rent on the date you open. Be sure to tie your build-out timetable to your actual possession date (the date you can enter the premises.) Second, ask for a strict timetable for landlord approval of architectural plans and drawings. These timetables will be included in the work letter from your landlord. Without strict timetables, your build-out period can quickly erode should the landlord create delays in approving the various stages of your build-out. Last, require your contractor to provide a definitive delivery date for your office. If they are unable to deliver within the allotted time, require that they be responsible for any rent due between the promised and actual completion dates.
2. Tenant Improvement Allowance. Landlords will usually grant a certain dollar amount or allowance towards your tenant improvement costs – it is up to you to negotiate the amount. While the industry standard is to tie allowances to usable square feet, this typically represents a lesser amount than rentable square feet – so try to have the allocation tied to rentable square feet in order to obtain the most generous allowance.
3. Type of Lease. Find out exactly what type of lease you will be signing. Landlords are increasingly turning to triple net leases, which pass on all costs of running and maintaining the property to you, the tenant. And, depending on the lease, your rent could be much higher than the quoted price per square foot that you negotiated. You can’t change the form of the lease, but you can be adequately prepared for hidden costs if you know of them ahead of time.
In our law firm, only 10% of our clients consult with us prior to signing a letter of intent – and those 10% are the most satisfied with their lease agreement. With a little guidance, you too can transform your lease transaction from potential heartache, to a business triumph.
Statements of opinion not necessarily endorsed by ADA Member Advantage, ADA Business Enterprises, Inc., or the American Dental Association, or any of its subsidiaries, counsels, commissions, or agencies.
Patrick J. Wood, BA, JD, is the founder and senior partner of Wood & Delgado, a law firm specializing in representing dentists for their business transaction needs. Wood & Delgado has multiple offices throughout California. Pat Wood can be reached at 800-499-1474 or by email at email@example.com.
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